Back in June financial markets were well and truly shaken by Ben Bernanke's announcement that US policymakers were expecting to throttle back on asset purchases later this year and continue the process through to mid-2014. He simultaneously emphasised that the proposed actions would be subject to an unemployment rate of 6.5% and an inflation rate of 2% being reached in the intervening period. The South African equity market responded by falling 4% in June. Then, in the truest example of market schizophrenia, a slew of positive global macro data led to the great unloved of the previous quarter being welcomed back like the Prodigal Son, almost from Day 1 of the new quarter. The SA market delivered an exceptional 11.2% return and handsomely outperformed its emerging market peers, helped by a recovering Rand. Surprisingly, this happened in the face of still-rising bond rates.

The Cadiz Mastermind Fund delivered a return of 12.4% during the quarter. Led by platinum, the high beta commodity stocks staged a massive recovery. As a result, Anglo Platinum (+45%), Anglo American (+32%) and Impala (+23%) were among the largest contributors to the fund's performance. Our high conviction mid/small cap holdings also performed well. Grindrod (+19.4%), Howden (+14.5%) and Cashbuild (+12.3%) delivered good returns and underpinned the commodity stocks. In this 'risk on' environment, the fund's defensive counters lagged. Standard Bank (-4%), Libhold (-2.5%) and Spar (- 1%) were the biggest laggards during the quarter.

During the quarter we increased exposure to resources with purchases predominantly in Impala and Anglo Platinum. Exposure to Grindrod and Astral was also built up materially. These purchases were funded by reducing exposure to Naspers and exiting our positions in Old Mutual, Libhold, AECI and Richemont. These shares have been strong performers and are fully valued in our view.

Platinum remains our highest conviction position in the mining sector. While this has been the case for some time, recent evidence supports our view that the sector's normalisation process is underway:

Industry Fundamentals: Following several years of oversupply, the market has rotated into a significant deficit. Over the last 12 months, the major producers have culled some 600,000 ounces of primary production, with more to come in the next 12 months. These ounces are unlikely to re-emerge until the platinum price sustains levels above $2,000/ounce. Simultaneously, European auto demand, the biggest consumer of platinum, has bottomed out following its 26% decline since the peak of 2007; a 6 year bear market. Vehicle scrap rates, which are currently running ahead of new vehicle sales, point to enormous pent up demand for new cars. A demand rebound will place the market under significant strain resulting in upward pressure on the platinum price.

Share fundamentals: Impala Platinum and Anglo Platinum are trading well-below trend on profitability and value ratings. Current levels have last been seen in 1998 when Russian dumping of strategic stocks was at its peak and the Asian debt crisis depressed demand. The subsequent four-year period saw astronomical outperformance by the platinum sector. It is unlikely that this time will be different.

Management change: The CEO's of all the major producers have been changed. Their mandates are similar ie to right-size production and costs such that the businesses are profitable at structurally lower platinum prices. Investment in new projects is very low and unlikely to pick up. Labour challenges, government policy, cost escalation and geological complexity make capital allocation both risky and unattractive in the current price environment. The various management teams have expressed reluctance to commit to new projects given this uncertainty.

It is our view that the actions of the industry from a supply perspective, combined with recovering demand is likely to set up the next big cyclical upswing in the platinum sector. As in the last upswing, the market deficit could span several years until such time as producers respond with increased supply.

Grindrod has been held in the portfolio for some time. More recently we have increased exposure as the bulk of the risky Mozambican ports' expansion program has been completed. Earnings are beginning to flow meaningfully from these assets. Although further expansion is on the cards, this can be largely funded by the existing business. Grindrod has slowly but surely re-engineered itself into one of Africa's most attractive ports and logistics businesses. Moreover, we see excellent optionality in the shipping business, for which Grindrod has been synonymous. Shipping currently contributes nothing to the bottom line. According to our calculations, shipping is also valued at zero in the share price. Five years ago, shipping accounted for 80% of Grindrod's market value. Shipping valuations ebb and flow with the global freight rate cycle. As freight rates pick up off their lows (approximately +100% YTD), the shipping business will reflect more meaningfully in earnings and therefore the market's pricing of Grindrod. In time, when the ports business reaches scale, shipping is likely to be split off or sold, which should unlock significant value for Grindrod shareholders. Meanwhile, with Remgro as the largest shareholder, any meaningful retracement in the share price will be used as an opportunity for them to increase their stake thus providing downside protection to the share price.

Astral is a poultry producer. Its business model, very simply, is to convert maize into protein. The economics of the model are defined primarily by the price of maize relative to the price of chicken. Global maize prices have fallen some 40% in US dollar terms due to record US crops. While offset to some extent by the R/$ weakness, SA maize prices have also fallen significantly. On the positive side, however, R/$ weaknesses should crowd out cheap poultry imports, thereby restoring some pricing power to the poultry producers. Astral's profitability, which is currently very depressed, should benefit materially from these macro developments. The equally depressed value ratings should follow shortly thereafter. The highly publicised anti-dumping tariffs on poultry products will merely provide the cherry on top of an already handsome expected return.

These transactions have tilted the fund's barbell in favour of cyclical exposure. The value embedded in these cyclical stocks combined with declining systemic risk and recovering global economic growth provides the confidence to execute on our strategy. The fund's value attributes remain attractive, yielding a 2yr forward P/E, P/BV and dividend yield of 11.4x, 2.4x and 4.4%, respectively. These compare very favourably with the SWIX ALSI which yields equivalent metrics of 13x, 2.0x and 3.9%, respectively.

Equity markets faced several significant challenges during the past quarter. Chinese data set a negative tone earlier in April when it's Q1 GDP stat missed expectations. Thereafter, global industrial production stats pointed to a slowing in economic activity worldwide. The star of the volatility show was undoubtedly Ben Bernanke's announcement in June that the US Fed expects to throttle back on asset purchases later this year and continue the process through to mid-2014. As if that was not enough, Chinese authorities rapidly raised the interbank lending rate (SHIBOR) from 2.4% in May to 13% in June in a determined effort to rein in illegal lending practices. Global markets responded negatively, with emerging markets bearing the brunt. In local currency, the SWIX ended the quarter with a return of -0.32%. This relatively benign return masks an enormous degree of volatility: April -1.7%; May +6.7%; and June -4%.

Against this backdrop, the fund delivered a return of -1.67% during the quarter. The high beta commodity stocks fell by 18%, led by platinum shares, which declined more than 25%. ABIL's 45% fall also impacted performance negatively notwithstanding the fund's relatively low exposure to this share. These negative returns were largely offset by strong performances from the rand hedge, global industrial stocks. The biggest contributors were Naspers (+27.6%), Richemont (+21.8%), MTN (+13.8%) and British American Tobacco (+3.5%). Smaller defensive counters such as Spar, Kagiso Media, Howden and AECI added handsomely in aggregate, with individual stock returns ranging from 7% to 17%.

Exposure to ABSA and Kumba has been dramatically increased and was funded mainly by the sale of Sasol and trimming some of the winners, including Naspers, Old Mutual and MMI.

Purchases

ABSA's share price has lagged the Financial & Industrial Index (FINDI) by more than 25% over the past 18 months. As a result, it occupies a top quartile spot in our expected return ranking table. Its attractiveness is also evident using more conventional value indicators. The 1 year forward price/book, P/E and dividend yield metrics are 1.5x, 8.7x and 6.2%, respectively. Furthermore, ABSA's P/E is priced at a 32% discount to the P/E of the FINDI - almost one standard deviation from its long-term relative P/E rating. In combination, the Barclays Africa transaction and finalization of the Basel III capital regulations are catalysts for value unlock. ABSA no longer needs to conservatively hold an excess capital reserve - R6bn by our calculations. The negative drag on the return on equity (ROE) has been material. Optimizing the capital structure, either through a special dividend and/or share buybacks, should have a material positive effect on the ROE and therefore the rating. We estimate that a special dividend, yielding 4-6%, should increase the already attractive 6% forward yield to 10% or more over the next 12 months.

Kumba has underperformed the market despite a forward dividend yield greater than 9%. The balance sheet is exceptionally strong and cash flows remain robust at current commodity prices. The R/$ has fallen by some 20% over the past year, which offsets most of the dollar commodity price decline. Our analysis shows very little risk to the dividend yield at current commodity prices. The negative sentiment towards cyclical stocks in general has dragged Kumba down with it, with little or no regard for individual stock fundamentals.

Sale

Sasol has been a strong performer in the commodity space. Oil prices have held up exceptionally well in the face of the global slowdown and the R/$ weakness has certainly benefited earnings. Sasol is, however, fully valued in absolute terms and expensive when compared with the rest of the mining complex. We are concerned about the proposed $17bn to be spent on new projects over the next 7-10 years. At more than 65% of the current market capitalisation, investment on this scale does not come without risk. Historic analysis shows that profitability is likely to be diluted in a large capital cycle. Also, unless oil prices rise (let alone a fall), escalating debt levels is unavoidable, which raises concern over future dividends. At current levels, there is insufficient risk compensation for us to justify holding Sasol.

The elevated level of volatility experienced in the past quarter is likely to persist in the current quarter. Historically, the 2nd and 3rd quarters are the weakest from a macro statistical point of view. While the trend of Purchasing Managers Indices and the US Fed's comments will continue to receive intense scrutiny, global markets will also focus on political developments including:

(i) parliamentary elections in Japan, Australia and Germany, and
(ii) the ability of the Japanese Premier Shinz? Abe to persuade his peers on his proposed economic reform program.

Locally most of the attention will be on labour negotiations. Both AMCU and NUM have released their proposal on entry-level wage adjustments for the gold mines. Clearly gold mining companies cannot afford these massive increases and the battle lines have been drawn.

The fund's barbell strategy remains in place, although the biggest trades of the quarter have aimed at increasing the dividend yield even further. The focus remains on high yield, defensive counters with unique value attributes, such as ABSA. These shares counterbalance, to some extent, the volatility of the very cheap, but currently unloved cyclical shares. The fund's value attributes are attractive, yielding a 2 year forward P/E, P/BV and dividend yield of 11x, 2.5x and 4.9%, respectively. These compare very favourably with the SWIX, which yields equivalent metrics of 12.2x, 2x and 4.2%, respectively.

The Cadiz mastermind Fund returned 1.14% in March, matching the SWIX return of 1.1%. High beta shares, especially mining shares, were aggressively sold off in favor of their defensive counterparts. Scares came in the form of Cyprus's bail-out package, potentially negative budget sequesters in the US and war talk from North Korea.

The fund's mining exposure came under significant pressure. The largest detractors were Anglo American (-6.4%), Angloplatinum (-10%), MTN (-5.3%) and Exxaro (-5%). These negative performances were offset to some extent by solid performances from BTI (+9.6%), Sasol (+6.2%) and MMI (+5.9%). Smaller holdings such as Supergroup (+14.6%), Capitec (+13.9%) and Grindrod (+12.6%) contributed nicely. In all 3 cases, these midcap companies produced financial results that surprised the market positively. Companies displayin earnings certainty and above average growth are being very highly valued by the market at present.

During the month we increased the fund's exposure to BTI further. This high yielding stock is virtually uncorrelated to the SA market and offers significant long-term value. The dividend yield was supported by robust cash flows and a lazy balance sheet. Inefficiencies, built up over many years of acquisitions, are being extracted annually. This efficiency drive aims to enhance profit margins, which is what supports the high dividend yield and on-going share buyback program. Our strategy is to build this position opportunistically. The timing of the purchase was fortunate as we managed to secure a material part of the price increase during March.

Vodacom is a new addition to the fund. After a bout of underperformance we bought the stock on a forward dividend yield of 7.5% and a reasonable discount to intrinsic value. The company is exceptionally well managed, has a dominant position in the SA market and is underpinned by strong cash flows and a very strong balance sheet. As a result, we see the risk to dividends as skewed to the upside.

These two positions entrench our barbell strategy of exposure to very cheap, high beta mining shares combined with high yielding, defensive exposure. Shares such as Supergroup, Capitec and Grindrod, with independent value and price drivers, occupy the space in between.

December was an excellent month for global equities. Greater visibility surrounding a workable resolution to the US fiscal cliff was the primary catalyst, although support came in the form of reasonably good global macro data. Locally, the ANC's election conference concluded without any major upsets thus paving the way for the year-end rally. The SWIX returned 4.3% and closed a shade below its alltime high of 8 506. Risk was decidedly back on.

Our fund performed exceptionally well in this environment, returning 5.8% during the month. Our cyclical exposure, most notably platinum and general miners performed exceptionally well. The biggest contributors to performance were Impala (+16%), Absa (15.9%), Angloplatinum (+14%) and Investec (+9.7%). Smaller holdings such as Basil Read (+16%) and City Lodge (+11%) also contributed nicely to the return. These strong performances were marginally offset by BTI (-8%), Richemont (-4%) and Naspers (-1%).

Several small trades were executed during the month. Exposure to Aspen, Richemont and City Lodge was dramatically reduced towards the end of December. These counters performed spectacularly over the past year and had reached our fair value targets. The proceeds were applied to Standard Bank and Foschini, both of which are new entrants to the fund. Standard Bank underperformed massively over the past year impacted by bad debts and poor market conditions. Management has implemented a plausible turnaround strategy aimed at unlocking value and restoring profitability over the medium term. Foschini has lagged its retail peers and is, in our view, the cheapest clothing retailer in the market. Strong earnings growth projections and a forward dividend yield above 4% make Foschini an attractive addition to the fund.

On the whole, the fund structure is unchanged as we remain comfortable with the current pro-cyclical positioning. We expect that the market will continue to rotate into cyclical exposure over the course of the next 12 months as global macro fundamentals continue to stabilise and improve. Fears of a Chinese hard landing have all but evaporated driving a strong rebound in 'China plays' and Europe is expected to see the bottom in economic activity in 2013. Notwithstanding a positive outcome, the US fiscal cliff will still be a drag on economic performance. Against that the housing market is expected to continue to expand and unemployment levels to improve. Monetary policy will remain accommodative as the Fed attempts to further stabilise demand and stimulate consumption. Macro stability should also encourage corporates to commence capex programmes, which have been placed on hold for quite some time. US equities have the necessary ingredients to move higher taking global equities along for the ride. The SA economy is, however, forecast to show anaemic growth as consumer demand slows from previous buoyant levels. The political backdrop will hopefully be more supportive of investment flows into equities as Mangaung is now behind us. Labour unrest could, however, do as much damage as it did in 2012 and remains one of the variables that could lead to poor financial market performance in 2013. Whilst inflationary pressures are not expected to ease, monetary policy will likely remain accommodative.

As always, the fund's value attributes remain a core focus. The forward PE, PBV and DY are 11.3x, 2.1x and 4%, respectively compare favourably with the SWIX, which yields respective metrics of 11.9x, 2x and 3.7%.