The Kagiso Active Quants Fund commenced trading on 26 April 2004 as the first South African fund available to the retail investor that bases active stock-picking decisions primarily on a statistical model of share returns. The model is based on a large body of robust academic research. Its benchmark is the mean of the other funds in the General Equity sector. Since inception, the fund remains the top performing unit trust in the Domestic Equity General category and is currently also the top performer over 2 years to 30 September 2006.
In this quarter the fund performed roughly in line with benchmark but we noticed that, due to an abnormally high level of repositioning, our perceived benchmark (which is rolled forward from the last reported quarter-end holdings of the mean fund manager) marginally underperformed the actual fund managers.
The main characteristic of this quarter was a pull back in resource prices. The dollar prices of Brent Crude, Platinum and Gold dropped 15%, 7.1% and 2.7% respectively. The fund was overweight these sectors with an emphasis on Platinum. The absolute performance of these sectors was lifted by a counterbalancing drop in the rand of 8.2% over the period and the Resources 20 Index, for example, earned 0.67%. Note that this is in sharp contrast to the 11.54% achieved by the Financial- Industrial Index. For risk control purposes, our overweight in Resources was largely funded from an underweight in rand-hedge Industrial shares.
The latter benefited from the weakening rand but were not adversely affected by the reversal in commodity prices. As a result, these positions were the main detractors from our performance relative to the benchmark. However, certain of our individual stock picks helped to counterbalance this effect with Digicore, Paracon, Scharrrig, Wilson Balyley, Group Five and Peregrine all featuring strongly here. Resource prices are notoriously volatile and going forward we retain our current positioning.

Kagiso Asset Management
Portfolio Manager

The Kagiso Active Quants Fund commenced trading on 26 April 2004 as the first South African fund available to the retail investor that bases active stock-picking decisions primarily on a statistical model of share returns. The model is based on a large body of robust academic research. Its benchmark is the mean of the other funds in the General Equity sector. Since inception, the fund remains the top performing unit trust in the Domestic Equity General category and was fifth for the rolling 12 months up to 30 June 2006.
This was an extremely volatile quarter. During April the market continued its rise and we resumed our programme of incrementally increasing our tracking error by purchasing resources stocks. However, in mid May there was a sharp sell-off which ended in a short-lived rebound towards month end only to be followed by a second wave of selling in the first half of June. The maximum drawdown from a peak NAV value of 245 to about 205 was approximately 20%. This minimum value was just above the NAV at the beginning of the year (200). Since then the market (and with it the fund) has rallied up some 30% ending the quarter with a NAV of about 230. Despite the wild swings along the way this remains a decent return year-to-date.
Aided by the weakening rand over this period, our overweight in resources was the major positive contributor to our benchmark relative performance with Amplats, Implats, Anglos, Sasol and Goldfields being the main contributors. This was slightly offset by our underweights in other non-resource rand hedge stocks, most notably SAB and Richemont. Over overweights that lost the most were the very same smaller cap stock picks that served us so well in the preceding periods: Value Group, Scharrig Mining, Digicore, Busby and CMH. However, underweights in larger capitalisation interest rate sensitive stocks such as Edgars, the Banks and Life insurance (where we do not hold a single counter) helped counterbalanced this. In sum we moderately outperformed the benchmark over a volatile period.
Looking forward, the market remains somewhat volatile given mixed signals regarding the duration of the US interest rate cycle but due to sound fundamentals we remain moderately optimistic for the longer term.

Kagiso Asset Management
Portfolio Manager

The Kagiso Active Quants Fund commenced trading on 26 April 2004 as the first South African fund available to the retail investor that bases active stock picking decisions primarily on a statistical model of share returns. The model is based on a large body of robust academic research.

Since inception, the fund remains the top performing unit trust in the Domestic Equity General category and was fourth for the rolling 12 months to 31 March 2006.

Over the quarter performance has been good, both in absolute (16.97%) and relative terms, to our benchmark, the mean of the other funds in the General Equity sector (14.23%).
Primarily, this can be attributed to successful stock picking with PSG, Scharrig Mining, Digicore, Busby and CMH being some of the major contributors.

Sectorally we have shifted to overweight positions in gold, platinum and construction shares and this has also turned out to be a good decision with all of these sectors performing very well.

The stock picks that lost the most for us over the quarter was being underweight Murray & Roberts (although, as mentioned, this was compensated for by being overweight the entire construction sector) and our overweight in BrandCorp which, despite being a good performer in the past, disappointed with its latest earnings figures. We promptly sold our position and this stock only lost the fund 0.15% relative to the benchmark.

Looking forward, we remain moderately optimistic and are in the process of increasing our tracking error again.

Kagiso Asset Management
Portfolio Manager