Kagiso Active Quants comment - Sep 07 - Fund Manager Comment24 Oct 2007
The third quarter of 2007 was very eventful in world financial markets, which exhibited very high levels of volatility. Despite this, the Fund again produced a strong performance of 4.49% for the quarter, comfortably outperforming its benchmark, the average performance of all funds in the General Equity unit trust category, by 1.84%. Since inception and over a rolling 3- year period, the Fund remains the top performing unit trust in the General Equity sector.
During the quarter, a slowdown in the US housing market and troubles with sub-prime mortgages had negative repercussions in global credit markets as liquidity tightened considerably. Investors repriced risk, in particular raising credit spreads. Importantly, the US Federal Reserve Bank responded by cutting interest rates and other central banks held back on expected tightening. Amid the uncertainty, the dollar weakened by 5.1% against the euro, and gold surged by 14.5% over the quarter.
In general, developed equity markets had a very poor third quarter, although the US market bucked the trend and was up, reacting well to the Fed's easing monetary policy and the weak dollar. Emerging markets did not escape the volatility, but were substantially up - the MSCI Emerging Markets index posting 13.7% for the quarter.
In SA, The FTSE/JSE All Share index gained 5.7% for the quarter, after being down 13% from mid-July to mid-August. Resources shares surged by 13.5% and industrials were up 3.3%. Financials performed poorly (down 1.56%) - affected by a 50 b.p. hike in interest rates during the quarter and expectations of a further rate hike in October.
Our Fund's relative performance over the quarter was aided slightly by an underweight position in the financials sector, but most of the outperformance came from stock selection. Significantly contributing to relative performance were our holdings in Exxaro (+30.8%), Bell Equipment (+18.3%), Impala Platinum (+11.1%) and Mittal Steel (+7.6%). We avoided many of the quarter's worst performers, e.g. Steinhoff (-19.5%), Reunert (-11.7%), JD Group (-18.0%), Imperial (-11.5%) and Harmony (-18.6%).
Our main detractors from relative performance were our large underweights in Murray and Roberts (again) (+40.4%), and Anglo American (+11.7%). Our positions in African Glass (- 26.8%), on the back of very disappointing financial results from poor execution of plant expansions, and Woolworths (-15.4%), along with other interest rate sensitive retailers, subtracted from alpha.
Looking ahead, we are generally:
o avoiding interest rate sensitive consumer cyclicals, despite remaining positive on the banks sector on valuation grounds,
o becoming more cautious on the resources stocks, given concerns about the impact of a slowdown in US consumer spending on global growth,
o positive on the food retailers, given defensive demand and rampant food inflation
o positioning in indirect beneficiaries of the SA infrastructure boom and resultant activity The fund remains fairly aggressively positioned in our best stock selections, based on our team's proven bottom-up stock picking process.
Gavin Wood
Portfolio Manager