Market review Central bank talk dominated financial markets over the past quarter. Investors reacted positively to the Bank of Japan's announcement early in the quarter about its large-scale monetary easing policies. Riskier trades were particularly well supported, and emerging market equities started to retrace some of the earlier losses. However, US Federal Reserve Chairman Ben Bernanke put a damper on rampant asset price appreciation by hinting that the market should recognise record policy accommodation as finite and data dependent. Even though his comments were merely providing guidance, markets responded immediately. Emerging markets saw one of their weakest months on record. Currencies depreciated against the US dollar and local currency debt - which has been a beneficiary of global investment flows for a long time - sold off sharply. Commodity prices followed other risk assets, first up, then down sharply in June, as global economic growth data remained mixed and the road to a rebalanced Chinese economy seemed rocky. South African equities ended almost unchanged in the second quarter, but volatility was high during this period. The sector laggards remain mostly confined to resource stocks with gold (-33.5%), platinum (-23.9%), coal (-10%) and diversified miners (-10.8%) all experiencing double-digit losses in rands. Year to date, the resources sector is trailing the overall market by 19.4 percentage points. Industrial stocks mostly held their ground over the quarter and defensive stocks, on average, achieved strong absolute returns. Financials lagged, with banks down 6.2% and life insurers flat for the quarter after a particularly weak June.
Portfolio review The fund's sizeable holdings in Mediclinic, Curro and Coronation Fund Managers once again contributed positively to performance. The fact that we have no exposure to African Bank, Harmony and Sibanye Gold also added significant value relative to the fund's benchmark. Unfortunately, these returns were partly offset by the fund's holdings in DRDGOLD, Northam Platinum and Ellies Holdings.
Portfolio activity We increased our exposure to the African and South African infrastructure expenditure theme through further purchases of Consolidated Infrastructure, DAWN, Bell Equipment and Grindrod. We also acquired a new holding in Calgro M3. We maintained our rand hedge exposure during the quarter by purchasing Sun international and Datatec. This was funded through profits taken in Northam Platinum and BarloWorld. We also added to our holdings in Business Connection, Clover and Peregrine Holdings, primarily funded through profits taken in Palamin, AECI and Coronation Fund Managers.
Portfolio positioning We continue to believe that many stocks in the mid- and small-market capitalisation sectors must still realise their full rerating potential. This may take many years to materialise, which is therefore supportive of share prices. We believe that the fund is invested in companies that are attractively priced relative to their underlying valuation and/or their forecast growth prospects. We are well positioned to benefit from a recovery in global economic growth, driven by the US, China and Africa, and should therefore continue to generate good returns into the foreseeable future.