Market review
The All Share Index (ALSI) closed 3.4% up over the quarter, losing some of its earlier gains as inflation fears gripped global markets. Substantial dispersion in performance across the sectors was evident as resources gained 13.4% over the quarter, while the Financial and Industrial Index lost 6.4%. General mining led resources higher, closing up 18.1% over the three months to the end of June. Banks and general retailers shed close to 15% over the quarter, while the defensive food retail and telecommunications sectors ended up 3.2% and 3.4%, respectively. The telecommunications sector was buoyed by corporate activity as MTN sought a potential merger with an Indian telecoms company.

The bond market weakened substantially over the quarter. The All Bond Index lost 4.9% over this period, while cash (as measured by the STeFI) returned 2.7%. The listed property sector took its cue from rising interest rates and higher bond yields, selling off aggressively to shed 19.6% in the second quarter.

Fund performance
The Investec Cautious Managed Fund had a tough second quarter. The fund delivered a return of -4.8% over the quarter, while the 12 month return was 1.6%.

The portfolio's lower (net) equity weighting combined with no exposure to resources resulted in the weak absolute and relative performance over the period. In broad terms - the portfolio's equities have lagged behind the performance of the All Share Index (ALSI) for quite a while and are significantly undervalued (in both absolute and relative terms).

The portfolio's offshore equities held up phenomenally well compared to the broader global equity market but detracted from performance in absolute terms. Our offshore equities continue to show great fundamentals and attractive valuations. In particular, our global defensive stocks should perform well if we were to enter into a prolonged period of stagflation (slowing growth accompanied by rising prices).

The fixed income component performed well, marginally ahead of benchmark. We had very little exposure to bonds, which contributed to relative outperformance.

The substantial difference in performance across equity sectors and at asset class level has presented the portfolio with a rare opportunity to create wealth at above-average rates. While short-term negative returns are not ideal, declining prices are not necessarily a concern. As patient, long-term investors we know that as long as business values remain intact, returns are merely delayed, not lost. We fully expect medium-term returns to meaningfully exceed both cash and inflation.

Portfolio activity
There were no material changes in asset and sector allocation over the month. We took advantage of the increased volatility and equity sell-off to adjust the portfolio weightings. Over the quarter we increased the portfolio's exposure to African Bank, AVI and Standard Bank.

In May, the portfolio sold out of MTN entirely as a result of outsized gains in the share price over a very short period. We continue to admire the business and management, but have used the proceeds of our sale to pursue more compelling value opportunities in the domestic market.

It is our view that near-term inflation concerns will ease significantly in the first half of 2009. We remain vigilant and may increase our exposure to bonds if the market weakens further.

Market outlook and portfolio positioning
We are still positive about the longer-term outlook for equities and hold a portfolio of stocks that are both cheap and defensive relative to the market. Our view is that bonds will struggle to perform better than cash in the medium term. The rand is marginally overvalued. The local currency is at risk of getting weaker due to emerging market jitters by investors and ongoing concerns over our country's large current account deficit.

The portfolio is positioning itself for an impending change in market leadership. Financials and domestic interest rate sensitive stocks will most likely lead the next advance. The risks for this group of stocks are now increasingly known and more than fully reflected in share prices. In contrast, the risks for commodities are not adequately reflected in share prices.

The positioning of the portfolio is consistent with the following medium-term expectations:
o Commodity prices (especially base metals like copper) weaken or remain flat at best. In line with this, commodity stocks (particularly the high index weighted stocks) decline due to lower investment appeal and popularity.
o The ALSI (excluding resources) advances strongly and meaningfully outperforms the market.
o Domestic interest rates remain high and provide a minor headwind for domestic stocks.
o Global defensive stocks and US large capitalisation stocks perform better than local stocks.
o The domestic currency weakens relative to the US dollar and to a lesser extent other currencies.
o The US Federal Reserve keeps US interest rates unchanged.

Market review
Equity markets ended the first quarter sharply lower, driven by fears of a US recession, general risk aversion and a massive downward revision to earnings. On the local front, The FTSE/JSE All Share Index retraced the losses sustained towards the end of 2007, closing the first quarter up 2.9%. The All Bond Index lost 1.9% over the quarter with the short-dated bonds anchored by uncertainty about the next policy move, while the longer end sold off on the elevated inflation outlook.

Fund performance The improving trend in relative performance which started in the middle of May 2007 continued into the first quarter of 2008. The Investec Cautious Managed Fund returned 2.2% over the quarter and the fund's 12 month return was 7.8%. The fund achieved top quartile performance over the quarter, 12 months and two years to the end of March (annualised returns). In terms of positioning, the portfolio still has a lower (net) domestic equity weighting than the average portfolio. On a net basis the portfolio is effectively long SA financial and industrial stocks and short resources. In addition, the portfolio has a relatively full offshore weighting, with a strong bias towards the US dollar. The offshore portion has a high equity weighting based on the view that selected foreign equities offer a better risk reward profile than domestic stocks. The portfolio has no exposure to domestic listed property. The residual effect of the portfolio's positioning has been a higher cash weighting than the average portfolio.

Over the quarter, the weighting of the various asset classes contributed significantly to the portfolio's relative outperformance. The lower domestic equity weighting and consequent higher cash weighting, enabled the portfolio to take advantage of the equity selloff. The star performer over the quarter was the portfolio's exposure to global defensive stocks, which managed a positive performance when most equity markets suffered severe downturns. The portfolio's contrarian position in Japanese yen performed well as global markets experienced a further unwinding of the carry trade. In addition, the portfolio's exposure to the rand gold price via NewGold exchange traded fund (ETF) also added significant value.

The domestic equity component lagged the FTSE/JSE All Share Index (ALSI) over the quarter. This was mainly due to the lack of exposure to the big diversified miners (Anglo American and BHP Billiton) as well as other select resource stocks that outperformed the ALSI over the quarter. Only two stocks (Liberty International Plc and Mondi Plc) outperformed the ALSI and helped mitigate significant underperformance in the rest of the portfolio. The domestic equity component is currently out of step with a local market that is currently driven by momentum factors (price and earnings). Furthermore, a select group of mostly resource stocks are driving the market higher, while the vast majority of stocks have lagged, in line with global markets.

While we remain aware of momentum factors, we always prefer to invest on the basis of undervaluation and low expectations. At present, this means that our individual ideas result in a portfolio of financial and industrial shares, that have lagged the general market for quite a while and are undervalued (in both absolute and relative terms).

The fixed-income component performed well (marginally ahead of benchmark). The portfolio's 3% allocation to bonds, which is significantly less than the average portfolio, contributed to relative outperformance.

Portfolio activity There were no material changes in asset and sector allocation over the quarter. On the buy side, we took advantage of the increased equity volatility and sell-off to adjust the portfolio weightings. Over the quarter the portfolio increased its exposure to the following existing holdings: African Bank, AVI, Bidvest, FirstRand, Investec Plc, Remgro and SAB Miller.

The portfolio reduced the weighting of Afgri after a strong performance in a declining market. The proceeds were re-directed into other, more compelling ideas. We continue to admire the business and the stock remains undervalued. Similarly, we reduced the weighting in MTN and Liberty International Plc over the quarter as a result of outsized gains in their share prices (over very short periods). The portfolio continues to hold both stocks. They remain undervalued at current prices. The portfolio weighting has merely been adjusted downwards.

The portfolio has a 3% weighting in short duration bonds. It is our view that near-term inflation concerns will abate significantly in the first half of 2009. We remain vigilant and anticipate increasing the bond weighting into additional price weakness.

Market outlook and portfolio positioning We remain positive on the longer-term outlook for equities and hold a portfolio of stocks that are both defensive and cheap relative to the market. However, we remain cautious due to the high level of downside risk in margins and in particular commodity (mostly base metals) related earnings.

It appears that the domestic bond market has finally adjusted for higher inflation and interest rates. We continue to believe that bonds will struggle to meaningfully outperform cash in the medium term but we are encouraged by the recent increase in yields.

The rand is marginally overvalued and at risk of a sudden bout of weakness as a result of emerging market jitters. The local currency is also vulnerable as a result of our large current account deficit. We could easily see a period of sustained dollar strength, as the US current account deficit diminishes on the back of increased US exports. The sell-off in the rand in 2008 has been swift and unexpected. Our view remains unchanged but we reserve the right to make tactical switches based on market movements.

The positioning of the portfolio is consistent with the following expectations:
o Commodity prices (especially base metals like copper) weaken or remain flat at best. In line with this, commodity stocks (particularly the high index weighted stocks) decline to lower investment appeal and popularity.
o The ALSI (ex resources) advances strongly.
o Domestic interest rates remain flat and provide a minor headwind for domestic stocks.
o Global defensives and US large cap stocks outperform local stocks.
o The domestic currency weakens relative to the US dollar and the Japanese yen and to a lesser extent other currencies.
o The US Federal Reserve (the Fed) cuts US interest rates at a measured pace and allows the recent excesses to normalise in a systematic fashion.
o The Fed (in concert with other central banks) intervenes in credit markets to ensure that financial market liquidity is restored.

Market review
Against a backdrop of substantial volatility and heightened uncertainty, global equity markets fared poorly over the final quarter of 2007. The Global MSCI composite lost 2.3% over the fourth quarter (in US dollars). Emerging markets held up admirably on the back of domestic currency strength and somewhat different local growth dynamics. The MSCI Emerging Markets Index gained 3.7% over the quarter (in US dollars).

Domestic equities came under pressure during the quarter, with the All Share Index closing down 3%, but achieving respectable returns of 19.2% for the year as a whole. The losses were concentrated towards the end of the period, as both resources and financials became victims of the uncertain global growth outlook and continued negative sentiment associated with the global banking sector. Gold miners ended the year as the market's worst performer, losing 14.1% over the quarter and 20.6% over the year. The construction sector continued its strong run, to end the year 77.3% higher as the best performing sector.

The local bond market focused on inflation data and the near term direction of interest rates. With inflation accelerating and the outlook for food and energy prices deteriorating, the bond market had priced in a fourth interest rate hike in 2007. The South African Reserve Bank's monetary policy committee statement leaned towards a peak in the interest rate cycle and the yield curve shifted down, retracing some of the earlier losses. The All Bond Index returned 0.9% over the quarter and 4.2% for the year. Cash (as measured by the STeFI) returned 9.3% for the year and 2.5% over the fourth quarter.

Fund performance
The improving trend in relative performance, which started in the middle of May continued into the fourth quarter of 2007. The Investec Cautious Managed Fund generated a positive return of 1.6% for the final quarter of 2007, placing the fund in the top quartile for this period. The result was particularly pleasing in the light of the negative returns from domestic equities in November and December. The key reason for the improved relative performance was simply that the market finally moved in favour of our conservative positioning. The 12-month return was 9.3%. Since inception the fund has adequately fulfilled its objective of achieving meaningful real returns, at low risk of permanent capital loss.

Over the quarter, the weighting of the various asset classes contributed significantly to the fund's relative outperformance. The lower domestic equity weighting and consequent higher cash weighting, enabled the fund to take advantage of the equity sell-off. The fund's domestic equities held up phenomenally well in the sell off. High weightings in Remgro, MTN and Abil helped performance as well as a lack of exposure to Anglos and Billiton. The big detractor was the fund's position in Liberty International Plc. The share continued to underperform the All Share Index. We believe that Liberty International offers extraordinary value at current prices and at the portfolio level mitigates the risk of a rapid sell-off in the rand.

The star performer over the quarter was the fund's exposure to global defensive stocks, which managed a positive performance when most equity markets suffered severe downturns. The fund's contrarian position in Japanese yen held up well. In addition, the fund's exposure to the rand gold price (via the NewGold ETF) also added value.

The fixed income component performed well, marginally ahead of benchmark. The fund's 4% allocation to bonds, which is significantly less than the average fund contributed to relative outperformance.

Portfolio activity
There were no material changes in asset and sector allocation. On the buy side, the fund took advantage of the recent equity volatility and sell-off to realign the portfolio weightings. We increased the fund's exposure to the following existing holdings: Liberty International Plc, MTN, Standard Bank, Nedbank, Remgro, Imperial and Steinhoff. The fund gradually reduced the weighting in strongly performing stocks most notably - Sasol, Billiton, Mittal and the platinum stocks.

We have a 4% weighting in short duration bonds. It is our view that near-term inflation concerns will abate significantly in the first half of 2008. We remain vigilant and anticipate increasing the bond weighting into additional price weakness.

Market outlook
We remain positive on the longer-term outlook for equities and hold a portfolio of stocks that are both defensive and cheap relative to the market. However, we remain cautious due to the high level of downside risk in margins and in particular commodity (mostly base metals) related earnings.

It appears that the domestic bond market has finally adjusted for higher inflation and interest rates. We continue to believe that bonds will struggle to meaningfully outperform cash in the medium term but we are encouraged by the recent increase in yields.

For the past eight months we have repeatedly warned that listed property yields may be inadequately discounting future uncertainties and remain vulnerable to changes in interest rate and inflation expectations. The best case for property fundamentals (Industrial and Office) is already fully discounted and expectations can only be revised downwards.

The rand is marginally overvalued and at risk of a sudden bout of weakness as a result of emerging market jitters. The local currency is also vulnerable as a result of our large current account deficit. We could easily see a period of sustained dollar strength, as the US current account deficit diminishes on the back of increased US exports.

Portfolio positioning
The portfolio composition reflects the paucity of individual equity ideas that meet our criteria for investment. For that reason, the domestic equity weighting still remains below average and well below that of other similarly mandated funds. We remain comfortable that our positioning will adequately protect capital in a declining market and participate meaningfully if the market surges ahead from here.

The positioning of the fund is consistent with the following expectations:
- The All Share Index runs out of steam and corrects strongly as a result of derating (PE multiple contraction) and a decrease in risk appetite.
- Commodity prices (especially base metals like copper) decline or remain flat at best.
- Domestic interest rates keep on rising and provide a headwind for domestic stocks.
- Global defensives and US large cap stocks outperform local stocks.
- The rand weakens relative to the US dollar and the Japanese yen, and to a lesser extent against other currencies.
- The US Federal Reserve cuts US interest rates at a measured pace and allows the recent excesses to normalise in a systematic fashion.