Market review
The third quarter of 2009 provided evidence that the global economy is on the mend. A sharp fall in the rate of job shedding, stabilising house prices, a turnaround in consumer confidence and expanding industrial production in developed economies, marked what is likely to be the end of a deep and protracted global recession.

Over the quarter, global equity markets continued to head higher, with a 17.6% rise between July and September over and above the 21% gain in the second quarter of 2009. Cyclical stocks led markets higher, reflecting an improving economic outlook. Financials (25.9%), materials (21.5%) and industrials (19.8%) all ended strongly, while utilities (11.3%), healthcare (12.3%) and energy (12.9%) lagged the overall market. Emerging markets extended their gains over developed markets, closing the quarter 21% higher and ahead of the global composite for the third consecutive quarter. (All returns are in US dollars).

Risk appetite has greatly improved over the last few months. The rand continued to benefit from massive foreign portfolio flows into the local bourse, more than offsetting the outflows seen in the second half of 2008. The local currency appreciated by nearly 3% over the third quarter, pushing the year's gains to 22% against the US dollar.

The downward trend in inflation is likely to continue, but at a slower pace into 2010. Weak demand, the strong rand and the better nearterm inflation outlook, saw the monetary policy committee cut interest rates by a further 0.5% to 7% in August. The All Bond Index returned 3% over the third quarter, while cash, as measured by the STeFI, gained 2%.

The domestic equity market took its cue from global markets, which benefited from the improvement in the global growth outlook and a higher risk appetite. The All Share Index added 13.9% in the third quarter and has gained 18.6% this year. Over the quarter, the All Share Resources Index (11.1%) lagged the overall market, with gold miners earning a disappointing 6%. Domestic-oriented and interest rate-sensitive sectors enjoyed good gains. Construction (19%), general retailers (19.1%) and banks (14%) stood out as strong performers, with foreigners particularly active buyers. Telecommunication (3.8%) and short-term insurers (6.1%) underperformed the market.

Portfolio review
The Investec Cautious Managed portfolio generated a satisfactory return in the third quarter. Our recent run of strongly positive returns is very pleasing, but it has increased our level of caution regarding the near-term return potential for the equity market.

Portfolio activity
Our equity weighting remains high on a gross basis, but we are steadily reducing the net equity weighting through a combination of selling and selective hedging. In broad terms, we have increased our bias towards global equities and within domestic equities we are rapidly shifting towards a more defensive bias. The portfolio's cash position remains high enough to take advantage of the many unfolding opportunities.

Portfolio positioning
Our focus is always on prospective returns and as a consequence of declining yields on cash, we have maintained a high gross weighting in equities. The portfolio's underlying equity holdings remain undervalued (despite the recent rally) and should outperform the broader equity market in the medium term.

In line with global markets, the domestic equity market has staged a strong recovery since the lows in March 2009, when valuation spreads soared to all-time highs. Current market conditions and valuation levels should lead to above average results for investors willing to take a long-term perspective. More importantly, the trajectory of future returns will necessarily be lower than the past six months.

South African equities have dramatically outperformed the MSCI World Index over the last eight years and recently the rand has been very strong. We have therefore increased our weighting in selected global equities, with a strong bias towards quality and value.

We focus exclusively on stocks that are undervalued and out of favour. Although we remain aware of the macro environment, we spend no time trying to forecast macro variables or potential investment themes. Our bottom-up stock picking does, however, often result in certain identifiable themes that are merely a residual effect (as opposed to our initial objective). Our portfolio activity in the third quarter (selling cyclical stocks and buying undervalued laggards, defensives and gold stocks) is potentially an early indicator of the following developing themes:

· The recent rally has been led by lower quality issues and as a consequence, the valuation multiples of high and low quality businesses have converged. In line with financial market history, we expect a divergence in the future (in favour of higher quality stocks).
· Energy, industrial commodities and capital goods stocks are most geared to China's success and have become the new high expectation stocks. They remain vulnerable to future disappointment.
· The market has moved well ahead of the economy and remains vulnerable to future earnings disappointment as de-leveraging and lower growth become the norm.

Market participants have to be more discerning from this point onwards and in recognition of this, our underlying equities are heavily biased towards absolute undervaluation and higher quality businesses.

Less favourable valuations and strong upward price momentum have increased our level of caution. In line with global trends, the current rally has been led by lower quality stocks and valuations have compressed significantly. Price earnings multiples have expanded significantly (in the face of rapidly declining earnings), as market participants anticipate a cyclical recovery. If such optimism is misplaced, lower quality stocks are the most vulnerable.

The risk-reward ratio has shifted firmly in favour of high quality stocks. The rapidity of the recent advance has led us back into selected defensive stocks and gold, both of which have lagged during the recent cyclical rally.

Market review
The improved growth outlook was reflected in sharply higher equity prices. The MSCI Word Index gained 21% over the second quarter. Markets were led higher by cyclical sectors. Defensive sectors, which had outperformed the market as economies collapsed, lagged the upturn, but still recorded absolute gains over the quarter. The S&P 500 Index gained 15.9%, lagging both the German Dax 30 Index (24.4%) and UK FTSE 100 Index, which gained 26% over the quarter (all in US dollars). The local equity market had a positive quarter (8.6%), its first in 12 months, despite giving up some of its gains during the month of June (-3.1%). Year to date, the All Share Index closed 4.1% stronger. The market's foreign currency returns for the three month to the end of June, were boosted by the rand's appreciation against the US dollar (24.1%) and the euro (16.7%). Over the quarter, the financial and industrial composite (13.4%) outperformed resources (2.8%), with gold miners (-16.2%) the largest underperformers. Other sectors lagging the composite over this period included fixed line communications (-0.8%), travel and leisure (6.6%) and food producers (7.7%). General retailers (15.6%), banks (13.8%) and the construction (16.6%) sectors all ended the quarter well above their March levels. The platinum (9.5%) and general mining (8.9%) sectors performed in line with the overall market. The bond market continued to struggle, with the All Bond Index returning 0.3% in the second quarter. The negative factors outweighed very weak final demand and activity data and a strong domestic currency, to push yields higher across the curve. Inflation data remained sticky around the 8% level, while the announcement of substantial tax revenue shortfalls announced by the ministry of finance provided further support to the bond bears. The decision to leave rates unchanged in June was not entirely surprising, given previous remarks by the Reserve Bank governor. Listed property underperformed equities, bonds and cash, losing -0.9% over the quarter. Cash, as measured by the STeFI, returned 2.3% for the three months to the end of June.

Portfolio review
In contrast to the previous quarter, the second quarter of 2009 proved to be extremely rewarding for patient investors in the portfolio. Our typically early positioning of the portfolio (premised on our customary long-term orientation and value-conscious approach) meant that we captured most of the gains from the cyclical upswing in equities. As a result, the portfolio performed strongly against its peers over the quarter and over the longer term.

Portfolio activity
We have maintained a high equity weighting. In broad terms, we increased our bias towards global equities and within equities we have reduced selected resources holdings. The portfolio's cash position remains high enough to take advantage of the many unfolding opportunities.

Portfolio positioning
Our focus is always on prospective returns and as a consequence of continuing declining yields on cash, we have maintained a high weighting in equities. Our underlying equity holdings remain undervalued (despite the recent rally) and should outperform the broader equity market in the medium term. South African equities have dramatically outperformed the MSCI World Index over the last eight years and recently the rand has been very strong. For that reason, we have increased our weighting in selected global equities, while keeping the overall equity weighting constant. The passage of time has strengthened our belief that March represented a cyclical low in the equity market. A significant downside correction is becoming less probable as a result of:
o A stabilisation of leading indicators
o Reduced systemic risk and credit spreads
o Low and declining yields on cash and fixed-income alternatives
o The high level of cash on the sidelines, combined with a high percentage of market participants that have missed the recent rally

We remind you that current market conditions and valuation levels have historically resulted in above average results for investors willing to take a long-term perspective. This by no means rules out the possibility that the market could go lower. It simply means that equities exhibit a very attractive risk-reward profile and in the case of selected individual stocks, we believe that share prices have already bottomed.

Market review
Local economic news continued to deteriorate over the quarter. The release of fourth quarter GDP numbers confirmed the sharp slowdown experienced in the second half of 2008. Domestic demand remained under pressure in the first three months of 2009. Weak employment prospects and the slump in the manufacturing sector continued to bear down on retail spend and vehicle sales. Policy makers responded with two interest rate cuts of 100 basis points each during the quarter. The second meeting, held earlier than initially scheduled, indicated somewhat greater urgency on the part of the South African Reserve Bank to respond to the extremely weak global backdrop and evidence that the local economy was unlikely to escape a recession. The outlook continues to favour more rate cuts.

South African bonds followed global yields higher after reaching record lows in December. While prospects of weak growth and falling inflation continue to provide a bond-friendly environment, the market remains sensitive to the impact of a rapid increase in government spending and concomitant future funding requirements. The All Bond Index lost 5.1% over the quarter. The listed property sector (-1.4%) fared somewhat better, but could not escape deteriorating sector fundamentals. Cash, as measured by the STeFI, returned 0.9% over the quarter.

Equities weakened for the third consecutive quarter, with the All Share Index losing 4.2% year to date. Both financials (-7%) and industrials (-9.2%) ended the quarter in negative territory. Resource counters clawed back some of their losses sustained in the second half of 2008 to end up 1.6%. Gold mining (22.8%), platinum mining (9.6%) and pharmaceuticals (22.4%) were the only sectors to gain over the quarter. While general miners (-4.6%) performed broadly in line with the overall market, it was the domestic oriented sectors that fell most with banks (-9.8%), retailers (-7.6%) and the construction sector (-10.6%) all ending down.

Portfolio review
The Investec Cautious Managed Fund's returns since inception have been satisfactory - comfortably ahead of cash and bonds. Since inception, the portfolio has consistently avoided areas of the market that are overvalued and unrealistically priced. In doing this, we have avoided permanent capital losses that accompany investing at market peaks. We believe that capital losses as a result of overpaying for assets are permanent and our strategy of avoidance is an important part of how we add value over time.

The first quarter of 2009 proved to be extremely volatile and challenging for the portfolio. Our long-term orientation and value conscious approach have not worked well in the current environment of heightened risk aversion, panic selling and high volatility. We started the year with a close to fully weighted position in equities and no hedges. As a consequence, the portfolio has been fully exposed to equity market volatility.

The period leading up to 9 March was characterised by fear, panic and declining equity markets. Over this period our positioning (unhedged and fully weighted in equities) was exacerbated by the underperformance of our underlying equities, resulting in massive downside volatility. However, the period after 9 March was characterised by increasing risk appetite and rising equity markets. Our positioning remained unchanged and the portfolio enjoyed a strong upside rally as the underlying equities outperformed the market significantly. The portfolio's strong performance in March, helped to offset some of January and February's losses. Our cash weighting has been high throughout, but this has provided minimal relief from the dramatic equity sell-off.

Portfolio activity
The equity weighting of the portfolio remains high and in February we continued to add to our existing holdings into market weakness. In addition, we established a long-term position in global investmentgrade credit (spreads are at multi-generational highs). The dramatic equity rally in March enabled us to sell into strength and we disposed of our holding in Impala Platinum (after generating a return of close to 90% in less than five months). The portfolio's cash position remains high enough to take advantage of the many unfolding opportunities.

Portfolio positioning
Since the start of 2009, the equity weighting has been close to maximum based on our view that individual stock prices were well below their intrinsic value. As a consequence, we did not consider the declines in January to early March to be permanent and in many cases we have proved our conviction by adding to existing positions at even greater discounts to intrinsic value.

The late March rally has not altered our view that equity markets remain oversold and are currently discounting an outcome that seems far too pessimistic. The ever increasing demand for gold (including gold stocks) and US treasuries is symptomatic of the new momentum which is bearish, risk averse and obsessed with balance sheet quality. Since 9 March, market perceptions have shifted slightly and there are early signs that this momentum is beginning to wane.

The portfolio's positioning is unequivocally anti the current momentum:
· We are optimistic and bullish (based on the current valuations of equities both domestically and globally). On the local front, increased public spending and lower interest rates should ultimately result in higher corporate earnings, which will support SA equities.
· Risk premiums are too high. With regard to safety, holding US treasuries and gold has looked very smart of late, but in our view this represents a "return-free risk" rather than a risk-free return. Investors in US treasuries and gold are saying that they are willing to sacrifice yield for safety. US treasuries could be the next bubble to burst.
· We agree that strong balance sheets are preferable in any market environment. However, we contend that the market has gone too far in penalising companies with weaker financial positions. In fact, quite a few of the companies, which represent our most compelling ideas, have capital and balance sheet issues. Based on current evidence, these companies should survive the current cycle.

We remind you that current market conditions and valuation levels have historically resulted in above average results for investors willing to take a long-term perspective. This by no means rules out the possibility that the market could go lower. It simply means that equities exhibit a very attractive risk-reward profile and in the case of selected individual stocks, we believe that share prices have already bottomed.

The depressed outlook has created a myriad of opportunities where valuations offer a considerable margin of safety. Intentionally avoiding equities at a time when valuations are so attractive strikes us as a very risky strategy. For this reason, we feel confident that our current positioning (which readily accepts a higher degree of equity risk than normal) will be extremely beneficial to unit holders that elect to stay the course.

Market review
The final quarter of 2008 brought no relief to investors, consumers or policy makers as the financial crises and concurrent economic slowdown continued to unfold. Activity data across the globe reached multi-decade lows, marking the worst global recession post World War Two. The quarter was characterised by accelerating job losses, falling house prices and tighter bank lending standards. While macro fundamentals deteriorated sharply, yields on US government debt plummeted to new depths, indicative of the ominous economic outlook. Global equities experienced one of their worst periods in history, erasing impressive gains over the last few years. The MSCI World Index fell 21.7% over the quarter in US dollars and was down 40.3% in 2008. The MSCI Emerging Markets Index lost 27.6% over the fourth quarter in US dollars to end the year down 53.2% - surpassing its previous crash during the Asian crises in the late 1990s.

On the domestic front, bond yields continued their downward move as both the weak growth and lower inflation outlook favoured the potential for significantly lower interest rates. The All Bond Index gained 11.3% in the fourth quarter to end the year up 17%. Cash, as measured by the STeFI, rose 2.9% over the quarter and 11.7% for the year. The listed property sector increased by 8.5% over the fourth quarter, but returned -4.5% over 2008.

The global financial crises and the ensuing slowdown in economic activity left their mark on the domestic equity market. The All Share Index lost 23.2% over the year, all of the losses sustained in the second half of 2008. The market ended 9.2% weaker over the last quarter of the year, with falling commodity prices driving down platinum (-25.8%) and general miners (-15.2%). The construction sector slumped 36.1% in the fourth quarter as companies saw their order books curtailed by weaker demand and foreign investors seemed to lose faith in the sector. Life assurers (-15.9%) continued their underperformance of the general market. Exposure to falling interest rates and defensive earnings streams dominated the outperformers over the quarter, with banks (-6.1%), healthcare equipment and services (5.6%), food producers (6.6%) and food retailers (16.2%) high up on the performance table. However, it was the gold miners (22%) that took the top spot over the quarter as the dollar gold price held its own and rand weakness and positive production news boosted returns to the sector.

Portfolio review
The Investec Cautious Managed Fund generated a positive return over the last three months of 2008, against the backdrop of a big negative quarter for equities. When measured from the peak of the domestic equity market on 23 May 2008 to the trough in late November, the portfolio managed to produce a solid positive return, while equities declined by more than 35%. We are pleased to have preserved capital over a period that matches some of the highest profile meltdowns in financial market history.

Over the quarter, the portfolio's domestic equity holdings outpaced the broader market and the offshore equities generated positive returns in hard currency terms. Our continued high cash weighting performed steadily over this period.

Portfolio activity
The equity weighting increased significantly over the course of the quarter and we enter 2009 with the highest domestic weighting since inception of the portfolio. We remain net buyers of domestic equities. Our holding in the NewGold exchange traded fund was sold over this period. In broad terms, we reduced our weighting in domestic defensives, in favour of selected cyclical shares.

In addition to increasing the weighting in offshore equities, we established positions in a select basket of preference shares and listed property. The cash position is the lowest since inception of the portfolio, but remains high enough to take advantage of the many opportunities that are emerging.

Portfolio positioning
In recent months, our emphasis has shifted towards the unfolding bear market in stocks (both domestically and globally) and this is where we currently believe the greatest return opportunity resides.

If recent trends persist, the portfolio will continue to move closer to the maximum weighting in domestic equities. This positioning is based on attractive valuations and not market timing. The near-term outlook remains poor, but we are confident that the unprecedented global stimulus effort will eventually lead to higher asset prices and improved investor risk appetite. The majority of market participants are currently obsessed with either trying to time the "bottom of the market" or waiting for "greater visibility in the outlook" - a quest that we consider both fruitless and unnecessary when valuations are this low.

We remind you that current market conditions and valuation levels have historically resulted in above average results for investors willing to adopt a long-term perspective. This does not rule out the possibility that the market could go lower. It simply means that equities exhibit a very attractive risk-reward profile and in the case of selected individual stocks, we believe that share prices have already bottomed.

The depressed outlook has created a myriad of opportunities where valuations offer a considerable margin of safety. Intentionally avoiding equities at a time when valuations are so attractive strikes us as a very risky strategy. For this reason, we feel confident that our current positioning (which readily accepts a higher degree of equity risk than normal) will be extremely beneficial to unit holders that elect to stay the course.