Market review
Risk assets experienced a torrid third quarter. Equities slumped, commodities retreated sharply, credit spreads widened materially and currencies depreciated against the US dollar. The traditional safe haven assets performed well: both US Treasury yields and German Bunds fell to record lows, closing the quarter at 1.9%. Gold added a further $125, up 8.2%, despite the slump in September. The US dollar gained 6% in trade-weighted terms over the quarter. With fears of a sharp growth slowdown and a high probability of an imminent recession in some regions, commodity prices could not hold on to the elevated levels reached in the first half of the year. Copper declined 23.3%, platinum fell 11.6% while Brent crude closed 5.3% lower. The MSCI World Index ended the quarter 16.5% weaker and emerging markets tumbled 22.5%. The FTSE 100 Index dropped 15.5%, the Dax 30 Index slumped 31%, while the Nikkei 225 Index outperformed meaningfully, closing 7.1% weaker. The S&P 500 Index shed 13.9%. (All returns are quoted in US dollars.)

South Africa remains subject to global pressures, the uncertainty about the crisis in Europe, the structural impediments to a more meaningful global recovery and asset market volatility. The South African Reserve Bank, concerned about global macro events, kept interest rates on hold at record lows. Citing a slightly higher inflationary trajectory and its continued willingness to consider all eventualities, the Bank heeded calls to maintain its mandated policy objective of stable inflation. The slump in the rand, along with the depreciation of other emerging market and commodity currencies, added support to the decision. Domestic growth remains sluggish, with manufacturing and mining output particularly weak. With average house prices falling, personal debt to income ratios high and job growth mostly absent, private sector investment continues to languish. SA GDP growth estimates for the year have now slipped to well below the 3% mark, with forecasts for 2012 being revised downward towards 3.5%. The All Bond Index gained 2.8% over the quarter and cash, as measured by the STeFI Index, edged 1.4% higher. The listed property sector rose 2.2%, buoyed by firmer bond yields.

The FTSE/JSE All Share Index closed the quarter down 5.8%, with significant rand weakness partially offsetting the sharp fall in commodity prices. The index lost 21.3% in US dollars. Significant dispersion marked the quarterly performances, with sectors most exposed to the SA economy generally outperforming the broader market. The food and general retail sectors fared particularly well, closing 6.4% and 1.7% higher, respectively. Banks lost 3.3%, while short-term insurers gained 6.9% over the three months. The health care sector, up 2.5%, continued its recent strong performance. Commodity-exposed rand hedge stocks fared poorly over the quarter, but even here there was significant dispersion. Diversified miners lost 17.3% and platinum miners shed 9.7%. The gold sector posted one of its strongest relative performances, gaining 19.5% over the review period.

Portfolio review
Patient investors in the Investec Cautious Managed portfolio have been rewarded with strong gains this year as our defensive positioning is starting to pay off. The past quarter saw a significant sell-off in equities and the rand, as markets reacted to sovereign debt concerns in Europe. Bond markets are usually good leading indicators of what lies ahead. The extremely low level of yields in the US, German and Japanese bond markets point to expectations of poor global growth prospects and a worsening of the debt crisis. We have been concerned about when this troubled world view will be more widely reflected in the prices of other asset classes.

Portfolio positioning
The large gold exposure, which has supported performance all year, continues to be a cornerstone of the portfolio. Pressures on consumers to pay down debt will be met with action by central banks to prevent deflation. If consumers save, they don't spend, and many countries are dependent on consumer spending to sustain their economies. Given that interest rates are near zero, monetary policy will continue to be centred on further quantitative easing. It is ironic that whilst saving and debt reduction are good, there is no reward for saving. The Bank of England has commenced its second tranche of quantitative easing and it seems as if the only solution for Europe is for similar action to be taken by the European Central Bank (ECB). The ECB has the balance sheet and financial means to properly support the financial system. More generally though, when we aggregate all central bank liquidity, we can clearly see that the electronic printing presses are working in the major markets around the world. All of this means that gold has not yet reached its highs.

Other industrial commodities have started to decline in the past two months. This suggests that Chinese growth is beginning to moderate. Emerging market currencies have also borne the brunt of the changed mood regarding global growth prospects. After two strong years where the rand was at the top of the performance tables, investors have seen this position erode rapidly. The good news is that the foreign exposure has assisted the portfolio's overall performance. Our defensive, high quality offshore equity holdings delivered a positive 12-month dollar performance, which translated into a 22% rand return.

A loss of confidence in the value of emerging market currencies will probably lead to lower local equity prices. We are holding cash to be able to take advantage of well-priced opportunities when they present themselves.

As pricing continues to adjust across markets, capital preservation remains paramount. We are, however, increasingly comfortable with overall asset valuations, which are consistent with expectations of meaningful future real returns, and we will await the right time to capture this upside.

Market review
Developed market equities (0.7%) continued to outperform emerging markets equities (-1%) over the review period. The S&P 500 Index ended the quarter flat, while the German Dax, UK FTSE and Japanese Nikkei indices added 7%, 1.7% and 3.3% respectively. The emerging market BRIC members performed poorly. Russia lost 5.4%, Brazil 5.3%, and India ended the quarter 3.6% weaker. All returns are quoted in US dollars.

While global financial markets were characterised by extreme volatility, the rand seemed almost oblivious to it all. Unchanged over the quarter against the US dollar, the local currency ended only slightly weaker against the euro. Strong portfolio flows - predominantly into the local bond market - plus Competition Tribunal confirmation of Walmart's acquisition of local retailer Massmart, added to the lustre of the rand. Local bonds rallied over the quarter, with the All Bond Index gaining 3.9%. Cash, as measured by the STeFI, returned 1.4% over this period. The listed property sector enjoyed healthy gains, lifting total returns to 5%.

The FTSE/JSE All Share Index closed 0.6% lower over the review period, with the market falling 2% in June. Resources were the biggest detractors, with gold miners and platinum stocks down 13% and 7.7% respectively. Diversified miners lost 3.3%. Health care (6.9%), food producers (4.5%) and telecommunication (5.4%) performed well. Banks gave up 0.9%, with flat returns year to date. Sasol, the only oil & gas sector constituent, fell 8.5% in the second quarter after a strong first three months of the year.

Portfolio review
Over the quarter, the portfolio more than preserved capital in a lacklustre environment for risk assets. Our positioning remained cautious and defensive throughout the review period. The strong rand and our overweight position in gold equities detracted from returns.

Portfolio activity
The portfolio's positioning remains virtually unchanged, with minimal activity over the quarter. The cash position is still high and we are well positioned to take advantage of future opportunities.

Portfolio positioning
Our long-held concerns about a variety of tail risks (including but not limited to the frailty of the euro zone, the unintended consequences of quantitative easing and the aggregate level of public debt) have proven to be largely justified. Our insight into these macro issues have been of little consolation to us due to market participants bidding or holding up the prices of risk assets, as a result of repeated fiscal and monetary intervention by policy makers. The market's positive response to the recent round of interventions is short-sighted and will have no durable effect.

The present financial market conditions have never been seen before. Consequently, we are in an unprecedented risk environment and the resilience of risk assets cannot be reliably sustained. We consider it imprudent to assume normality when the policy makers' arsenal is mostly depleted, the margin for error is narrowing, and the range of uncertainty is abnormally wide.

Our net domestic equity weighting has declined steadily since the first quarter of 2010, and currently hovers close to the portfolio's all-time low. We maintain significant stock market hedges on the basis of the outsized alpha potential of our underlying stocks relative to the broader index, as well as the unattractive risk/reward ratio of the domestic equity market. In contrast, the underlying domestic stocks held in the portfolio exhibit the attractive combination of higher yields, lower valuations and relatively depressed earnings. These shares have also lagged the average stock for an extended period. In aggregate, the composition of our underlying domestic equities remains significantly different to the market index.

The weighting in global equities is higher than domestic equities, and we are fully exposed to currency fluctuations. Offshore equities have a strong quality bias. Our asset allocation is intentionally anti-risk, and we remain well positioned for the inevitable end result of the current risk binge. For now we will exercise the patience and discipline required to benefit from this anticipated outcome.

The portfolio's current positioning is premised on the following views:
- We are not prepared to accept risk at this juncture. Valuations do not adequately compensate investors, and we are intentionally extending the anti-risk composition of the portfolio.
- The domestic equity market is overvalued and mildly overbought, offering only speculative merit for market participants willing to embrace price momentum.
- Domestic equities have seen a synchronised upswing since the March 2009 lows, resulting in a dearth of individual stocks that meet our strict criteria of absolute undervaluation.
- Global equities offer absolute value and significant relative value, particularly on an unhedged currency basis.
- We are content to hold cash, despite it being universally despised. We remain confident that attractive opportunities will present themselves when the current risk trend comes to an end.

In summary, we retain a dramatically reduced exposure to risk assets and our equity holdings, (domestic and global) have a quality and defensive bias. The underlying reasons for our positioning remain intact. We would require a significant decline in risk assets, or strong evidence of a sustainable earnings recovery to change our view or the composition of the portfolio.

Market review
Equity markets performed well during the quarter considering the negative headwinds, which in preceding years would have resulted in sharp falls in risk appetite. Developed markets (4.9%) outperformed the emerging market composite (2.1%), despite a 9% drop in Japanese equities in March and a 6% weaker close over the quarter. Local equities mimicked global market volatility, recovering January's losses and ending the quarter marginally higher (1.1%). Resource counters performed best, with Sasol, the only oil & gas producer constituent in the index, rising 13.1%. Diversified miners closed 3.2% higher while paper stocks added 15.5% over the period. Platinum stocks lost 10.5%. Both the industrial and financial sectors underperformed the broader market, closing down 0.3% and up 0.7%, respectively. Again, there was substantial dispersion amongst the various sub-sectors, with construction (-25%), food producers (-4.3%) and pharmaceuticals (-11.5%) underperforming, while mobile telecommunication (3.9%), life insurance (6.4%) and industrial metals (14.5%) enjoyed strong returns. Local bonds traded weaker over the quarter, with the All Bond Index losing 1.6%. The yield curve has continued to steepen, while inflation concerns both globally and at home have been more pervasive. The firm rand has offset gains in oil prices for now, while food prices, rising at producer level, have not been passed on to consumers. Listed property, highly sensitive to the bond market, also gave up some of its 2010 gains, closing 2.2% weaker. Commercial property fundamentals remain under pressure, though highly dissimilar across regions and asset type. A recovery in growth, coupled with a lagged onset of new supply, will lend support to the market over the next year. Cash, as measured by the STeFI, provided a steady 1.4% over the quarter.

Portfolio review
The portfolio had a very strong first quarter in both absolute and relative terms. Our defensive positioning enabled the portfolio to advance, while most asset classes moved sideways for the quarter. We maintained an extremely high cash weighting as a direct consequence of the dearth of attractive investment opportunities in the domestic market. Our local equity weighting remains below average due to a significant hedge. The hedged equity position added great value as our underlying equities significantly outperformed the market. The main contributors were Sasol, Harmony, MTN, Steinhoff and SABMiller. In addition, our lack of exposure to the construction and platinum sectors added value.

Portfolio activity
Our positioning remains virtually unchanged with minimal activity over the quarter. The portfolio's cash holdings are high and we are well positioned to take advantage of future opportunities.

Portfolio positioning
The portfolio's equity weighting remains high on a gross basis, while the net domestic equity weighting is significantly below average as a result of stock market hedging. We remain defensively positioned in domestic equities. Local equities are fairly evenly split across broad sector lines and comprise a select group of stocks that we continue to believe should outperform the broader market over the medium term. In aggregate, the composition of our underlying domestic equities remains significantly different to the market index. Correlations are declining and valuations are more relevant to market participants. This bodes well for future returns. Recent trends are very encouraging for our typically contrarian and valuationconscious approach. Our current positioning is premised on the following key views:

o We are not prepared to accept risk at this juncture. Valuations do not adequately compensate investors for their investment risk and we are intentionally maintaining the 'anti-risk' composition of the portfolio.
o The domestic equity market is overvalued and overbought, offering only speculative merit for market participants willing to embrace price momentum.
o Domestic equities have seen a synchronised upswing since the March 2009 lows, resulting in a lack of individual stocks that meet our strict criteria of absolute undervaluation.
o We are content to hold cash, despite it being universally despised. We remain confident that attractive opportunities will emerge when the current risk binge comes to an end.

We are once again at odds with the consensus opinion as reflected in recent asset price movements. Such a view suggests that embracing risk is the correct way to be positioned and that it is pointless to fight the flood of liquidity that will engulf markets in the medium term. We do not share this view, as reflected in our current portfolio positioning.

In summary, we retain a dramatically reduced exposure to risk assets and our underlying equity holdings have a quality and defensive bias. The fundamental reasons for our positioning remain intact. We would require a significant decline in risk assets or strong evidence of a sustainable earnings recovery, to change our view or the composition of the portfolio.

We anticipate increasing our bond weighting into price weakness, as higher inflation expectations and global yield pressures present a headwind in the medium term. We maintain our low (and hedged) domestic equity weighting and would only change our positioning if value returns to the market.

Market review
After a volatile first three quarters of 2010, risky assets responded to prospects of an improved economic outlook and ended the year firmly in positive territory. During the fourth quarter, investors switched out of bonds into equities. Global equities added 8.8% over the period, while global bonds lost 1.8% in US dollars. Local bonds could not shrug off the global bond sell-off, ending up only 0.7% over the quarter. Cash, as measured by the STeFI, returned 1.6% for the three months to the end of December. The best performing asset class over the past year was the listed property sector. The sector continued to show strong returns, despite weak property fundamentals. Listed property gained 3.1% in the fourth quarter to rise by 29.6% for the year. Local equities participated in the global equity rally. The FTSE/JSE All Share Index rose 9.5% in the fourth quarter on top of the 13.3% gain over the prior three months, ending the year 19% higher. Resources (16.5%) proved to be the top performing sector, with financials flat and industrials up 7.8% for the period. Amongst the resource counters, diversified and platinum miners (both up 19.2%) did best, while short-term insurers (15.4%) and some smaller industrial sectors (media and support services) beat the overall market. Stocks predominantly focused on the South African economy fared worse. Construction ended the quarter 3% higher, banks closed flat, while food and general retailers added 2.9% and 6.2% respectively.

Portfolio review
The portfolio preserved capital in the fourth quarter, a satisfactory outcome in absolute terms. However, our positioning remained very defensive throughout the quarter and as a consequence, performance significantly lagged cash and the positive momentum in risk assets.

Portfolio activity
Our positioning remains virtually unchanged with minimal activity over the quarter. The portfolio's cash holdings are high and we are well positioned to take advantage of future opportunities.

Portfolio positioning
Our equity weighting remains high on a gross basis, while the net domestic equity weighting is significantly below average as a result of stock market hedging. We have a higher weighting in global equities and within domestic equities we have a more defensive stance. Domestic equities are fairly evenly split across broad sector lines and comprise a select group of stocks that we continue to believe should outperform the broader market over the medium term. In aggregate, the composition of our underlying domestic equities remains significantly different to the market index. Correlations are rising and valuation is currently less relevant to market participants. We accept and fully understand that such conditions are not conducive to outperformance for our typically contrarian and valuation-conscious approach. Our current positioning is premised on the following key views:

o We are not prepared to accept risk at this juncture. Valuations do not adequately compensate investors for their investment risk and we are intentionally extending the "anti-risk" composition of the portfolio.
o The domestic equity market is overvalued and overbought, offering only speculative merit for market participants willing to embrace price momentum.
o Domestic equities have seen a synchronised upswing since the March 2009 lows, resulting in a lack of individual stocks that meet our strict criteria of absolute undervaluation.
o Global equities offer absolute value and significant relative value, particularly on an unhedged currency basis.
o We are content to hold cash, despite it being universally despised. We remain confident that attractive opportunities will emerge when the current risk binge comes to an end.

The US Federal Reserve's second quantitative easing programme (QE2) and increased liquidity have resulted in a euphoric rush for risk assets. The last four months of 2010 saw a relentless rise in asset prices. We believe that QE2 will prove to be high on rhetoric and low on economic delivery. Furthermore, QE2 has widened the range of potential outcomes (including some with disastrous consequences for risk assets everywhere).

We are once again at odds with the consensus opinion as reflected in recent asset price movements. Such a view suggests that embracing risk is the correct way to be positioned and that it is pointless to fight the flood of liquidity that will engulf markets in the medium term. We do not share this view, as reflected in our current portfolio positioning.

In summary, we retain a dramatically reduced exposure to risk assets and our underlying equity holdings (domestic and global) have a quality and defensive bias. The fundamental reasons for our positioning remain intact. We would require a significant decline in risk assets or strong evidence of a sustainable earnings recovery, to change our view or the composition of the portfolio.