Market review
World equity markets opened the quarter with a roar and ended July in tatters as risk appetite in the fixed income markets evaporated in the face of subprime contagion concerns. This was to dominate news flow and markets worldwide over the quarter and August proved a massively volatile month. A credit crunch forced a substantial deleveraging process, which saw a rush to the safe end of the quality spectrum and a virtual closing of new lending to any part of the market that was perceived to be a potential harbour of credit risk. Action by the central banks to inject liquidity and cut the costs of borrowing engendered a rally in markets over the second half of August. Investors became more confident that the impact of the credit squeeze could be contained in the financial sector and realised that the balance sheet strength of much of the world's industry in the listed markets is at a historically high level.

The US Federal Reserve (the Fed) rode to the rescue once again in September. A larger than expected 50 basis point interest rate cut virtually extinguished worries over the credit crunch and sent investors charging back into equities. The sight of queues of depositors outside Northern Rock branches in the UK and warnings about the impact of marking to market asset-backed bonds from the banking sector forced even the previously aloof Bank of England to take action. The Bank provided funding against a wider range of securities at the three-month rate. Certainly, problems in the money markets persist and it would be unwise to predict a return to normality in the near term. However, it is important to remind ourselves that the price of risk had indeed become hugely expensive and although the money markets may not be functioning quite normally at this point, a repricing of risk to more normal levels has at least been achieved. This can only be assessed as a healthy achievement.

The big question of course is whether or not this healthy adjustment has implications for the wider economy. The Fed's actions have alleviated a bit of this concern but they have also raised the spectre of inflation. As we have said many times, it will be a negative surprise on inflation that will end the current bull market; as yet this has not materialised.

One area of inflationary risk is within commodity prices. Wheat prices moved to new highs, whilst oil is again hovering around US$80. This is partly as a result of supply issues (such as a drought in Australia affecting the wheat harvest), but it also shows that demand remains robust in much of the world. Central to this is China where, given much faster growth, the change in gross domestic product (GDP) is now equivalent to the change in GDP in the considerably larger US economy. Throughout the recent credit crunch, emerging markets - and especially Asia - have therefore been resilient as investors consider that a US slowdown is likely to have fewer repercussions than in the past. The Investec Worldwide Equity Feeder Fund continues to benefit from these trends with investments in Hong Kong (Chinese H shares), Taiwan and Korea all performing well over the month. At the present time, even though the Chinese inflation rate is increasing (mainly due to food prices) and interest rates are going up, the economic picture looks strong.

Fund performance
The Investec Global Equity Fund of Funds gained 2% over the quarter in rand terms, well ahead of the MSCI World Index, which returned 0.2% (in rands). The fund achieved top quartile performance (it was ranked fourth out of 23 funds). The average fund in the sector returned -0.7%. The market fell at the start of the period, driven by concerns over subprime debt and its impact on the financial sector. However, cyclical sectors continued to perform well as earnings, and economic strength, remain solid.

Market outlook
Global equity markets continue to look reasonably valued despite the turmoil of recent months. With worries building over macroeconomic indicators it is important to focus on the lack of any real valuation extension in global markets (with the exception of China). Our overall view remains that further upward progress can be obtained but that progress is likely to be more volatile than in recent years. We have lost the supporting leg of private equity activity. However, we would anticipate a renewal of activity from the listed sector as companies use their cash piles to solidify their market positions or step up buybacks or dividends to make their balance sheets more efficient.

We will remain focused on companies which offer good value and quality, as well as those receiving upgrades to their earnings estimates and that offer a good share price trend. We believe that a disciplined investment process, combined with an emphasis on those companies undergoing change from outside influences or internal restructuring, will prove rewarding for investors in the long term.

Market review
Global equities advanced steadily through the second quarter despite a significant shift in the outlook for fixed interest markets, which saw global bonds weakening over the three-month period. It is indeed rare for the two asset classes to diverge to the extent seen over the second quarter and, historically, this has often proved a very negative portent for the future direction of equity prices. However, it is evident that the shift to a more positive global yield curve was conditional upon evidence of a stronger than anticipated US economy and a shift in the predicted direction of US short-term interest rates from a decline to stable levels at best.

The reporting season for the first quarter demonstrated that the perceived wisdom of a general, and meaningful, slowdown in the US economy was a fallacy and that companies were still enjoying record levels of profitability and cash generation. The importance of this being that analysts had, in general, been doubting the sustainability of the levels of free cash flow generation seen in 2006 when the combination of buy backs, special and ordinary dividends had seen the S&P 500 Index yield more than 8%. The strength of first quarter earnings suggests that 2007 could again see a situation whereby equities would yield more than bonds over the year.

Despite a tightening in liquidity conditions, the world's equity markets are at historically low levels of valuation, and continue to offer the best value of any of the major asset classes particularly as the momentum for real estate now seems to have dissipated. Furthermore, worries about a slowdown in merger and acquisition activity, sub prime contagion or the bubble that is the Chinese A-share market will not destroy the generally positive market trend. It will take a negative inflation surprise to provoke this.

From a regional perspective, the US is still underperforming, albeit by a lesser margin than before. The Japanese market remains in the doldrums, held back by a weak yen. European companies continue to outperform as return on capital is raised to levels prevalent in the UK and the US. Emerging markets and Asia are still strong. Small and medium sized companies were widely expected to underperform large cap companies this year, but the high level of earnings growth meant that this prediction was not realised. Very large companies are still struggling to overcome diseconomies of scale and a lack of organic growth opportunities. The long term trend of outperformance by small and medium sized companies looks set to continue.

Fund performance
The Investec Global Equity Fund of Funds returned 4.4% in rand terms over the quarter, compared to 3.8% for the MSCI World Index (rand terms). The fund outperformed the average fund in the sector.

Market outlook
We still find the world's equity markets an attractive place to invest. Valuations are reasonable and growth expectations appear to be rising. We also recognise that the weakness in the US housing market could have a knock on effect on stock markets and in this context we also anticipate some increase in volatility over the remainder of the year.

Despite some tightening in liquidity conditions, the world's equity markets remain under owned and look particularly good value against the alternatives of fixed income and real estate. We will remain focused on companies which offer good value and quality, as well as those receiving upgrades to their earnings estimates and that offer a good share price trend. It is our belief that a disciplined investment process, combined with an emphasis on those companies undergoing change from outside influences or internal restructuring, will prove to be rewarding for investors in the long term.

Market review
Goldilocks economics held sway among investors in the opening days of the new year. Under the consensus macroeconomic scenario US growth was going to be just soft enough to persuade the US Federal Reserve not to raise rates any further and just strong enough to enable the other economies of the world to take up the slack created by a slowdown in the world's largest economy. Two months is all it took to shatter the confidence of investors in the perfect environment for risk assets. By the end of February it seemed quite plausible that the US housing market might go into crisis mode. All the major data releases disappointed the markets. Almost overnight, everyone heard about the appalling abuses of the sub-prime lending market. Global equity markets did not take kindly to the deterioration in the macroeconomic backdrop. By mid March most markets were 5% to 10% down from their earlier highs with investors expecting a further decline as the collateral damage from the sub-prime lending fiasco seemed to loom ever larger. However, the second sell-off never happened and by month end, equity markets were on their way back up to their earlier highs. The MSCI World Index gained 1.9% (in US dollar terms) over the month and 2.6% over the quarter. The US dollar fell 0.2% against sterling and 0.9% against the euro and the yen over the quarter. The Citigroup Global Bond Index returned 1.2% in US dollars over this period. The Federal Reserve continued to leave rates unchanged at 5.25%. Markets discount nearly 50 basis points of cuts this year. A slowdown in the US economy is clearly underway, but the extent of the slowdown remains unclear. Inflation surprise indicators have picked up, suggesting excessive complacency about the trend. Rates were increased 25 basis points in Europe, the UK and Japan to 3.75%, 5.25% and 0.5%, respectively. Economic growth outside the US remains solid. Oil prices fell below US$60 per barrel, but ended the quarter at US$66. The gold price rose to US$664 per ounce, and other metals recovered strongly at the quarter end from earlier weakness.

Fund performance
The Investec Global Balanced Feeder Fund returned 5.2% in rand terms over the quarter, while the average fund in the sector returned 5.3%, in line with the benchmark index. Asset allocation and equity stock selection contributed positively to returns while bonds detracted from performance. Equity exposure was reduced early in the quarter, but raised again in March, ending the quarter at 66.5%, compared with a benchmark weighting of 60%. Bond exposure was increased slightly to 27.9%

Market outlook
The speedy recovery from the market correction has taken investors by surprise. Analysts' earnings estimates for 2007 have been reduced to around 8.5% globally even though 2006 results were better than expected. However, preliminary forecasts for 2008 show a pick up in growth to 11%. Investors remain more cautious than analysts, even though there are signs that these growth estimates are too low. The valuation of equity markets has risen only in line with earnings, producing a historic price earnings ratio of 16.6 and a prospective one of 15.2. The 10-year US Treasury yield should remain in a trading range with a yield below 5%. UK and European yields have returned to the highs of the last 12 months, but we do not expect significant further upside. As we stated last quarter, the probability of a US recession is lower than the probability of a re-acceleration in growth and bonds should return around their coupon. With bond yields picking up and commodity prices strong, equity markets have probably gone far enough in the short term. The combination of better than expected earnings growth, a possible market re-rating and vigilant central banks should ensure further gains in the remainder of the year. However, volatility is likely to be higher than in recent years. We expect to keep an overweight position in equities for most of the year, but may reduce exposure tactically from time to time.

Market Review
The Fund finished the year with a return of -1.7%. Global equities performed strongly in Dollar terms with a gain of 8.5% but this was offset when converted to Rands by that currency's strong recovery. Over the year as a whole the Fund delivered a respectable return in absolute terms and an average performance within its peer group with a gain of 30.3%. This compares with an MSCI World Index return of 34.1% for the year as a whole. The core global portfolio which comprised approximately 75% of total assets generally performed well. Taube Hodson Stonex, Artemis and Investec (Global Strategic Equity) delivered strong first quartile performance. Threadneedle was a laggard with Index like returns. Longer term however the latter's performance remains strong. Within the thematic section of the portfolio exposure to emerging markets, gold and mining performed strongly but returns were held back by the weak performances of the energy and healthcare sectors and Japan. To some extent this is a simple matter of the cut off dates because performance has come through strongly in January.

Looking ahead not much has changed. We remain broadly constructive for equity returns in the year ahead. Fears about a housing stimulated consumer retrenchment in the United States are already fading and it is clear that global growth is very broadly based and therefore resilient. The sharp fall in energy prices and moderation in the US growth rate should help to maintain inflation at moderate levels. Consensus earnings are too modest in our view, largely due to concerns about the sustainability of corporate profitability at current elevated levels. Until now equity performance has been a function of strong earnings growth and price earnings multiples in the major developed markets have actually compressed over the last three years. Generally speaking we believe that we are in a new phase for equity markets which will be characterised by developed market out performance of emerging markets and leadership within those markets passing from small and mid cap stocks to large cap stocks. Developed market returns are likely to be augmented by multiple expansion.