Market review
Economies and asset markets across the globe had a good second quarter. The rate of contraction in economic activity slowed sharply and risk assets such as equities, corporate credit and commodities generated high positive returns. Policy makers seemed increasingly comfortable that measures introduced at the height of the financial crisis were gaining traction and forward-looking data indicated that the global economy may have reached an important turning point in the current quarter. While conflicting signs of 'green shoots' prevail, markets and economists seem unconvinced that a 'normal' recovery will ensue from here on. 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: financials gained 38%, materials ended 27% higher and industrials rose 24%. Defensive sectors, which had outperformed the market as economies collapsed, lagged the upturn, but still recorded absolute gains over the quarter. Healthcare rose 9%, telcos increased by 10% and utilities ended the quarter 13% higher. 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).

Portfolio review
The Investec Global Equity Fund of Funds returned -2.2% in rand terms over the quarter. In the same period the benchmark MSCI World Index lost -1.7% in rand terms. The recovery in global equities that began in mid March 2009 continued in the second quarter, but this was masked by a strong rally in the rand. The emphasis on quality defensive equities detracted from performance over the quarter, as cyclically oriented stocks rebounded strongly. There were no significant changes in the allocations over the quarter and the fund continued to be fully invested.

Portfolio positioning
We continue to expect a bounce back in the global economy, though this could fizzle out next year owing to debt aversion, rising household savings and fiscal cutbacks in the developed economies. There is already evidence of a recovery in Asia and emerging markets, as shown by the rise in commodity prices. We expect the developed economies to follow. The valuation of the global equity market has risen to 15.6 times 2009 earnings, close to our fair value estimate of 16. However, consensus forecasts for corporate earnings predict 27.5% growth in 2010, after a 14.4% fall in 2009. There are now more upgrades to estimates than downgrades, which mean that as 2010 approaches, the market will look increasingly good value. This does depend on the absence of a renewed trend of earnings downgrades, but the scale of recent corporate cost-cutting, especially in the US, suggests significantly faster earnings growth than current forecasts. Although the current market consolidation may continue for a while, we believe that we are possibly in the early stages of a long bull market in risk assets. There are, however, significant concerns about the economic outlook, the state of government finances, the durability of the recent return to financial stability and the skittishness of investor sentiment, but bull markets can climb a wall of worry. We remain confident about the portfolio's performance in both the remainder of 2009 and thereafter.

Market and portfolio review
The first quarter of 2009 was marked by continued economic weakness and financial market volatility. The severe global economic recession was reflected in a drastic contraction in final demand and international trade and sharp declines in capital investment. Industrial production was substantially weaker than in any other recession post the 1930s Great Depression; company earnings plunged and asset prices continued to drop.

The quarter was also marked by further announcements of fiscal and monetary packages intended to stabilise the global banking sector and support an eventual recovery in economic activity. The latest round of policies in the form of company bailouts and public-private investment programmes brought along some hope of stabilisation, but provided little evidence of successful implementation.

An improvement in some economic indicators and a better earnings picture for three major US banks saw risk appetite returning to global markets and equities retracing from heavily oversold levels. The MSCI World Index rose by 7.6% in March, but gave up 11.8% over the quarter. The S&P 500 Index gained 8.8% in March, but still closed 11% weaker for the quarter. The Dow Jones Industrial 30 Index lost 12.5% over the quarter, but gained 7.9% in March. The German Dax 30 Index lost 18.9%, the French Cac 40 Index ended 16.6% weaker and the Japanese Nikkei 225 Index dropped 16% over the quarter (all in US dollars). All markets generated strong positive returns in March.

Emerging markets did not retest their fourth quarter lows and continued their outperformance over developed markets. In US dollars, the MSCI Emerging Markets Index gained 1% over the quarter. Brazil (10.4%) and Russia (5.9%) performed strongly, while Turkey (-12.7%) and Korea (-4.3%) lagged the peer group over the first three months of the year. The MSCI South Africa Index gave up some of its recent outperformance to end the quarter 4% weaker (in US dollars).

During the quarter the Investec Global Equity Fund of Funds outperformed the MSCI World Index in rand terms.

Portfolio positioning
In an environment of high volatility and rapid swings in investor sentiment the temptation to move in and out of markets is extremely high. In our view this is rarely an effective investment strategy. We believe that a consistent focus on quality and value rather than on momentum usually pays off at such times. Despite the recent rally, quality and value abound at the present time. Investors are still very risk averse and are hoarding cash and less risky assets at a very high level relative to historical norms. In these circumstances signs of any underlying improvement in future corporate profitability can lead to a buying panic as investors race to build risk into their portfolios.

Examining corporate profit expectations we notice a general flattening of the downward trend that has been so strong and all encompassing over the past year. The upcoming earnings season is likely to prove particularly important. If the earnings picture improves, we could see a further extension of recent price gains as market participants become increasingly confident about the value case for global equity markets. A case that we believe will eventually be recognised to the benefit of long-term investors.

A disciplined investment process which is evidence based and consistently applied will be rewarded over time. Our focus on quality, valuation, earnings revisions and technical momentum will, we believe, deliver outperformance over the medium and longer term.

Market review
The crisis in the world's financial system reached a crescendo in September with the collapse of Lehman Brothers. Over the course of the final three months of the year, the effects of the turmoil in the financial sector were felt across all areas of the global economy. The world's major economies, including the US, UK, Japan and the euro zone are all experiencing significant declines in output and the severity of these recessions intensified during the fourth quarter.

Authorities in the US and UK took dramatic action in an attempt to stimulate their respective economies and to jump-start the flow of credit from banks to companies and households. At the start of the quarter, the federal funds target rate stood at 2%. After two cuts of 0.5% in October, the rate was reduced to between zero and 0.25% on 16 December, as the threat of deflation appeared on the horizon. The Bank of England cut rates from 5% at the beginning of October to just 2% by 4 December.

The countries of the euro zone had appeared to be better placed to cope with a global slowdown, given their generally low levels of household and corporate debt. However, weak global demand in the fourth quarter has seriously affected European manufacturing and industrial output.

Many of the world's emerging economies continue to grow, but it is clear that they are not immune from the problems affecting developed economies. Exports to the West are one of the main drivers of growth in Asia and these have begun to suffer. Many emerging Asian economies are also employing substantial monetary and fiscal measures to support their economies.

Portfolio review
The Investec Global Equity Fund of Funds had a difficult fourth quarter, but managed to outperform its benchmark, the MSCI World Index, in rand terms. Generally, the better quality companies with the most stable cash flows, such as the defensive consumer stocks outperformed. Cyclical stocks, whose earnings were most under threat from an economic downturn, continued to weaken. Stocks such as Wal-Mart and McDonalds outperformed. Despite being exposed to discretionary consumer spending, these companies are likely to benefit from down-trading by increasingly cost conscious consumers.

At a stock level the biggest contributors to performance were NTT DoCoMo and Chubb Corp. NTT DoCoMo, the Japanese telecoms services company, is benefiting from more rational competition in its domestic market, while returns have also been boosted by the strong yen. Chubb Corp, the property and casualty insurance company, is expected to benefit from any shrinkage in market underwriting capacity following the restructuring of AIG.

The two biggest detractors from performance were both financial stocks. National Bank of Greece was harshly de-rated, following investor concern about emerging market exposure. Although Credit Suisse Group remains one of the better managed global banking franchises, recent losses on its proprietary trading book have caused concern. However, at a sector level, banks made a positive contribution as we were underweight this underperforming sector.

Portfolio positioning
With risk aversion continuing to be the defining feature of capital markets, it is becoming increasingly evident that investors can expect little or no reward from any strategy that offers a safe haven. Preservation of capital appears to be the best outcome that can be expected from investments such as US Treasuries. As a result, there are potentially extraordinary returns to be earned by investors prepared to accept some level of risk. Corporate bonds and equities offer unprecedented levels of value even on an extremely pessimistic economic outlook. High quality franchises are plentiful, but thus far investors remain too fearful to commit funds. It appears that governments are going to continue throwing money at the markets and at some point credit conditions will begin to meaningfully ease.

The problem for any potential investor is the timing of a more riskaccepting investment strategy. Momentum remains poor, despite the rally we have seen since mid November. It is important to remember that the market is likely to see the improvement in conditions first and that it has the tendency to rally sharply from its currently oversold position. Our focus remains on acquiring strong business franchises at historically low multiples. In the current market environment we have a unique opportunity to obtain these businesses at bargain basement prices. We will continue to concentrate on attractively valued companies, with good track records and an improving earnings outlook. This should pay dividends over the longer term.