Market and portfolio review

During the quarter, low interest rates and further quantitative easing continued to support financial assets. Low nominal cash yields have drawn investors into riskier asset classes. Emerging market equities, along with commodity prices and emerging market currencies, were the clear winners. The MSCI Emerging Markets Index rose 18.2% in US dollars over the quarter while the MSCI World Index gained 13.9%. Zinc, copper and aluminium ended more than 20% higher, outperforming a substantially weaker US dollar. Gold breached the $1300 mark, to gain 5.4% over the quarter and 19.4% year to date. Platinum and Brent crude both returned 8% in the past three months. Ten-year US Treasuries strengthened, with yields ending the quarter below 2.5%. During the review period, the Investec Global Equity Fund of Funds underperformed its benchmark in rand terms.

Portfolio positioning

Global net debt to equity levels are extremely low relative to history (excluding financials) and large cash balances are building in some sectors, most notably technology. It therefore seems reasonable that investors have stepped up the pressure for cash to be returned.

Free cash flow yields of public companies almost match those of high-yield bonds and exceed the yield level on investment-grade bonds by around a third. Meanwhile, the spread between the dividend yield of the S&P 500 Index and US treasuries is at one of its highest levels since the Second World War. It seems perverse that the yield on high quality, large capitalisation companies should exceed the income levels available on low quality, low liquidity fixed income instruments.

The mounting cry of 'use it or lose it' aimed at management is likely to have a few effects. Most prominently, aside from the higher level of payout, is an increase in the marginal propensity to acquire. It seems that investors are prepared to reward companies for moving assets into higher returning, though more risky, enterprises and away from low returning cash. With the pressure mounting to do something with surplus cash and no acquisition penalty, it seems highly probable that merger and acquisition activity will gather momentum.

As greater confidence in cash returns appears to be growing, the question is whether the 'risk-on/risk-off' phenomenon that has characterised global equity markets this year can be replaced by a more trended market. We believe that this is possible; however, the aftershocks of the 2008 market dislocation may not yet have completely dissipated.

The second quarter of 2010 reminded investors and market commentators that excess global indebtedness which had resulted in the global financial crises was not likely to be resolved in a few short months or by some extraordinary policy miracle. The spotlight remained firmly focused on Europe, with certain countries in the region straining under the heavy burden of sustainable funding requirements.

Global share markets headed lower as uncertainty rose around the likelihood of a V-shaped economic recovery. The MSCI World Index dropped sharply, closing 12.5% down over the quarter, dragging this year's returns into negative territory (-9.6%). Emerging markets fared somewhat better, shedding 8.3% over the quarter and 6% year to date. (All returns are quoted in US dollars).

Market review
2009 marked the end of the recession and provided asset markets with ample opportunity to retrace some of the losses sustained in the wake of the worst global financial and economic crises in decades. Along with commodities and the corporate credit markets, emerging economies were the prime beneficiaries of improving global growth prospects, the strong recovery in risk appetite, the weak US dollar and low borrowing costs across the developed markets. Emerging market equities rose 8.6% over the last quarter and 79% in 2009, well ahead of developed markets. The MSCI World Index returned 4.2% over the quarter to push the year's gains to 30.8%. All returns are quoted in US dollars.

Portfolio review
The Global Equity Fund of Funds underperformed the MSCI World Index in rand terms over the fourth quarter of 2009. The best performing sectors for the portfolio over the review period came from a variety of super sectors. Performance benefited from good stock picking.

Portfolio positioning
Entering 2010, we believe the world's equity markets are in a reasonable condition. Functionality in the credit markets has returned and the raising of equity in both the primary and secondary markets has gathered momentum, further enhancing the general strength of corporate balance sheets. Money has now begun the next stage in the transition from cash to bonds and is moving strongly to equities as risk appetite continues to grow. This is as a result of greater confidence and the paucity of alternative income-producing assets. In our view, this process is likely to continue through 2010, although government support for capital markets may be gradually withdrawn and the funding markets would then have to function without it. We are also concerned about the extent of the legislative wave that is approaching the financial sector and how the balance between capital adequacy and the provision of finance to the corporate and consumer sectors will be achieved. In 2009 deep value was rewarded, but in 2010 clear value opportunities are likely to be significantly less prevalent (with perhaps the exception of the financial sector). Therefore, we look to 2010 as the year when those corporations that succeed in delivering an enhanced operating performance at a time of muted, but positive economic performance may be rewarded by the investment community. We would also anticipate a stronger focus on quality as institutional money flows to equities. Quality companies have been broadly neglected, as buyers have looked for cyclical exposure rather than size and strength and this group appears good value relative to its history. In this context, we expect further progress for markets in the medium term, but anticipate a more broadly based leadership where quality is added to the mix of value and momentum factors.

Market review
2009 marked the end of the recession and provided asset markets with ample opportunity to retrace some of the losses sustained in the wake of the worst global financial and economic crises in decades. Along with commodities and the corporate credit markets, emerging economies were the prime beneficiaries of improving global growth prospects, the strong recovery in risk appetite, the weak US dollar and low borrowing costs across the developed markets. Emerging market equities rose 8.6% over the last quarter and 79% in 2009, well ahead of developed markets. The MSCI World Index returned 4.2% over the quarter to push the year's gains to 30.8%. All returns are quoted in US dollars.

Portfolio review
The Global Equity Fund of Funds underperformed the MSCI World Index in rand terms over the fourth quarter of 2009. The best performing sectors for the portfolio over the review period came from a variety of super sectors. Performance benefited from good stock picking.

Portfolio positioning
Entering 2010, we believe the world's equity markets are in a reasonable condition. Functionality in the credit markets has returned and the raising of equity in both the primary and secondary markets has gathered momentum, further enhancing the general strength of corporate balance sheets. Money has now begun the next stage in the transition from cash to bonds and is moving strongly to equities as risk appetite continues to grow. This is as a result of greater confidence and the paucity of alternative income-producing assets. In our view, this process is likely to continue through 2010, although government support for capital markets may be gradually withdrawn and the funding markets would then have to function without it. We are also concerned about the extent of the legislative wave that is approaching the financial sector and how the balance between capital adequacy and the provision of finance to the corporate and consumer sectors will be achieved. In 2009 deep value was rewarded, but in 2010 clear value opportunities are likely to be significantly less prevalent (with perhaps the exception of the financial sector). Therefore, we look to 2010 as the year when those corporations that succeed in delivering an enhanced operating performance at a time of muted, but positive economic performance may be rewarded by the investment community. We would also anticipate a stronger focus on quality as institutional money flows to equities. Quality companies have been broadly neglected, as buyers have looked for cyclical exposure rather than size and strength and this group appears good value relative to its history. In this context, we expect further progress for markets in the medium term, but anticipate a more broadly based leadership where quality is added to the mix of value and momentum factors.