Market review
Sovereign indebtedness and slowing growth remained key concerns for markets during the quarter. Early August ushered in the start of a strong and rapid correction for risk assets as 'contagion fears' coincided with poor macro releases and a surprise downgrade to US long-term federal debt. Although second quarter results were generally solid, investors worried about a double-dip recession, a Chinese 'hard landing', and the perceived lack of political inaction over Greece as a debt default or euro exit appeared increasingly likely. Rumours over the potential enlargement of the European Financial Stability Facility and new injections for troubled banks, helped to stabilise markets to some extent at the end of the quarter. The MSCI All Countries World Index tumbled 17.4% in US dollar terms.

Portfolio review
The portfolio experienced a tough quarter. Exposure to stocks related to the emerging market growth story hurt performance. The resources and services super-sectors were the key detractors. In resources, there were significant declines in a number of our base metal companies. As concerns in September moved on from an isolated euro-zone crisis to a world-wide slowdown, the prices of copper, zinc and even gold declined sharply. We hold a number of stocks that mine copper, so these fell as a result. Within services, stocks that are perceived as having less operational and financial risk found favour with investors, whilst luxury goods companies sold off as investors began to link a global slowdown with a retrenchment of high-end sales. This change in the market was detrimental to the portfolio. However, we continue to hold our current positions, as neither the company specific evidence, nor indeed the broader sales trends in the industry, confirm this shift in investor perception.

Portfolio positioning
With near-term news flow driving rapid changes in market sentiment, we anticipate that volatility will continue into the final quarter of 2011. In the short term, investors will be watching policymakers closely and assessing their efforts to resolve the European crisis, support confidence in the banking sector, and bolster growth. Although valuation dispersion across sectors is currently abnormally high, creating a difficult backdrop for active fund management, this lack of fundamental differentiation ultimately creates excellent investment opportunities.

Market review
Equity markets experienced a weak second quarter as macroeconomic releases pointed towards a softening in data. Fears about the future of the global recovery resurfaced just as the US terminated its second round of quantitative easing. Sovereign debt woes failed to fade from the headlines as a potential default for Greece became more likely. However, the passing of austerity measures by the Greek parliament dovetailed with verbal commitments from the European Union and financial institutions to help secure Greece's sovereign credibility. Consequently, global equity markets rallied sharply at the end of the review period. At the corporate level, although first quarter results were ahead of consensus, guidance, particularly from technology firms, was troubling. Commodity prices slid sharply off their highs as a result of profit-taking by speculators and signs of easing demand from China. In the markets, the technology, resources and financial sectors underperformed as food producers, healthcare and the tobacco sectors performed well.

Portfolio review
The Investec Global Equity Fund of Funds gained 1.8% in rand terms over the quarter. The performance was driven by good stock selection balanced across the portfolio, encompassing economically sensitive industrial and consumer discretionary stocks as well as the more typically defensive consumer staples stocks, such as pharmaceuticals. The strongest returns came from owning a number of international retailers that are able to grow revenues and margins faster than expected, as well as engineering stocks that supply into the stronger oils and chemicals sectors. Equally, the portfolio performed well in pharmaceuticals as companies with strong drug pipelines were rewarded. The worst performing sector in the portfolio over the quarter was semiconductors, where forward-looking guidance was very cautious as demand for PCs and TVs has slowed.

Portfolio positioning
So far, corporate earnings have been very strong through the recovery phase of the market. Our 'regime indicator', along with leading sectors such as semiconductors, is flashing a warning signal to us that within the upcoming reporting season companies that disappoint on earnings or guidance will be dealt with harshly. The market is not in a forgiving mood, given Greece's sovereign fragility and the precarious game being played out in the US over its budget. Nevertheless, we do not believe that the market is particularly vulnerable, unless global economic indicators take a sharp downward dip.

Market review
Equity markets continued to advance over the quarter, with the MSCI All Countries World Index returning 4.4% in dollar terms. The MSCI Emerging Markets Free Index returned 2.1% and the MSCI Asia ex Japan Index 1.2%, both in US dollars. Smaller companies performed broadly in line with the major indices; the HSBC Index returned 4.8% in US dollars. Forecasts for global economic growth have been trimmed, not least owing to short-term downgrades in Japan. The economic data, however, has been generally positive, especially in the US. Inflation data has been disappointing, due to rising commodity prices, but there is little evidence of this feeding through into core rates. Forecasts for the current year have been increased but there is no assumption that price pressures will reverse in 2012. The European Central Bank has signalled an imminent rise in interest rates, the Bank of England is likely to follow and even the US Federal Reserve is indicating policy tightening with a further phase of quantitative easing unlikely.


Portfolio review
The Investec Global Equity Fund of Funds gained 3.8% in rand terms over the quarter. The review period was characterised by significant performance divergences between sectors, with more defensive sectors such as consumer staples (3.8%) lagging overall market returns materially. In contrast, more cyclical sectors such as industrials and energy outperformed significantly with returns of 9.5% and 16.5% respectively (in rands). Given the conservative, quality-oriented policy pursued by the fund, we would expect it to lag strong up moves in equity markets that tend to favour more cyclical, lower quality equities. As the recovery matures, quality stocks with solid earnings prospects should rally on a relative basis.


Portfolio positioning
Despite all the shocks, concerns and uncertainties in the first quarter, global equities still returned 4.4%. Annualised, this would produce a return of 18%, in line with our forecast of high-teens returns for the year. Markets are bouncing back from a mild setback, yet investors are hunting for reasons to ignore the improving trend. With strong earnings growth, modest valuations and under-invested institutional and private investors, we think it will take at least one significant new shock to prevent equities rising further in the second quarter and over the rest of the year. On the positive side, growth in corporate earnings is likely to continue to exceed forecasts with margins in developed markets unlikely to peak until unemployment has fallen substantially, while the relative performance of emerging markets is recovering strongly from its recent setback. We expect current affairs to bring more to worry about in the rest of the year, but investment markets, especially equities, should continue to produce solid returns.

Market review
General currency weakness in developed markets, extraordinarily supportive policy settings amongst most major economies and robust demand from Asia, boosted commodity prices. Copper, silver and palladium closed up 20.9%, 42.1% and 39.1% respectively over the last three months of the year. Gold added 8.6% in the fourth quarter to close at a record high of $1407 an ounce. Brent crude oil closed 16.6% higher in the fourth quarter and 22.7% up on the year. While both equity and bond prices saw strong gains in the third quarter, bond yields surged in the fourth as the asset class faced a raft of headwinds. Economic data showed some improvement, bond auctions proved softer, investors switched out of bonds into equities and the Irish debt crisis evolved. In addition, widespread criticism of the US Federal Reserve's continued use of unconventional policies, in the face of excessive government debt burdens, gained momentum. Global equities added 8.8% over the quarter, while global bonds lost 1.8% in US dollars, the latter cushioned by the surge in the Japanese yen. The S&P 500 Index rose 10.8%, Tokyo's Nikkei 225 Index gained 12.5%, while the FTSE 100 Index in London ended the quarter 6.2% higher. Developed markets (9.1%) saw better returns than their emerging market (7.4%) counterparts. Russia (16.5%), South Africa (13.1%), and South Korea (11.4%) beat the likes of Turkey (-7.9%), India (2.2%) and China (0.7%). (All returns are in US dollars).

Portfolio review
A positive return over the calendar year in terms of US dollars and euros was largely offset by the strength in the rand. Over the year, the Investec Global Equity Fund of Funds returned -3% in rand terms, while the MSCI World Index gained 0.9%. Having demonstrated its defensive properties in the sharp market setback between mid April and July, the fund lagged a rebounding market in the fourth quarter. The portfolio returned 0.9%, in rand terms over the period, with the MSCI World Index returning 3.5%. Given the conservative quality-oriented policy pursued by the fund, we would expect it to lag strong up moves in equity markets that tend to favour more cyclical, lower quality equities. As the recovery matures, we would expect quality stocks with solid earnings prospects to rally on a relative basis.

Portfolio positioning
After a strong run we could see a short-term setback, as there is presently an excess of bullish sentiment in the market. The consensus forecast shows that global equity markets are good value; this is based on a price earnings ratio of 14.6 for 2010 and 12.6 for 2011. Investors, however, are sceptical of the consensus forecast showing earnings growth to be at 16.6%. We believe that this is an underestimation and that double digit earnings growth should continue into 2012. Markets should have a strong 2011, with historic highs in developed markets perhaps being challenged. Equity weightings are low, interest rates negligible, and as investors are increasingly nervous of bonds, we would expect any equity setback to be seen as a buying opportunity. Important risks remain in the form of continued deleveraging, the potentially inflationary effect of abnormally low interest rates and quantitative easing as well as excessive government borrowing. The structurally defensive characteristics of the fund, which result from its core exposure to stocks with strong and established global franchises as well as contrarian special situations, should continue to suit more conservative investors.