Market review
Global equity markets continued to be heavily influenced by news from Europe. However, this proved to be a positive driver over the quarter as the MSCI All Countries World Index rose by 6.8% in US dollars. The commitment by European Central Bank (ECB) President, Mario Draghi, in July that the bank would do "whatever it takes" to save the euro, led investors to put aside their immediate concerns about the euro zone. Positive sentiment was supported in September by announcements of additional injections of liquidity from the ECB, US Federal Reserve and Bank of Japan, buoying markets further. However, the rally in risk assets occurred despite the disappointing economic data that continued to come out of the US, Europe and China. Boosted by the return of investor risk appetite, the financials and resources supersectors posted the strongest returns.

Portfolio review
The US Federal Reserve has taken a strong position regarding unlimited quantitative easing (QE) for economies and markets with the announcement of the recent QE3 'infinity' policy. This action is a deliberate attempt to prevent the dollar from appreciating and to control borrowing costs by keeping long-term interest rates low, making savers subsidise borrowers. We do not believe that such strategies will create jobs, but that they will simply stall negative employment trends. However, we believe that these actions should spur renewed interest in equities, where the valuation gap is large to bonds, and within equities, the gap between income-generating, stable, growth businesses is even larger when free cash flows are compared. Sector rotation occurs frequently, as investors largely seem incapable of taking long-term views, wanting to buy 'lively' stocks in more buoyant markets. Such a strategy involves selling defensive winners to buy cyclical higher beta names, but typically ends badly as the events of January 2012 showed. This strategy appears to have been adopted by investors over the last quarter. We have the patience and resilience to hold quality, being mindful of the longer term. The Investec Global Equity Fund of Funds delivered strong returns over the quarter.

Portfolio positioning
A cyclical sector from which we are starting to draw more ideas is consumer discretionary, in general, and certain luxury goods names, in particular. Where stocks screen attractively on mid-cycle free cash flow yields, and are supported by great operating metrics, we become interested. We expect to make investments selectively in this area in the next few months. A common concern of investors is whether the performance of consumer staples has peaked, given high valuations and strong performance momentum. Our fund is not a top-down consumer staples fund, although several names are attractive to us on a bottom-up basis. Seventy-five percent of the portfolio is invested in high quality investments and twenty-five percent in out of favour turnaround stocks. The valuation of the fund on 13.6x 2012 earnings, a 6.5% historic free cash flow yield and a 3.3% dividend yield, with earnings growth capability is attractive to us. It is important to note that over two-thirds of the overall fund volatility comes from fluctuations in the rand/dollar exchange rate, which we cannot control. However, we believe that uncompetitive labour costs locally, a 6.4% current account deficit and falling commodity prices suggest that the rand will remain a tailwind to performance, as it has been over the past year.

Market review
Global equity markets witnessed a downturn in the second quarter, as measured by the MSCI All Countries World Index, which fell 5.6% in dollar terms. The overall return for the period masks June's recovery, with most of the positive performance coming on the last day. Markets were overshadowed during the period by fears of a slowdown in the three main global engines, Europe, the US and China, although it was primarily events in Europe which grabbed the headlines. This was in spite of companies generally reporting good earnings for the first quarter, indicating that the selloff in equities was a 'risk-off' trade, rather than being about fundamentals. Interestingly, volatility as measured by the VIX Index is at lower levels than in 2011, suggesting that investors have learnt the lessons of previous periods and are not as quick to react extremely to events in the market.

Portfolio review
Commodity prices, with the exception of gold, have fallen over the past 12 months. Oil and copper, both reliable barometers of the health of the global economy, have slipped 16% and 18%, respectively. Emerging market stock prices have also fallen, with the commodity exporting BRIC nations - Russia and Brazil - seeing their equity markets tumble over 25% over the past year. We have been able to avoid losses of capital through minimal direct exposure to emerging markets. Most of the decline has come from falling currencies. In contrast, the US has led intellectual capital-rich corporates to new share price highs, despite the economic challenges facing the US economy. Our non-consumer staples share price positioning in the Investec Global Franchise Fund has benefited from these trends. Technology shares have been winners, and our holdings in Microsoft and Samsung Electronics have been leading performers. Both shares still offer compelling valuations, and we expect further gains from these holdings. Japan Tobacco's strong performance has surprised many investors, but all we have seen is a closing of the valuation disparity with its global peers. A value added tax increase in Japan, which should allow it to implement a price increase, bodes well for the improved profitability of the Japanese tobacco business. The international business has been extremely strong and underappreciated by the markets. The stock continues to be our largest holding. The world's largest brewer, Anheuser-Busch InBev, has launched a bid to buy the remainder of Mexico's Modelo business. Funding costs of 2%, pretax, represent an incredibly low cost of capital and with cost synergies should propel the earnings power of this business to higher levels. The share has performed well, but merely in line with the new earnings trajectory, and we believe still offers value relative to its peers. In general, this extremely low cost of debt can be compared with the high cost of equity. In our view, the valuation disparity between equities and bonds is much too stark. One could justify earnings multiples of almost 50 times earnings on certain shares we hold.

Portfolio positioning
Many strong first quarter earners are reluctant to upgrade expectations for the year and there are some cautious statements from managers as to the outlook for the remainder of 2012. This has resulted in many broad 'industry headwind' justified earnings downgrades. The second quarter reporting season will provide an insight into whether this more negative outlook is justified, or whether companies will be able to exceed expectations, as they have managed to do for so many recent quarters. It seems unlikely that a generally better earnings season will be enough to enable jittery investors to look beyond the headlines and focus on bottomup analysis. However, we believe that individual stock selection will remain key in generating alpha (outperformance). Our message remains positive, with June demonstrating again that at current valuation levels progress can be made, despite an atmosphere of fear. Equities are very attractive relative to bonds and, if margins can be maintained, are intrinsically cheap in an absolute sense. Some positive surprises in the coming earnings season will help to support markets, but focusing on shareholder returns and returning cash to owners should prove the most productive method of attracting money to global equity markets.

Market review
Global equity markets made a strong start to the year as companies continued to report earnings in excess of expectations and the US economy's steady recovery helped improve sentiment toward risk assets. Emerging market and Asian stocks outperformed, while Europe, demonstrating a significant North/South divergence in returns, underperformed. The US market was broadly in line with the global average. Investors focused on the attractively valued sectors that had sold off in 2011, including technology and financials.

Portfolio review
The Investec Global Equity Fund of Funds gained 3.7% in rand terms over the quarter. Good stock selection across diverse supersectors, including consumers, services and technology contributed to returns. The connecting theme over the period was attractively valued stocks that were executing well, such as Apple, priceline.com and Macy's. Although the materials sector underperformed, owning individual shares that could benefit from the weaker feed stock prices, such as LyondellBasell and BASF, contributed to the overall outperformance of your portfolio. Equally, being underweight some of the large cap defensive sectors also helped, including food & beverages and household & personal goods. Our overweight position in non-life insurance stocks detracted from returns, as they are less geared to equity market than bond market returns.

Portfolio positioning
Equities are attractively valued against global government bonds. Global stock markets are also attractively valued in absolute terms relative to history. These would seem to be good enough reasons to allocate capital to equity markets. However, we believe an understanding of the sustainability of the forces behind the strong improvement in margins and returns is needed to round off the case for equities right now. Our focus is on attractively valued stocks

Market and portfolio review

Although equity markets produced considerably better returns than those of the dismal third quarter, political and economic news flow continued to cause volatility for much of the period, particularly on developments relating to the euro zone. Whilst investors were initially relieved that measures announced at the October EU summit answered immediate euro-zone funding concerns, peripheral sovereign yields remained elevated, given changes of government in Greece, Italy and Spain.

Markets rallied, however, after six central banks extended cheap dollar funding to European banks, and China lowered the reserve ratio requirement for its banks. The European banking sector was also supported into the end of the quarter by the European Central Bank's three-year lending operations. Whilst consumer discretionary stocks generally rebounded, financials and materials-related shares did not, given that there was no fundamental shift in economic growth expectations. Many banks came under pressure again this quarter.

The Investec Global Equity Fund of Funds returned 2.7% in Rand terms over the quarter.

Portfolio positioning

In an environment featuring huge amplitude in sentiment and the instantaneous transmission of these sentiment changes to equity prices, we superficially appear to be hostages to short-term macro/political events, where predictability is very low. However, in the long term, company fundamentals will prevail and currently companies are performing well in a challenging environment.

Whilst there have been a few corporate casualties over the past few months, quality businesses are still focused on generating strong cash flows and have extremely solid balance sheets. We remain committed to high quality, cheap companies with improving operating performance and as correlations drop, these are the types of companies that should attract investors.