The Investec Global Balanced Feeder Fund will change it's name to Investec Global Strategic Managed Feeder Fund, effective from 12 September 2011

Market review
Equity markets largely recovered from an 8.5% fall to finish the quarter with the MSCI All Countries World Index little changed in dollar terms. Despite a quarter-end jump, yields on ten-year government bonds fell to 3.16% in the US (having been back below 3%), 3.38% in the UK, 3.0% in Germany and 1.14% in Japan. Yield spreads relative to Germany rose to new peaks in Greece, Portugal and Ireland. They also increased in Italy and Spain where actual yields reached 5% and 5.7% respectively. Spreads on investment-grade and high yield corporate bonds rose but overall returns were still positive in US dollars, as were returns from emerging market debt. The US dollar fell 2.2% against the euro, 0.6% against the yen and 0.2% against sterling. The US dollar return on the Citigroup World Government Bond Index was 3.3%.

Portfolio review
Economic data for developed markets has been worse than expected, but points to a slowdown in growth rather than a return to recession in our opinion. Meanwhile, there is evidence that many emerging markets are near the end of a phase of monetary tightening, a response to inflation pressures which now appear to be fading as commodity prices wilt. Though the European Central Bank has signalled another rise in interest rates, we do not believe the Bank of England and US Federal Reserve are likely to follow this year. A further phase of quantitative easing is very unlikely in the US while confidence that the European authorities will achieve more than a short-term postponement of a euro crisis is close to zero. The Investec Global Balanced Feeder Fund returned 0.7% in rand terms over the quarter.

Portfolio positioning
The performance of equities in the first half of 2011 has been duller than we expected, but we still forecast equity market returns in the high teens for the year as a whole. Much is discounted in current valuations and, as the gloom about macro issues lessens, we anticipate that markets will rise. The issues are not likely to disappear, but could be more benign than expected in their consequences. Commodity prices have already fallen back and it would take a pick-up in growth expectations to result in new highs, though that should not coincide with significant weakness in global growth.

Government bonds, however, have produced better-than-expected returns as has our preferred mix of corporate bonds, high yield and emerging market debt. The bulk of the year's returns have probably already been earned, but there is scope for further falls in corporate and emerging market spreads, benefiting shorter duration bonds. With interest rates likely to remain ultra low in developed markets, it would be a mistake to be too bearish about bonds. Our view on currencies is firmly neutral. We remain sceptical of the consensus bearishness on the yen and euro and doubtful that the dollar, though appearing cheap, will rally significantly.

It is easy for investors, scarred by two severe equity bear markets in the new millennium already, to be frozen into inactivity by the information overload enabled by recent technology. In our view, it is tempting but wrong to wait for the clouds to lift before increasing portfolio risk: by then, markets will likely have risen and could well be facing another prolonged period of consolidation. Focusing on bottom-up factors such as valuations, corporate earnings, quality of returns and investor positioning is currently unfashionable, but points strongly to favouring equities over cash, bonds and alternatives in the second half of the year.

Market review
Equity markets continued to advance over the quarter, with the MSCI All Countries World Index returning 4.4% in US 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. Despite a mid-quarter dip, yields on 10-year government bonds rose to 3.47% in the US, 3.69% in the UK, 3.35% in Germany and 1.25% in Japan. The 45 basis point rise in German yields was the most marked. Yield spreads relative to Germany rose to new peaks in Greece, Portugal and Ireland. They dipped in Italy and Spain, although actual yields rose markedly. Spreads on investment-grade corporate and high yield bonds rose during the equity correction but fell at the end of the quarter, resulting in positive US dollar returns, while returns from emerging market debt were also positive. The return on the Citigroup World Government Bond Index was 0.7% in US dollars.


Portfolio review
The Investec Global Balanced Feeder Fund had a good quarter, with global equities making a strong contribution to returns. The fund gained 4.5% in rand terms over the review period.

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. Government bonds have performed better than we expected, even though developed market yields have risen, particularly in Europe. Corporate bonds, especially high yield bonds, Asian government bonds and emerging market debt have delivered satisfactory returns, enabling us to produce reassuringly positive returns from bonds overall. The outlook for bond returns may be only modest, but we believe claims that a bubble in valuations is about to burst is far too alarmist. Our scepticism at the start of the year about the prevailing bearishness of the yen and euro relative to the US dollar has been broadly vindicated; we now expect the yen to rally. We anticipate that current affairs will 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
The Investec Global Balanced Feeder Fund outperformed its benchmark in rand terms over the quarter. Global equities contributed to returns, while asset allocation, including currency positions and non-core positions also added value.

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 experience a strong year ahead, with historic highs in developed markets 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. Looking at 2010 yields, government bonds performed better than we had expected with the upward trend in yields over the final quarter likely to continue. The global economy is growing at a steady pace, while attempts to cut fiscal deficits in peripheral Europe seem ineffectual, and non-existent in the US and Japan. We may see growth slowing in the short term, as investors are likely to seek higher real yields to compensate for the increasing risk. However, it should have the effect of enforcing greater fiscal discipline and counter-inflationary policies, which would be to the long-term benefit of economic growth and investment returns. Government bonds and high grade bonds are expensive and we think there is better value in short duration bonds, high yield and emerging market debt. We have focused our portfolio in these areas. However, we believe that the main driver of performance in 2011 is likely to be in equities.