Market review
Equity markets continued to rise in April and the first half of May, but then retreated before rallying at the end of June. The MSCI AC World NR Index returned -0.4% in dollars over the quarter. The MSCI Emerging Markets NR Index lost 8.1% and the MSCI Asia ex Japan NR Index shed 5.3%. Yields on 10-year government bonds rose to 2.49% in the US, to 2.45% in the UK, 1.73% in Germany and 0.86% in Japan. Spreads of government 10-year bonds relative to Germany fell to 3.04% in Spain and 3.47% in Italy, despite rising in June. Spreads on investment-grade and on high-yield corporate bonds relative to government issues rose while yields on local emerging market debt increased sharply. The dollar gained 0.1% against sterling and 5.1% against the yen, but lost 1.2% against the euro. The return on the Citigroup World Government Bond Index (All Maturities) was -3%.

Portfolio review
The allocation to the Investec global equity funds contributed to portfolio returns over the quarter. Non-core Investec and other equity allocations detracted from relative performance, while non-core bond allocations added value. Asset allocation and currency hedging also contributed to performance.

Portfolio positioning
The turbulence across financial markets came as something of a shock to bond investors, but it was only a modest correction to equity markets by historical standards. We have been expecting the end of the 30-year-long bull market in bonds for some time and have positioned the portfolio for it. The bond market sell-off represents the start of "normalisation", a return of bond yields to historical levels as economic growth picks up. In the medium to longer term, this is good news for economies and markets, but investors have focused on the shorter-term impact. It would be naive to expect equity markets to move in the opposite direction to bonds, but a better outlook for growth is good for corporate revenues and earnings. As soon as bond yields stabilise, we expect equities to rally strongly. Value is improving, revenue growth is solid and earnings growth is strong, with consensus forecasts pointing to double-digit growth in 2013 and 2014. The downgrade momentum of these estimates has almost stopped and looks likely to swing to net upgrades. In many years, second quarter market turbulence has been followed by a strong second half. We believe this year should follow the same pattern.

Market review
Equity markets rose steadily in the quarter, with the MSCI AC World NR Index returning 6.5% in dollars. The S&P 500 NR Index returned 10.4%, the MSCI Europe ex UK NR Index 2.8%, and the Topix Index (Japan) 11.7% (all returns in dollars). The MSCI Emerging Markets NR Index returned -1.6% and the MSCI Asia ex Japan NR Index returned -0.5% in dollars. Yields on 10-year government bonds rose to 1.85% in the US, but fell to 1.77% in the UK, 1.29% in Germany and 0.55% in Japan. Spreads of government ten-year bonds relative to Germany declined slightly to 3.76% in Spain, but rose to 3.47% in Italy. Spreads on investment-grade and on high-yield corporate bonds relative to government issues fell, while yields on local emerging market debt rose slightly. The US dollar gained 7% against sterling and 2.7% against the euro and 8.6% against the yen. The return on the Citigroup World Government Bond Index was -2.8% in dollars. While the euro-zone crisis rumbles on and the economic outlook there remains remorselessly negative, currency depreciation has improved the outlook for the UK and Japanese economies. Growth in the US continues to gather strength and the outlook in Asia and emerging economies is improving overall. Inflation pressures are subdued, helped by flat to falling commodity prices. Data releases had been significantly better than expected on both activity and inflation, but there was a pick-up in the number of negative surprises as the quarter drew to a close. The Brent oil price was little changed at $109 per barrel and the gold price dropped to $1 599 per ounce.

Portfolio review
The Investec Global Strategic Managed Feeder Fund returned 13.3% over the quarter. Asset allocation and currency hedging contributed to performance. The global equity portfolio and non-core bond and non-core equity funds also added value.

Portfolio positioning
The steady progress of markets in March brings the first quarter of 2013 to a satisfactory conclusion. Progress has been underpinned by good results for the fourth quarter of 2012; a steadily improving trend of earnings forecasts for 2013; and an upbeat preliminary assessment about the outlook for 2014 - all on top of valuations that remain reasonable. Persistent selling of equities by investors has turned into persistent buying, so investors have used even the modest setbacks triggered, inevitably, by macroeconomic issues to add to exposure. Moreover, the growing dispersion of returns within the market points to more opportunities for active funds to add value. It is increasingly difficult to find value across the bond market, but we do not believe a sudden spike in yields is likely. With good credit, country and currency selection, it should continue to be possible to generate moderate, but positive, returns from bond portfolios - especially with the help of exposure to absolute return bond funds. Our exposure to bonds is being steadily reduced, but it still fulfils a useful role in diversifying returns, reducing volatility and generating income. We are ready to raise exposure tactically if bond markets sell off. However, investors seeking to preserve the real value of their capital have little choice but to focus primarily on equities and correlated asset classes. Some short-term volatility is inevitable and bursts of performance will be interspersed by dull periods. Patient investors able to cope with mild volatility and endless macroeconomic scare stories should be well rewarded.

Market review
The MSCI World Index added 2.6% in US dollars over the quarter, with Germany (+8.1%), France (+11.6%) and the emerging market composite (+5.6%) showing particularly strong gains. Yields on 10-year government bonds rose to 1.76% in the US and 1.85% in the UK, but fell to 1.32% in Germany and were barely changed at 0.79% in Japan. Spreads of government 10-year bonds relative to Germany fell to 321 basis points in Italy and 399 basis points in Spain. Spreads on investment grade and on high-yield corporate bonds relative to government issues fell while yields on local emerging market debt also declined. The US dollar fell 0.7% against sterling and 2.5% against the euro, but rose 10% against the yen. The return on the Citigroup World Government Bond Index was -1.7%. Economic activity in the US may have been held back by worries relating to the political impasse concerning fiscal issues. The UK economy may have suffered a relapse after the strong third quarter while a period of apparent calm in the euro zone could not disguise a deteriorating economic outlook. Political change in Japan underpinned a determination by the central bank to ease monetary policy and weaken the yen. Overall, data releases have been as expected. The Brent oil price was barely changed at $111 per barrel while the gold price dropped to $1675 per ounce. The CRB Commodities Index fell 1.3%.

Portfolio review
The Investec Global Strategic Managed Feeder Fund benefited from asset allocation over the quarter, and the global equity portfolio was a major contributor to performance.

Portfolio positioning
While market commentaries have been obsessed with the US fiscal cliff, investors have taken the issue in their stride. A short-term political fix in the US is not a significant point for global markets, for better or for worse. Political confusion, mistakes and self-delusion will be as much of a feature of the investment landscape in 2013 as in 2012 and no barrier to similarly solid returns. Of much greater importance is the question of whether steady global growth will stabilise the outlook for corporate revenues and earnings after over 18 months of constant disappointment. If so, equities should perform well in 2013; if not, returns may be dull. Government bond yields have edged up, but remain extremely low on any long-term timescale. In developed markets, government bonds represent an asymmetric outcome: heads, yields will stay low and returns will be small; tails, yields will rise as credit expansion resumes and growth picks up, in which case they will start the climb back up to historic norms. Elsewhere in the bond market, generating reasonable returns will likely be more of a struggle than in 2012, but not impossible. Macroeconomic problems, geopolitical issues and domestic governmental strife will continue to dominate the headlines in 2013. The pressure to position portfolios according to the performance of the recent past, rather than any objective or pragmatic assessment of the future, will be intense. An old fashioned focus on virtues such as long-term investment in well-managed companies with strong cash flow and sustainable growth might be the safest option available.