Fund performance has continued to exceed the benchmark returns set out as targets. We have chosen to deliberately achieve this return at the lowest level of risk, and without the reliance of the overall direction of markets as a source of return.

Some people may view these returns as disappointing; however, we do not think this is the case, as the fund was set up to do something very different from the conventional balanced fund.

The worst environment for the strategy is in fact a persistent bull market where interest rates are low and falling. In fact this has been the case for the past 2 years. Conversely, there are several signs that with equities only priced to give real returns of around 5%, and the trough in short and long term interest rates potentially already on us, the outlook for strongly differentiated performance is considerably brighter.

The combination of futures and put options for downside protection has worked very well over the past six months, and we continue to believe that insurance is under-priced.

Fund returns in the first six months have been in line with cash, given largely the continued decline in the market's interest rate expectations (which determines the price of the futures contract supporting the protection). Nevertheless, the fund equity selection has contributed, but not to the full extent expected by the underlying operational performance of the positions. Banks' share prices in particular have not matched the overall market returns. Good stock selection within the Resource index has prevented the fund from underperforming cash.

Looking forward, the small equity exposure in the fund will aid performance in the likelihood of continued market performance, but the option protection will kick in if the market loses ground. Forward looking returns are still likely to deliver the targeted return.

April was a trying month in the markets, given the JSE All Share Index's 5% decline. The Investec Absolute Balanced Fund's value increased over the month and exceeded the return on cash. So far this year, the returns have been consistent and positive, notwithstanding volatile market conditions.

The re-allocation of a portion of the portfolio protection in the form of put options on equity last month was timeous as the value of the options increased significantly over the month. We continue to carefully monitor these developments.

The fixed income component continues to perform robustly and year to date has generated satisfactory returns.

Unit holders might question the current 16% effective exposure to equities, when the market is looking weak. Our first assertion is that markets have seen a welcome correction after a continued run. These events occur regularly and are healthy.

Furthermore, the Investec Absolute Balanced Fund has built in put options at a specific level of the market, close to the current level, which has the effect of rapidly reducing the effective weighting to equities down to 0%, if the correction deepens. Upside potential exists, by having some exposure to better market conditions, particularly for the stocks that we prefer. Most of the balance of the protection is in the form of index futures.

We think that investors can sleep comfortably even if volatility remains.

With more than R800m under management after two years, the fund has been a marketing success, though it has sharply underperformed Stanlib's fund, which has a similar target. Derivatives are used to protect against falls in the equity and bond markets, though it has a 16% net exposure to equities to exploit the recent correction in the market from record highs.

Financial Mail - 22 April 2005

The Investec Absolute Balanced Fund delivered another positive performance month, with low associated volatility. Overall 2004 yielded a return that exceeded cash by around 1%, with no associated risk addition. The fund continues to offer part of the solution to a low risk client with a constant concern about preserving capital.

We expect the overall level of returns in 2005 to be higher than 2004. Interest rates should pick up an increasing trend, and market conditions should be more volatile after a benign 2003 and 2004. Investors, who have shown concern about underperforming market
exposed funds, should not have the same concern into this year.