Market review
During the quarter, low interest rates and further quantitative easing continued to support financial assets. Low nominal cash yields have drawn investors into riskier asset classes. Emerging market equities, along with commodity prices and emerging market currencies, were the clear winners. The MSCI Emerging Markets Index rose 18.2% over the quarter while the MSCI World Index gained 13.9%. Zinc, copper and aluminium ended more than 20% higher, outperforming a substantially weaker US dollar. Gold breached the $1300 mark, to gain 5.4% over the quarter and 19.4% year to date. Platinum and Brent crude both returned 8% in the past three months. Ten-year US Treasuries strengthened, with yields ending the quarter below 2.5%.

Local economic activity moderated, with GDP expanding by 3.2% in the second quarter, down from 4.6% in the first quarter. Concerns about the global economic recovery and subdued demand locally, coupled with the favourable inflation outlook, motivated the South African Reserve Bank to further reduce the repo rate to 6%. The August inflation number of 3.5% was the lowest since-mid 2005. The rand was one of the strongest emerging market currencies over the review period, gaining more than 10% against a weak US dollar. Bond yields fell sharply, boosted by foreign investor demand and continued downward pressure on inflation. The All Bond Index ended the quarter 8% higher, behind listed property (13.7%), but well ahead of cash which returned 1.7% over the period.

The FTSE/JSE All Share Index rose 13.3% over the quarter. The non-resources sector led the market higher, with a significant increase in mergers and acquisitions globally spilling over into the local market. Old Mutual confirmed that it was in discussions with HSBC on its stake in Nedbank. Nippon Telegraph proposed a cash buyout of Dimension Data and Wal-Mart made a cash offer for Massmart. Both the gold and platinum sectors ended down over the quarter, with platinum miners losing 2.3% while gold mining gave up 1%. Consumer services, which include the general retail sector, gained just shy of 25% over the same period. Food retailers, banks, life insurance and personal goods continued to perform well ahead of the broader market.

Portfolio review
The fund had a tough quarter, given its largely defensive positioning. All the good work done in the first eight months was unwound by the JSE which delivered a knock-out performance in September. Interestingly, the performance of the fund was impacted not by what we owned, but by what we chose not to own. The negative exposures to retailers hurt the fund, with Massmart in particular striking a blow. Our view before the announcement by Wal-Mart was that the company would not pay a lofty multiple of over 20 times, at a time when the rand was at least 20% too expensive, to buy a business that was optimally run, and where directors had sold over R105 million worth of shares In September alone.

This 'halo' effect took Shoprite and all other highly rated retailers to levels that can only be justified by looking at multiples for retail companies in BRIC countries (Brazil, Russia, India and China). We have seen this relative delusion before in 1999 when the TMT bubble reached its zenith. Of course, it didn't end well for investors. Now that the best news on foreign inflows is out, the rand has advanced to an expensive level, interest rates have bottomed and markets have risen too quickly, we believe the cautious positioning of the fund will be vindicated on a 12-month view.

Portfolio positioning
We remind investors how robust the world looked in the first half of 2008, when there was no sign that China's appetite for commodities would be sated. We now know what happened in the following years, and how fully exposed funds' returns were hurt. The Investec Absolute Balanced Fund has a net equity exposure of just over 10%, concentrated in shares of companies that have strong businesses. These companies would do even better in a slightly weaker rand environment.

Market review
The second quarter of 2010 reminded investors and market commentators that excess global indebtedness, which had resulted in the global financial crises, was not likely to be resolved in a few short months or by some extraordinary policy miracle. The spotlight remained firmly focused on Europe, with certain countries in the region straining under the heavy burden of unsustainable funding requirements. Global share markets headed lower as uncertainty rose around the likelihood of a V-shaped economic recovery. The MSCI World Index dropped sharply, closing 12.5% down over the quarter, dragging this year's returns into negative territory (-9.6%). Emerging markets fared somewhat better, shedding 8.3% over the quarter and 6% year to date. The FTSE/JSE All Share Index lost 8.2%, dragging the year's returns 4.1% lower. The weaker rand detracted from US dollar returns. The local currency depreciated 4.9% over the quarter and 3.5% year to date against the dollar. The rand gained significantly against the euro, appreciating 12% over the first six months of 2010. Resources were worst hit over the quarter, with platinum and diversified miners off 11% and 18.2% respectively. The gold sector was the best performer over the quarter, rising 16.5%. Other defensive sectors also performed admirably: food and drug retailers ended 11.9% higher and fixed line telecommunications surged 10.5%. Industrials lost 7% with general retailers (4.1%) outperforming the local banking sector (-9.9%) by a wide margin. Bonds, cash and listed property provided positive returns over the quarter. Cash returned 1.7%, bonds 1.1% and listed property rose 0.6%. Year to date, listed property remains the best performing asset class (10.6%).

Portfolio review
Markets have been trying to advance, but the cross-currents from a slowing China, deteriorating credit conditions in Europe and doubts surrounding the quality and longevity of the US economic recovery have had a negative impact on investor sentiment. The Investec Absolute Balanced Fund earned a return of 1% over the second quarter. The positions in gold securities helped the performance, with the gold debenture performing better than the shares. Ongoing fiscal challenges faced by governments suggest that it is still prudent to have a meaningful weighting in gold. The holdings in Sasol and MTN have hindered performance, with these shares delivering only downside risk, with no gain as yet. These counters seem to have lost favour with the global emerging market fund managers, given the rising ascendency of the retailers. In this regard, momentum has taken over from value.

Portfolio activity
We added a 2% position in the African Bank inflation plus 5% corporate bond and this has generated a solid return. We will continue to seek other such opportunities.

Portfolio positioning
The fund has a small positive exposure to equities of 7%, down from 12% earlier this year. The equity positioning should continue to deliver the bulk of the investment performance in the months to come. The current lower rates of observed inflation and market conditions make the achievement of the real return objective likely.

Market review
In the first quarter of 2010 asset prices continued to rise as the global economic recovery gained traction. Strong March returns took the global equity market composite back into positive territory for the year. The MSCI World Index closed 3.4% higher over the first quarter while the MSCI Emerging Markets Index returned 2.5%. US markets led their global peers, with more cyclical markets and sectors generally showing stronger returns. On the emerging market front, South Africa along with Turkey, India and Russia all recorded dollar returns above 4% (MSCI indices). Chinese equities (-1.6%) continued to languish, despite domestic growth data pointing to robust investment spending and rising consumption growth. The global market weakness in response to Chinese policy tightening early in the quarter was short-lived, with risk appetite improving and optimism about the recovery again prevailing. All returns are quoted in US dollars. The South African economy is also showing signs of recovery. Year-on-year comparisons indicate strong gains across most categories, boosted by very weak economic activity at the start of 2009 when the recession was in full swing. The Reserve Bank's monetary policy committee's decision to cut the repo rate to 6.5% provided a welcome boost to indebted consumers in March. Greater certainty about electricity tariff increases, slowing inflation and the negative impact of a strong rand on the economy's competitiveness were all cited as factors warranting a further cut in rates. The All Bond Index returned 4.4% over the quarter, well ahead of cash. The listed property sector added nearly 10% over this period. Greater risk appetite globally boosted the local equity market. The FTSE/JSE All Share Index (ALSI) provided solid gains in March (7.9%), pushing the quarter's return into positive territory (4.5%). Rand strength, on the back of over R14.5 billion in net equity and bond inflows over the quarter, contributed to the ALSI returning 1.5% in US dollar terms. Financials (9.9%) were well ahead of industrials (4.4%) and resources (2.1%) over the first three months of the year. However, intra-quarter sector rotation saw the All Share Resources Index adding more than 10% in March. Banks (12.2%) and general retailers (17.1%) strengthened over the quarter, on the back of a surprise cut in rates and strong interest from foreign buyers. Gold miners fared poorly during the three-month period, shedding 8.2%. The platinum sector (11.3%) and general miners (12.4%) enjoyed market-beating gains in March, but the platinum sector (2.1%) still trailed the ALSI over the quarter, while diversified miners performed in line with the general market.

Portfolio review
When observing the one-year performance tables for all market-sensitive funds, particularly equity funds, it is easy to get excited about money being made in the stock markets. It is important to note that the past three years' figures for most funds are quite lacklustre, masking the big dip that we went through in 2008. However, the consistency in the performance of the Investec Absolute Balanced portfolio is very pleasing. Returns have been compelling, and similar irrespective of the exact dates when money was invested. This portfolio is ideal for anyone who does not believe that market timing is possible, or can add any value, and remains sceptical of market performances.

Portfolio activity
We have raised the exposure to the equity part of the strategy, not by increasing exposure to the direction of the market, but by adding weight to the stocks where we have the greatest conviction about future returns. The net equity weighting is still only 12%. (The total portfolio exposure is 78%, of which 66% enjoys protection). We added 2% to our bond weighting by investing in the African Bank Inflation plus 5% bond issued during March and we continue to seek such opportunities. The Sasol weighting in the portfolio was increased during the quarter. The share price continues to lag the recovery in the rand oil price and we see some upside in the stock. The counter has been flat for almost 18 months and has underperformed the JSE by over 40%.

Portfolio positioning
We note that the oil price is far less sensitive to Chinese growth than, for instance, copper or iron ore. These commodities have moved to levels which we believe cannot be justified by fundamentals of supply and demand over any period longer than three to six months. The combined earnings contribution from these sources is 48% for both Anglo American and BHP Billiton, highlighting the potential problems in respect of earnings if China were to falter. China has a looming inflation problem stemming from massively rising commodity input costs, rampant real estate inflation and money supply growth. Chinese money supply is growing over 25% year on year. There is no easy money to be made in equity markets, otherwise there would be many more successful investors. We remain cautious, but the portfolio is well positioned to ensure that the next seven years will deliver the same consistency in performance, as we have seen over the past seven years.

Market review
2009 marked the end of the recession and provided asset markets with ample opportunity to retrace some of the losses sustained in the wake of the worst global financial and economic crises in decades. Along with commodities and the corporate credit markets, emerging economies were the prime beneficiaries of improving global growth prospects, the strong recovery in risk appetite, the weak US dollar and low borrowing costs across the developed markets. Emerging market equities rose 8.6% over the last quarter and 79% in 2009, well ahead of developed markets. The MSCI World Index returned 4.2% over the quarter to push the year's gains to 30.8%. All returns are quoted in US dollars. In sync with other commodity currencies, the rand regained its composure in 2009. Record capital inflows and higher commodity prices fuelled a 28.7% gain against the US dollar. 2009 was not a good year for bond markets, reversing some of their gains of the previous year. Bond prices fell in 2009 as economies recovered and the cost of massive fiscal and monetary stimulus started to hit home. The increase in bond issuance over the next few years and large fiscal deficits will keep the pressure on bond markets. Offsetting this over the near term, will be the improved domestic inflation outlook and expectations of growth below the historical average. The All Bond Index lost 1% over the year, but marginally outperformed cash over the second half of 2009, gaining 4.1%. In the fourth quarter, the All Bond Index returned 1.1%, underperforming cash. The listed property sector showed some resilience in a very difficult trading environment, gaining 4% in the last quarter to finish the year 14.1% higher. Improved growth prospects and a higher risk appetite supported domestic equities. The All Share Index (ALSI) ended December on the year's high, returning 2.9% over the month and 11.4% over the quarter. Strong foreign investor interest to the tune of over R75 billion in net equity inflows boosted the market's rating and pushed the year's returns to 32.1%, erasing all of 2008's losses. Over the quarter, the basic materials (17%) and consumer goods (18.7%) sectors recorded similar returns, beating the ALSI. There was a large divergence in the sub-sector performances in the final quarter. The gold sector struggled (-1.2%), but platinum (17.7%) and general miners (23.1%) outperformed. In the consumer goods sector, SABMiller and Steinhoff stood out as strong performers. Food producers (8%), general retailers (3.3%), banks (7.2%) and the life assurance sector (9.7%) all posted positive returns over the quarter, albeit below the overall market. The construction and telecommunications sectors, down 8.2% and 3.2% respectively, continued their underperformance during the year.

Portfolio review
The Investec Absolute Balanced portfolio produced steady returns over 2009. Although investors may lose out on another possible leg up in the bull market, the portfolio provides valuable downside protection.

Portfolio activity
Over the quarter we reduced the portfolio's holding in Naspers. We think that the value of Tencent is almost 85% of the value of Naspers and on 55 times earnings, represents some share price downside. The proceeds were used to increase our holding in MTN, which has underperformed over the past three months. The share is trading at the lower end of the valuation of its peer group, despite having attractive growth prospects that exceed that of its peers.

Portfolio positioning
2010 will see an earnings driven equity market, given that interest rates are likely to remain steady. If earnings grow at 35% in 2010 and then 10% in 2011, the equity market will return to a 'normal' longterm valuation. Nonetheless, we think that these growth rates do not seem unreasonable, given the likely recovery trend in the global economy. If this were to occur, pundits would conclude that fiscal policy conducted by global governments to boost the real economy was successful. The conclusion would have to be that policy makers did enough to offset the negatives of the housing market bust, most notably the collapse of consumption and investment by the private sector. Of course, there are always risks to our investments. Local equity valuations require stronger commodity prices, higher earnings growth rates than forecast, and sustained low interest rates. We continue to see more risks in domestic oriented companies than foreign oriented companies listed on the local bourse.