Market review
Risk assets maintained their upward trajectory during the third quarter, thanks largely to continued support from central bankers. The MSCI World Index added 6.8% over the quarter, with the US S&P 500 Index gaining 6.4%, the German Dax 30 Index adding 14% and the UK FTSE 100 Index closing 7.2% higher over the period. (All returns are quoted in US dollars.) Local equities performed well, adding 7.3% in rands over the third quarter and returning 14.8% for the year to date. Bonds added 5% in the quarter to record gains of 13.1% for the year to date. Longer-dated bond yields fell by 50 basis points over the quarter. Cash, as measured by the STeFI Composite Index, added a marginal 1.4% over the quarter and 4.2% for the year to date.

Portfolio review
The Investec Absolute Balanced Fund is a medium- to long-term alternative to money market funds. The fund aims to produce low volatility, inflation beating returns that are ahead of cash. Outperformance is generated by capturing the alpha created through stock selection while minimising the associated market risk through hedging strategies. The fund is currently invested in a combination of equities, fixed interest and cash instruments. Since equity alpha is usually larger and more accessible than bond alpha, our allocation to equities tends to be large and somewhat static. The limited market risk in the portfolio means that this allocation is independent of the current economic environment, as there is little risk of the fund's performance being significantly affected by negative markets. Stock-picking is therefore core to generating returns ahead of cash. The largest equity contributors to the portfolio's return were our overweight holdings in Santam, MTN and Assore. The largest detractors from return were the underweight positions in Woolworths, Naspers and Old Mutual. The standout performance in the portfolio over the quarter was our large holding in inflation-linked bonds. Overall, the Investec Absolute Balanced Fund was firmly ahead of money market funds for the quarter.

Portfolio activity
Portfolio activity over the quarter was muted. We took advantage of the widening gap between the rand price of oil and Sasol, and increased our holding in the share. We also reduced our holdings in Richemont, following the run-up in the share price. In addition, portions of the protection held in the portfolio were rolled into longer-dated maturities.

Portfolio positioning
The Investec Absolute Balanced Fund offers similar levels of security to cash, but provides enhanced returns through our stock selection and hedging strategies. The portfolio is therefore well positioned to weather volatility in the months to come. In previous commentaries, we communicated our concern about the recovery in the US, the sovereign debt crisis in Europe and a slowdown in China's growth. We believe that the economic fate of South Africa is directly tied to the fortunes of the largest economies (and our largest trading partners). Over the last quarter, we have become more concerned about the specific risks within South Africa. The growing unrest among labour and the actions that they have taken pose a significant threat to our economic growth. The wildcat strikes and the demands for large wage increases are a function of the financial hardships faced by the majority of the population. However, they also show a complete lack of appreciation for the stresses faced by the mining sector as a result of a weaker global economy: falling global demand for resources amid declining productivity and rising input costs. We believe that miners with the strongest balance sheets and lowest costs will survive (one of the reasons that we continue holding Impala Platinum in our portfolio). However, weaker companies may be forced to rationalise their operations, and this is something that our country cannot afford given current levels of unemployment, the widening current account deficit and anaemic economic growth. Given the low exposure to equity markets, the fund remains appropriately positioned for conservative investors through all market conditions. As always, we remain unwavering in our commitment to growing the portfolio's capital in a judicious and discriminate manner.

Market review
After sharp declines in May, commodity prices, with the exception of Brent crude, generally edged higher in June. Brent crude fell nearly 15% over the month, declining by more than 25% during the quarter. Gold (+2%) and copper (+3.5%) closed higher in June, but weakened over the quarter. Equity markets reversed some of the previous months' losses, with the MSCI World Index closing 5.1% higher in June. Over the quarter, the index was down nearly 5%. The FTSE 100 Index gained 7% for the month and lost 4.1% over the quarter while the S&P 500 Index rose 4.1% in June and declined by 2.8% over the quarter. Emerging markets trailed their developed market peers, gaining 3.9% for the month and losing 8.8% over the quarter. Turkey led the advance, rising 17.8% in June, up nearly 29% for the year to date. (All returns are quoted in US dollars.) Local assets showed strong absolute returns, despite significant intra-month volatility. Bond yields fell to near record lows in June, with the All Bond Index gaining 3.3% over the month and 5.2% for the quarter. Listed property continued its strong run, adding 6.9% in June and 10.3% over the quarter. Cash, as measured by the STeFI Index, gained a steady 0.5% during the month and 1.4% over the quarter. The FTSE/JSE All Share Index made modest gains over the quarter (+1%) while in June, the index rose 1.9%. General miners performed well over the month, gaining 5.6% (-1.6% over the quarter). May's strong returns from gold miners were partially reversed in June, with the sector shedding more than 9% over the month. While the sector only lost 2.2% over the quarter, it has recorded the weakest performance for the year to date (-16.7%). Healthcare added 10.9% over the quarter, general retailers rallied a further 7.3% and food retailers closed 9.2% higher. Construction (-11.3%), household goods (-10.4%) and the personal goods sector (-5.7%) were weaker over the 3-month period. Telkom fell 20% in June after the South African government blocked Korea's KT Corp from acquiring a 20% stake in the fixed-line operator.

Portfolio review
The Investec Absolute Balanced Fund is a medium- to long-term alternative to money market funds. The fund aims to produce low volatility, inflation beating returns that are ahead of cash. Outperformance is generated by capturing the alpha created through stock selection while minimising the associated market risk through hedging strategies. The fund is currently invested in a combination of equities, fixed interest and cash instruments. Since equity alpha is usually larger and more accessible than bond alpha, our allocation to equities tends to be large and somewhat static. The limited market risk in the portfolio means that this allocation is independent of the current economic environment, as there is little risk of the fund's performance being significantly affected by negative markets. Stock-picking is therefore core to generating returns ahead of cash.

Portfolio activity
There were no significant changes to the portfolio positioning over the quarter. Portions of the protection held in the portfolio were rolled into longer-dated maturities.

Portfolio positioning
The Investec Absolute Balanced Fund offers similar levels of security to cash, but provides enhanced returns through our stock selection and hedging strategies. The portfolio is therefore well positioned to weather volatility in the months to come. Three areas of investor concern have been a recovery in the US, the potential fragmentation of the euro zone and a slowdown in China. We recently had the privilege of visiting China, witnessing first-hand the engine of recent world economic growth. We believe that in the near term, the Chinese government has the ability to continue spending on infrastructure to ensure that its growth targets are achieved. However, irrespective of the rhetoric emerging from Beijing, Chinese consumers are more measured following asset price declines and they cannot be relied upon in the near term to drive economic growth. A question that investors need to consider is whether the infrastructure development is appropriate for the degree of urbanisation that will ultimately be achieved. Viewing the new developments in China is reminiscent of Dubai in the midst of its expansionary phase, but on a far larger scale. Rows of buildings in various states of completion and infrastructure that dwarfs the current level of utilisation can be seen. The difference, supposedly, is that the local population will support this infrastructure, whereas Dubai had aspirations that exceeded the size of its population. Whether this is the case or not can only be determined retrospectively, but the Chinese government's belief in its ability, supports economic growth in the short term. The market will remain nervous of a potential downturn in China and will watch economic data closely. With a potential $3 trillion in reserves at its disposal, China has a low risk of a hard economic landing in the short term, unless this is the course that the government chooses. Approximately 50% of China's GDP is fixed investment, and only 30% relates to household consumption. Our concern centres on the ability of the Chinese consumer to replace infrastructure spending once this development phase is complete. In light of the above, we remain cautiously optimistic that some drivers of world growth are intact in the short term. As always, we remain unwavering in our commitment to growing the portfolio's capital in a judicious and discriminate manner.

Market review
Events in Europe and the US again took centre stage during the first quarter of 2012. Asset markets remained resilient despite continued macroeconomic uncertainty and serious doubts about the ability and willingness of failing southern European economies to meet their austerity obligations. A strong take-up of emergency funding from the European Central Bank (ECB) by hundreds of European banks boosted sentiment, driving equities higher and strengthening commodity currencies. At the margin, economic data also continued to improve in the US, where stabilising house prices and rising employment levels boosted the prospect of positive but muted growth. The FTSE/JSE All Share Index gained 6% in the first quarter, but most of the positive performance came in January. Resource shares lagged the rally and gold miners (-14.9%), Impala Platinum (-8.9%) and Sasol (-3.9%) were notable underperformers. Financials gained 12.8% and industrials added 10.5%, driven by strong performances from consumer goods and consumer services. The All Bond and Listed Property indices returned 2.4% and 8% respectively, while the rand gained more than 5% against the US dollar, reflecting the broader rotation into riskier assets. Cash, as measured by the STeFI, returned 1.4% over the review period.

Portfolio review
The Investec Absolute Balanced Fund is a medium- to long-term alternative to money market funds. The fund aims to produce low volatility, inflationbeating returns that are ahead of cash. Outperformance is generated by capturing the alpha created through stock selection while minimising the associated market risk through hedging strategies. The fund is currently invested in a combination of equities, fixed interest and cash instruments. Since equity alpha is usually larger and more accessible than bond alpha, our allocation to equities tends to be large and somewhat static. The limited market risk in the portfolio means that this allocation is independent of the current economic environment, as there is little risk of the fund's performance being significantly affected by negative markets. Stock-picking is therefore core to generating returns ahead of cash. Two investments have produced disappointing returns over the quarter: Impala Platinum and MTN. Our analysis of Impala Platinum shows that despite a loss of the CEO and potentially 51% of the Zimbabwean operations, and the crippling strike, long-term investors should benefit, based on current valuations. Short-term production losses will be a blow to earnings this year, but the share price has been unreasonably punished for the expected loss of earnings from Zimbabwe. In the case of MTN, the allegations of impropriety from Turkcell appear to be motivated by an attempt from their Russian owners to lay their hands on the Iranian asset. It seems extremely unlikely that a US court will rule in their favour, and the actions come amid interesting geopolitical manoeuvrings between Turkey, Russia and Iran around nuclear activities. Turkcell has been losing market share at home and is under pressure from its main competitor Vodafone. We continue to believe that although trade and political deals are hard to call from an ethical perspective, countries may have ulterior motives in their dealings. We focus on MTN's cash generation, rising dividend payout ratio and attractive growth as reasons to remain long-term investors in the business.

Portfolio activity
Over the quarter, we sold our holding in Old Mutual. The share has run hard since it bottomed in 2009 and is trading at levels at which it is appropriate to exit. Although the special dividend and valuation underpin the share, we believe that there are more attractive, higher quality opportunities that are less dependent on a cyclical recovery. We increased our exposure to Impala Platinum and MTN, taking advantage of lower share prices. Further purchases included Assore, British American Tobacco and Santam. The maturity date of our protection strategy was extended, protecting the portfolio into 2013, and the level at which the portfolio is protected was also raised. Our yield-enhancing option position Impala Platinum matured, locking in a profit for the portfolio.

Portfolio positioning
In the current environment of uncertainty, volatility and a lack of market direction, money market investments are extremely attractive. However, we believe that a tactical or strategic holding in cash represents an opportunity cost over any time horizon. Absolute Balanced offers similar levels of security to cash but provides enhanced returns through our stock selection and hedging strategies. The portfolio is therefore well positioned to weather volatility in the months to come. As always, we remain unwavering in our commitment to growing your capital in a judicious and discriminate manner.

Market review

Equity markets generally saw positive returns over the last quarter of the year. The MSCI World Index (developed markets) rose 7.7% in US dollars, while the MSCI Emerging Markets Index gained 4.4%. US markets ended the year in positive territory, with strong gains over the last few months. Over the quarter, the US dollar rose 0.2% against sterling, 3.4% against the euro, but fell 0.2% against the yen. The return on the Citigroup World Government Bond Index was -0.1% in US dollars.

The All Bond Index gained 3.5% over the quarter and cash, as measured by the STeFI Index, returned 1.4%. Listed property closed up 3.7%. The FTSE/JSE All Share Index added 8.4% in the fourth quarter and rose 2.6% over the year. The broad industrial grouping outperformed both financial and resources over the quarter. Food and general retailers fared particularly well, closing up 20.3% and 15.5% higher respectively. Life insurers added 16.9% over the quarter while the smaller basket of technology stocks rose 12.1%. Gold and platinum miners lagged the overall index, ending flat over the quarter. General miners performed in line with the broader market while Sasol, the only company within the oil and gas sector, ended 18.6% higher.

Portfolio review

The Investec Absolute Balanced Fund is a medium- to long-term alternative to money market funds. The fund aims to produce low volatility, inflation beating returns that are ahead of cash. Outperformance is generated by capturing the alpha created through stock selection while minimising the associated market risk through hedging strategies.

The fund is currently invested in a combination of equities, fixed interest and cash instruments. Since equity alpha is usually larger and more accessible than bond alpha, our allocation to equities tends to be large and somewhat static. The limited market risk in the portfolio means that this allocation is independent of the current economic environment as there is little risk of the fund's performance being significantly affected by negative markets. Stock picking is therefore core to generating returns ahead of cash.

For the quarter, the Investec Absolute Balanced Fund produced returns ahead of cash in a schizophrenic environment, which saw investors desperate for real returns, ignoring the realities of the world economy.

Portfolio activity

Over the course of the quarter, we added a new position in the JSE Limited (trading well below fair value given the volumes going through the market), and marginally increased your exposure to Impala Platinum and Steinhoff. We also took profits on your holding in the Naspers rump.

We raised the level of protection on the equity component of the fund and simultaneously reduced the equity exposure slightly, following a strong run in equity markets in October. Our December futures positions were rolled into March 2012 positions and our option position in Naspers matured successfully.

Portfolio positioning

In the current environment of uncertainty, volatility and a lack of market direction, money market investments are extremely attractive. However, we believe that a tactical or strategic holding in cash represents an opportunity cost over any time horizon.

The Investec Absolute Balanced Fund offers similar levels of security to cash, but provides enhanced returns through our stock selection and hedging strategies. The portfolio is therefore well positioned to weather volatility in the months to come.

We expect that 2012 will be another year of bearish sentiment and volatility. We have a cynical expectation that the US presidential election will be preceded by some form of economic stimulation (we continue to vote for the very unlikely purchase of homes by the US Federal Reserve). Further quantitative easing aside, our original concerns about the impact of a slowing China and European sovereign debt crisis remain. In addition, the deleveraging process that began post 2008 will continue, providing further headwinds to growth in 2012.

Elevated levels of volatility and the difficulty and cost of any resolution to the European crisis have not driven equity values to levels that we consider cheap. Valuations are becoming more attractive, but the earnings yield on equities remains approximately in line with the yield available on South African government bonds. Our largest equity positions are in high quality names with above average earnings prospects or stocks that are exhibiting excellent value.

Growing one's capital has become secondary to preserving one's capital. We believe that this shift in thinking will persist for years to come as the current crises will be resolved slowly and painfully. As always, we remain unwavering in our commitment to growing your capital in a judicious and discriminate manner.