Market review
Central bank talk dominated financial markets over the past quarter. Investors reacted positively to the Bank of Japan's announcement early in the quarter about its large-scale monetary easing policies. Riskier trades were particularly well supported, and emerging market equities started to retrace some of the earlier losses. However, US Federal Reserve Chairman Ben Bernanke put a damper on rampant asset price appreciation by hinting that the market should recognise record policy accommodation as finite and data dependent. Even though his comments were merely providing guidance, markets responded immediately. Emerging markets saw one of their weakest months on record. Currencies depreciated against the US dollar and local currency debt - which has been a beneficiary of global investment flows for a long time - sold off sharply. Commodity prices followed other risk assets, first up, then down sharply in June, as global economic growth data remained mixed and the road to a rebalanced Chinese economy seemed rocky. The MSCI AC World NR Index returned -0.4% in dollars over the quarter. Emerging market equities underperformed developed market equities, with the MSCI Emerging Markets NR Index losing 8.1% over the quarter. The Citigroup World Government Bond Index (All Maturities) gave up 3% over this period. The All Bond Index lost 2.3% in rands over the quarter while inflation-linked bonds shed 5% from severely overvalued levels. Cash, as measured by the STeFI Composite Index, returned 1.3% for the quarter. Listed property ended the review period almost flat, having recovered May's losses with a bounce in June. South African equities ended almost unchanged in the second quarter, but volatility was high during this period. The sector laggards remain mostly confined to resource stocks with gold (-33.5%), platinum (-23.9%), coal (-10%) and diversified miners (-10.8%) all experiencing double-digit losses in rands. Year to date, the resources sector is trailing the overall market by 19.4 percentage points. Industrial stocks mostly held their ground over the quarter and defensive stocks, on average, achieved strong absolute returns. Financials lagged, with banks down 6.2% and life insurers flat for the quarter after a particularly weak June.

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 1% to 2% 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 tends to be 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 portfolio's return was flat over the quarter, led down by equities and, in large part, by the significant losses on inflation-linked bonds. In addition to inflation linkers, the largest detractors from performance over the quarter were our select resources holdings, NewGold and Impala Platinum. Concerns about the local mining industry remain, and the depreciation of the rand has not been sufficient to offset the effects of falling dollar commodity prices and lower production volumes. As we enter wage negotiation season, tensions among the dominant unions and between labour and management appear to be increasing. Physical gold deteriorated with rising real yields in the US. Higher real yields have increased the opportunity cost of holding the metal.

Portfolio activity
We are not short-term traders. Instead, we prefer to take positions in high quality companies that offer good value. Typically, these positions are held over the medium to long term. Activity over the quarter was muted. We increased our underweight positions in AngloGold and Absa, while buying more Richemont shares. Protection in the portfolio was reset at higher levels.

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 and generate cash-beating returns. We remain concerned about further rand weakness. Most economic indicators appear to be pointing to the US economy strengthening and a slowing of easy money. We are slightly less optimistic than most, as increases to bond yields at the long end of the curve will result in further pressure on consumers in the form of increased mortgage repayments. Nevertheless, the strengthening recovery should focus the "risk-on trade" in the US, resulting in a stronger US dollar. The risk to our local markets is that we have not yet experienced significant foreign outflows, even though we have seen a substantially weaker rand. As the US recovery gains momentum, we expect investors to become increasingly averse to risk in other areas of the global economy, and volatility to rise. On the China front, Beijing has turned its attention away from the quantity of growth, and is instead focusing on the quality of growth. Here, too, it appears that there are concerns about credit extension. Slower growth from China translates into weaker demand for resources, which is not bullish for commodity prices or the rand. The fund is ideally suited to weather this environment. We have hedged most of the market risk, and are therefore primarily concerned about the alpha generated by the individual stocks held within the portfolio. Equities continue to offer the best expected risk-return, and the strongest protection against inflation in the medium to long term. As always, we remain unwavering in our commitment to growing investors' capital in a judicious and discriminate manner.

Market review
The All Bond Index gained 1% in rands over the quarter, while cash, as measured by the STeFI Composite Index, returned 1.2%. Inflation-linked bonds gained 1.8% and the local listed property sector rose by more than 9% over the review period. South African equities recorded positive but modest returns in rands over the quarter, with the FTSE/JSE All Share Index closing 2.5% firmer. The rand weakened 9% against the US dollar and more than 6% against the euro. The resources sector's underperformance continued into the first quarter with gold (-17.9%), platinum (-13.5%) and diversified miners (-6.3%) ending sharply lower. The combined financial and industrial index rose 6.2% over the quarter, with industrials in particular performing strongly. There was a wide dispersion of returns within the broad industrial sector. Rand hedge global stocks saw double digit returns, with SABMiller and British American Tobacco rising 24.7% and 18.4% respectively. Meanwhile retailers, favoured amongst foreign shareholders, dropped nearly 10%, despite a strong performance in March. Banks marginally underperformed the FTSE/JSE All Share Index, while telecommunications lost more than 7% and healthcare gained 8.8% over the quarter.

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 1-2% 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 fund had a disappointing quarter. Returns over the review period were positive and almost in line with cash returns. The primary detractors from performance were Assore and Impala Platinum, which were down 23% and 19% for the quarter respectively. The macro and micro problems plaguing Impala are well known to the market. As a result, the share has been volatile, and we previously added to our holdings at levels significantly below the current share price. Assore's performance is more disappointing. Following its inclusion in both the Top 40 and MSCI South Africa indices, Assore has gained increased interest from less patient investors who appear to have been spooked by the decline in iron ore prices in the second half of 2012 and the increase in costs over the same period. For the first quarter, the market treated our resources holdings as if they were far worse propositions than their poorer quality cousins. As a result, the stronger performing industrial and financial companies have come to the fore in the portfolio. However, Assore remains in the top ten holdings.

Portfolio activity
We are not short-term traders. Instead, we prefer to take positions in high quality companies that are trading below their fair value. Typically, these positions are held over the medium to long term. Activity over the quarter was muted, with minor adjustments to Anglo American, MTN and Naspers. We sold the remainder of our holdings in Pick 'n Pay. In addition, the maturity of the protection in the portfolio was lengthened.

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 and generate cash-beating returns. As of this writing, South African equity markets have pulled back, and the market is in slightly negative territory for the year. The portfolio protection has done its job, and the net equity exposure in the fund has fallen from about 10% at the start of the year to approximately 6%. We are concerned about a further devaluation of the rand, given the perception of increased local risk compared to this time last year. At present, the rand is trading a few percent shy of the level that purchasing power parity suggests. The rand, however, is volatile, and usually overshoots its fair value. Given that we do not hold offshore investments as a hedge against this weakness, we favour shares such as SABMiller and British American Tobacco in the portfolio. If deleveraging is the primary force supressing global growth, a global economic recovery of any meaning needs this force to subside. However, corporates and households continue to value cash today ahead of building capacity for growth that may not materialise. While this path is painful, it is appropriate for the risks inherent in the current environment. The recent debacle in Cyprus alone shows how precarious the current system is. Governments have taken to punishing savers to right their economies, which is a concern. The fund is ideally suited to weather this environment. We have hedged most of the market risk, and are therefore primarily concerned about the alpha generated by the individual stocks in the portfolio. Equities continue to offer the best expected risk-return combination, and the strongest protection against inflation in the medium to long term. As always, we remain unwavering in our commitment to growing investors' capital in a judicious and discriminate manner.

Market review
Risk assets seemed to shrug off continued concerns about the fragile global economy, with equity markets posting strong returns over the last quarter of 2012. 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. The FTSE/JSE All Share Index (ALSI) ended the year at record highs, adding just shy of 27% in rands to the modest gains of 2011. The ALSI rose by 10.3% over the quarter. The SA bond market saw strong returns over the year, closing 16% higher. The All Bond Index added 2.6% over the quarter. On the back of falling bond yields, the local listed property sector did particularly well, rising by 35.9% over the year and 2.8% over the quarter. The year's gains were largely thanks to a significant rerating in the sector, rather than strong growth in distributions. Cash, as measured by the STeFI Composite Index, returned 1.3% over the quarter.

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 1-2% 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. 2012 can best be described as an uncomfortable bull market. Against a backdrop of multiple potential crises, and following yet more stimuli from central banks, risk assets rallied hard. The bears calling for a market collapse were left licking their wounds. We were not equity-market bulls, but we were positive about the select local opportunities in our portfolio. Inflation-linked and nominal bonds continued to look attractive relative to cash. Local equities were the strongest performer in the portfolio, followed by inflation-linked bonds (delivering another stellar year), nominal bonds, and, in a distant last place, cash (kept artificially low by central banks). Within the equity component of the portfolio, there was a strong showing across financials, industrials and resources. Assore was the standout performer, both across sectors and within resources, compensating for the disappointing returns from Sasol and Impala Platinum. Overall, the fund produced cash-beating returns for the year.

Portfolio activity
We are not short-term traders. Instead, we prefer to take positions in high quality companies that are trading below their fair value. Typically, these positions are held over the medium to long term. Activity over the quarter was muted and there were no significant changes. However, we used shortterm pullbacks in prices to top up our holdings in Steinhoff. In addition, the maturity of the protection in the portfolio was lengthened and struck at higher levels, following the strong performance in the equity market.

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 and generate cash-beating returns. At the best of times, we do not attempt to forecast the direction of markets. Following the unexpected bull market in 2012, we are even more reticent to attempt any form of prediction. We are in an environment marred by the artificial price of money and an artificial underpin to the price of certain assets. Central bank policy has shifted from inflation-targeting alone to include nominal GDP growth targeting. As a result, Europe is less of a basket case and is now just risky, and the US appears to have stabilised. After Obama's re-election, investors have taken comfort from the increased certainty around monetary policy and a surprising degree of bipartisanship with regard to the fiscal cliff. In China, the economy is going to perform exactly as communicated by the government: there will be neither a hard nor a soft landing. Any problems surrounding the misallocation of capital have been kicked further down the road. In other words, the global economy is slowly getting better. However, there is still the issue of dislocated or artificial prices. An improving economy and lack of yield could continue to drive the prices of risk assets upwards. Investors' nerves may be steeled by the belief that central banks' extraordinary policy measures will continue to support markets. Risk assets may even become less volatile with the open-ended stimuli from central banks. However, we remain concerned that prices supported by artificial circumstances ultimately have to correct in a disruptive, capital-destroying fashion. In the meantime, easy monetary policies are building inflationary pressures. Central banks have worked hard to remove some of the disruptive risks in the market, but, ironically, in doing so they have potentially created a greater imbalance and ultimately more risk for investors. The fund is ideally suited to weather this environment. We have hedged most of the market risk, and are therefore primarily concerned about the alpha generated by the individual stocks in the portfolio. Equities continue to offer the best expected risk-return combination, and the strongest protection against inflation in the medium to long term. As always, we remain unwavering in our commitment to growing investors' capital in a judicious and discriminate manner.