Market review
The third quarter was characterised by a recovery in leading indicators of economic activity and investor confidence. Cyclical markets performed strongly, especially the corporate bond market, which continued to reverse the sell-off that had occurred after the collapse of Lehman Brothers in 2008. Government bond markets also managed to rally as central banks successfully talked down market expectations of higher official interest rates any time soon. The return on the Citigroup World Government Bond Index was 6.2% in US dollars. Currency markets were dominated by persistent US dollar weakness as the Federal Reserve's loose monetary policy and an increase in risk appetite saw investors diversify into other currencies. Emerging market currencies and bonds also performed strongly thanks to renewed investor optimism and the portfolio benefited from diversified exposure to this area. The rand continued to benefit from massive foreign portfolio flows into the local bourse, more than offsetting the outflows seen in the second half of 2008. The local currency appreciated by nearly 3% over the third quarter, pushing the year's gains to 22% against the US dollar.

Portfolio review
The Investec Global Opportunity Income Fund of Funds had a good quarter. Returns were led by a very strong performance from corporate bond exposure. Active currency management and holdings in emerging market debt also added to returns, while interest rate positioning produced more mixed results.

Portfolio positioning
Looking ahead, the economic environment should support further gains in higher yielding assets over the next quarter, and the portfolio is positioned accordingly. Not only should growth continue to recover, but very low cash deposit rates in developed markets should encourage investors to reallocate money. Markets are unlikely to go up in a straight line after such a strong run, but the data should be good enough for any setbacks to be relatively modest. Mid-rated corporate bonds remain attractively priced for this stage of the business cycle, while global government bonds are increasingly expensive. We believe the US dollar is cheap, but it could weaken further before it finds a floor.

Market review
Economies and asset markets across the globe had a good second quarter. The rate of contraction in economic activity slowed sharply and risk assets such as equities, corporate credit and commodities generated high positive returns. Policy makers seemed increasingly comfortable that measures introduced at the height of the financial crisis were gaining traction and forward-looking data indicated that the global economy may have reached an important turning point in the current quarter. While conflicting signs of 'green shoots' prevail, markets and economists seem unconvinced that a 'normal' recovery will ensue from here on. Yields on 10-year government bonds rose, ending the quarter at 3.52% in the US, 3.38% in Germany, 3.69% in the UK and 1.35% in Japan. Spreads on corporate bonds narrowed, initially in investment grade non-financial issues, then in financials and high yield bonds as well. The return on the Citigroup World Government Bond Index was 3.5% in dollars during the quarter.

Portfolio review
The Investec Global Opportunity Income Fund of Funds returned -4.6% in rand terms over the quarter. The portfolio's holdings in corporate bonds made a substantial contribution to performance. During the quarter corporate bond yields narrowed significantly versus government bonds. The rally in credit during the quarter was easily the largest ever recorded by a margin of about four to five times. This unwound much of the sell-off in the market seen after the collapse of Lehman Brothers last year. Currency exposure and holdings in emerging market debt also added to performance, while interest rate positioning had more mixed results.

Portfolio positioning
It seems probable that the global economy will enter 2010 on a relatively strong note, thanks to the gradual easing of financial conditions, the huge amount of stimulus now coming through and a likely pick-up in production after aggressive inventory cuts. As a result, we remain positive on the outlook for credit markets, but feel it is prudent to adopt a more measured approach, given the extent of the recent fall in yields. At current levels, investment-grade corporate bonds still look cheap, offering a yield pick-up over government bonds almost 1.5 times greater than during other recessionary periods over the last 40 years. If history is a guide, this implies potential returns of almost 6% per annum in excess of government bonds over the next few years. High-yield bonds have also done well, but no longer appear cheap, given the ongoing rise in defaults. Returns should be reasonable as the recovery gains hold, but in the near term we expect the market to pull back somewhat as investors focus on the risks. We will use any sell-off as an opportunity to add exposure ahead of the next rally. Government bond yields should rise over time, but currently offer some value given the steepness of yield curves and the likelihood that official interest rates will remain on hold for the foreseeable future. The portfolio currently has only a small number of interest rate related positions, and is modestly biased against UK gilts in favour of sterling swaps, and Japanese and US treasuries in favour of European government bonds. The portfolio has temporarily reduced exposure to major currency biases due to a rise in volatility. However, ultimately we will look to increase our exposure to cheap European and commodity currencies against the US dollar and the yen in anticipation of a gradual economic rebound. We continue to see good medium-term value across a diversified range of emerging bond and currency markets.

Market review
The global economy started 2009 on a very weak note, but leading indicators began to pick up as the first quarter progressed. Improving sentiment caused government bond yields to reverse some of their earlier gains, but the rise in yields was ultimately limited by falling inflation and supportive central bank policy. Corporate bonds outperformed government bonds in January, thanks to a more benign economic outlook and good relative value. Non-cyclical issues continued to do well over the next two months. However, cyclical issues performed less well, given an increase in ratings downgrades and financial bonds were especially weak. The return on the Citigroup World Government Bond Index over the quarter was -4.8% in US dollars.

Emerging market bonds had a good quarter with falling inflation and interest rates helping returns, but emerging market currencies were more mixed. Major currency markets were fairly quiet during the quarter. The yen was the main exception, weakening notably over the period as the full impact of the global recession on Japan began to drive the currency.

Portfolio review
After a difficult 2008, corporate bonds recovered somewhat in the first quarter, benefiting the Global Opportunity Income Fund of Funds. The fund's exposure to bonds issued by non-cyclical companies, such as utilities and telecom providers made a significant contribution to returns.

Short duration positions in the US and the UK added to performance in January, as improving investor confidence and a large increase in the supply of new bonds, pushed government bond yields up. The portfolio also benefited from holdings in US inflation-linked bonds, which rallied strongly from very cheap levels, despite falling inflation. Yield curve positioning was also successfully adjusted during the first quarter and the portfolio's return was boosted by being overweight longer dated bonds versus short maturity bonds.

Other sources of return were generally mixed. Emerging market performance faltered in February, before recovering significantly in March.

Portfolio positioning
We see little value in government bonds, given low yields, large budget deficits and reflationary monetary policies. We expect prices to fall once the boost from central bank buying fades, especially if global economic activity stabilises. Therefore, we have begun gradually to reduce duration again. We remain long European government bonds, which offer the best value and provide scope for further rate cuts.

The yield pick-up available from corporate bonds remains close to historical extremes. These bonds are priced to withstand a very large number of company failures, well in excess of what has been seen in the past, including during the Great Depression. Despite the poor economic backdrop, we expect corporate bonds to deliver exceptionally good returns over the next few years, especially versus government bonds. In the short term, cyclical sectors and lower-rated bonds are vulnerable to rating downgrades and default, and so the portfolio is overweight defensive sectors within investment-grade bonds.

The portfolio also retains exposure to selective emerging market bond and currency markets, given relatively high interest rates and strong economic fundamentals, especially within Latin America and Asia. Among the major currencies, the euro is expensive and should underperform other European currencies. The portfolio is also positioned for some further weakness in the yen and the US dollar, especially against the currencies of commodity producing countries, which should start to benefit from a more benign global outlook.

Market review
The quarter was once again dominated by the credit crisis, which continued to punish all but the safest asset classes, as leveraged investors were forced to off-load exposure at any price. The yield pick-up on investment grade bonds versus government bonds rose to levels not seen during the height of the Great Depression, before easing back slightly in December.

The collapse in economic activity during the quarter and aggressive interest rate cuts helped global government bond markets to rally strongly in the final quarter of 2008. In the US, indications from the US Federal Reserve that they might intervene in the market pushed ten-year US Treasury yields briefly to 2%, matching their lowest level of the past 150 years. The decline in yields occurred, despite a big pick-up in bond issuance associated with worsening budget deficits. Currency markets were dominated by risk aversion and aggressive monetary easing, which caused the dollar to lose value against the yen. Sterling and other peripheral European currencies were very weak. After a rocky October, emerging market bonds performed well into the close of 2008, helped by more stable global markets and the potential for much lower official interest rates.

Portfolio review
The Investec Global Opportunity Income Fund of Funds had a disappointing quarter, with performance hurt by the sharp sell-off in corporate bonds during October. Yield spreads on investment grade corporate bonds rose by between 100 - 150 basis points on average, making September and October the worst two months for credit on record by a factor of about three times. The main positive contributor to returns was yield curve positioning, where the portfolio benefited from an overweight exposure to short-dated bonds. The fund underperformed its benchmark in rand terms over the quarter.

Portfolio positioning
In the medium-term, government bonds offer no value at current levels, unless a prolonged period of deflation (falling prices) is in store. Central bankers view deflation as a greater evil than moderate inflation and are working overtime to avoid deflation.

For now government bonds will continue to receive support from the very poor economic backdrop. However, as the downside risks to growth begin to diminish, the heavy supply of new paper will prove difficult to finance without a substantial rise in yields. We have begun to sell duration into strength. The portfolio is long European government bonds. We believe they offer the best value, as there is scope for further rate cuts which are not yet fully priced in.

The yield pick-up available from corporate bonds remains close to historical extremes. These bonds are priced to withstand a very large number of company failures, well in excess of what has been seen in the past. Despite the poor economic backdrop, we expect corporate bonds to deliver exceptionally good returns over the next few years. The portfolio now has a significant holding in corporate bonds and we favour defensive sectors that are less exposed to the consumer spending cycle.

We are fairly neutral on the major currencies, with a preference for the increasingly cheap currencies on the fringes of Europe and we have cautiously added to sterling exposure. There is scope for further gains this year, given the collapse in yields elsewhere and the favourable inflation environment. Many emerging market currencies also remain attractive, thanks to high relative rates and strong economic fundamentals. The portfolio retains a moderate exposure to this area.