Market review
The domestic equity market took its cue from global markets, which benefited from the improvement in the global growth outlook and a higher risk appetite. The All Share Index added 13.9% in the third quarter and has gained 18.6% this year. Over the quarter, the All Share Resources Index (11.1%) lagged the overall market, with gold miners earning a disappointing 6%. Domestic-oriented and interest rate-sensitive sectors enjoyed good gains. Construction (19%), general retailers (19.1%) and banks (14%) stood out as strong performers, with foreigners particularly active buyers. Telecommunication (3.8%) and short-term insurers (6.1%) underperformed the market.

Portfolio review
The Investec Commodity Fund appreciated by 12.2% in value this quarter, outperforming its benchmark, the Resources Index, which rose by 11.1%. Within the portfolio, the underweight position in the platinum sector detracted from performance. Platinum shares rallied as the metal price itself recovered. These shares already seem to be discounting metal prices at least 30% higher than the current metal price basket. We therefore believe that all the good news has already been captured in share prices. At current rand platinum basket prices, many mines are barely cash positive, with wage increases to follow.

Longer term, we see more value in Anglo Platinum and Northam Platinum compared to Impala Platinum. We prefer Anglo Platinum in the longer term due to the more diverse asset base and the potential for earnings recovery from restructuring its existing assets.

The fund benefited from its underweight position in the oil sector, through its low Sasol holding. The counter again underperformed during the quarter. Despite our bearish outlook on the oil price, we are now less negative towards Sasol and have decreased our underweight position, given Sasol's good valuation underpin.

Gold shares disappointed during the quarter and detracted from performance. The combination of a flat gold price, stronger rand, and weak operational updates (lower volumes than anticipated), resulted in all SA gold shares underperforming the market. However, we maintain our positive outlook on the gold price and gold shares for the following reasons:
· Bullion has attracted safe-haven buying. As an alternative currency, gold is the only currency whose production is going down, not up.
· The outcome of printing money is inflation; gold is an inflation hedge. (Bullion soared in the inflationary 1970s).
· No supply response to high gold prices is anticipated. Mining production is on a declining trend of approximately -1% per year.

We also believe that gold shares still have significant upside as a result of a high and rising gold price and costs have also stabilised. Weaker producing currencies (e.g. the rand) further widen margins. Therefore, this is the only market sector which will show strong yearon- year earnings growth. Gold shares appear oversold relative to the gold price and to their usual valuations.

Portfolio activity
During the quarter, we lightened our holding in Impala Platinum. Not only is this share expensive and pricing in a large increase in the platinum price, but operationally, the company will face a difficult next few years. Results revealed that a lack of adequate development at their primary Impala Lease mining operation will result in lower volumes mined in the near future. The portfolio's weighting in Kumba Iron Ore was increased. We no longer think that the market expects too much in terms of earnings. Our view is that the prospects for a hike in the iron ore contract price next year have increased.

Portfolio positioning
Our longer term view remains unchanged. We continue to believe that the long-term structural bull market for commodities remains in place. The structural bull market is premised on long-term emerging market growth, particularly from the so-called BRIC economies of Brazil, Russia, India and China.

The supply side response to much lower commodity prices appears to have been swift and significant. Existing production has been cut, as current prices for many commodities are unable to cover cash costs. These output cuts have happened alongside the deferral of large numbers of new projects. The credit crisis has undoubtedly added to this momentum, affecting small and large producers alike. Indeed, some of the more severe cutbacks have come from some of the larger players that have found themselves uncomfortably in debt at this stage of the down cycle.

Easing global monetary conditions and the initiation of several very significant stimulus packages should also boost demand for some infrastructure related commodities in particular.

Stabilisation in global finance and trade, an easing of credit availability as well as the first signs of fiscal stimuli taking affect could see improved demand data in the fourth quarter. There is also the possibility that increasingly desperate central bankers and governments may start throwing more and more money at the demand problem. This could lay the groundwork for meaningful inflationary potential in 2010, presenting unexpected upside for all commodity prices.

The miners are more sensitive to changes in currencies of commodity-producing countries than changes in any single commodity. Although commodity prices have recovered strongly from their lows, currencies of commodity-producing countries have strengthened significantly, putting pressure on margins. Some miners have already rallied strongly in anticipation of a recovery.

We believe there could be downside risk to those share prices in the absence of further evidence of a recovery. We therefore remain conservatively positioned. Diversified mining companies provide decent leverage without too much operational risk. The portfolio remains overweight the gold sector. We are positioning the portfolio for fresh highs in the gold price. This should be driven by a resumption in US dollar weakness as well as an increase in inflation volatility, which has historically been beneficial to gold prices. Central bank diversification into gold over the coming year also offers the possibility that in aggregate, central banks will be net buyers of gold for the first time in over 20 years.

We expect that US regulators will deliver on their promise to curb speculative activity in commodity markets. We will be watching to assess whether measures will lead to a drop in futures turnover as well as increasing the appeal of gaining exposure to the sector via the physical ownership of commodities.

Finally, we would avoid shares solely exposed to bulk commodities which carry the greatest downgrade risk. Current prices are in some instances three times long-term prices.

Market review
While company profits remained under pressure, equity markets rerated significantly as signs of an improvement in the global economy buoyed risk assets. The local equity market had a positive quarter (8.6%), its first in 12 months, despite giving up some of its gains during the month of June (-3.1%). Year to date, the All Share Index closed 4.1% stronger. The market's foreign currency returns for the three month to the end of June, were boosted by the rand's appreciation against the US dollar (24.1%) and the euro (16.7%). Over the quarter, the financial and industrial composite (13.4%) outperformed resources (2.8%), with gold miners (-16.2%) the largest underperformers. Other sectors lagging the composite over this period included fixed line communications (-0.8%), travel and leisure (6.6%) and food producers (7.7%). General retailers (15.6%), banks (13.8%) and the construction (16.6%) sectors all ended the quarter well above their March levels. The platinum (9.5%) and general mining (8.9%) sectors performed in line with the overall market.

Portfolio review
The Investec Commodity Fund gained 1.8% over the quarter, underperforming the JSE Resources Index, which rose by 2.8%. The fund benefited from its underweight position in the oil sector, through its holding in Sasol. Despite our bearish outlook on the oil price, we are now less negative towards Sasol and have decreased our underweight position. Sasol has already warned that earnings per share for the period ended June 2009 will fall by up to 50%. We believe that the resulting downgrades are already captured in the share price and that at current levels it is no longer prudent to be underweight Sasol, particularly given the good valuation underpin. Within the portfolio, the underweight position in the platinum sector detracted from performance. Platinum shares rallied as the metal price itself recovered. These shares already seem to be discounting metal prices at least 30% higher than the current metal price basket. We therefore believe that all the good news has already been captured in share prices. At current rand platinum basket prices, many mines are barely cash positive, with wage increases to follow. Mining houses as a sector performed in line with the broader resources market, but this masked vastly divergent performances. Anglo American massively outperformed BHP Billiton (from a very oversold position), as balance sheet concerns abated along with rising commodity prices. A friendly take-over offer by Xstrata (although at terms unfavourable to Anglo's management), further bolstered the share price. We remain overweight Anglo at BHP Billiton's expense. We prefer Anglo's valuation and favour the base and precious metals over the bulk and energy commodities. Whilst we don't believe that the Xstrata merger will occur at the current terms, we do feel that the pressure exerted by a potential buyer will result in existing management actively seeking to unlock value. Gold shares disappointed massively during the quarter and detracted from performance. The combination of a flat gold price, stronger rand, and weak operational updates (lower volumes than anticipated), resulted in all SA gold shares underperforming the market. However, we maintain our positive outlook on the gold price and gold shares for the following reasons:
· Bullion has attracted safe-haven buying. As an alternative currency, gold is the only currency whose production is going down, not up.
· The outcome of printing money is inflation; gold is an inflation hedge. (Bullion soared in the inflationary 1970s).
· No supply response to high gold prices is anticipated. Mining production is on a declining trend of approximately -1% per year.
We also believe that gold shares still have significant upside as a result of a high and rising gold price and mining costs that have stabilised. A weaker rand further widens margins. Therefore, this is the only market sector which will show strong year-on-year earnings growth. Gold shares appear oversold relative to the gold price and to their valuations.

Portfolio activity
During the quarter we increased our exposure to Sasol. Despite being bearish on the oil price, we believe that Sasol offers relatively good value compared to other rand hedge stocks. After warning that results year to date would be worse than expected and following an oil price correction, share price weakness has resulted in Sasol trading on a relatively undemanding price earnings multiple of 11 times. We also cut the fund's platinum weighting due to the sector's poor earnings outlook. Although we are bullish about the price of platinum, we expect a weak contribution from by-product metals, palladium and rhodium.

Portfolio positioning
We acknowledge that we are in the midst of a cyclical downturn, but continue to believe that the long-term structural bull market for commodities remains in place. The structural bull market is premised on long-term emerging market growth, particularly from the so-called BRIC economies of Brazil, Russia, India and China. The supply side response to much lower commodity prices appears to have been swift and significant. Existing production has been cut, as current prices for many commodities are unable to cover cash costs. These output cuts have happened alongside the deferral of large numbers of new projects. The credit crisis has undoubtedly added to this momentum affecting small and large producers alike. Indeed, some of the more severe cutbacks have come from some of the larger players that have found themselves uncomfortably in debt at this stage of the down cycle. Easing global monetary conditions and the initiation of several very significant stimulus packages should also boost demand for some infrastructure related commodities in particular. Stabilisation in global finance and trade, an easing of credit availability as well as the first signs of fiscal stimuli taking affect could see improved demand data in the second half of this year. There is also the possibility that increasingly desperate central bankers and governments may start throwing more and more money at the demand problem. An inflationary environment could present unexpected upside for commodity prices. Forecast risk for nearly all companies in our universe is increasing to unprecedented levels. Production unit costs, borrowing costs, sales volumes and commodity pricing transparency are all changing at a rapid rate. Consequently, forward earnings are by no means the only metric we are using for our portfolio construction. Qualitative issues such as margins, net debt and management have become increasingly important. We thus remain conservatively positioned. Diversified mining companies provide decent leverage without too much operational risk. We continue to be overweight the gold sector for the metal's defensive qualities. SA gold shares should also show strong year-onyear earnings growth. We are avoiding shares solely exposed to bulk commodities which, carry the greatest downgrade risk as current prices are in some instances three times long-term prices.

Market review
Equities weakened for the third consecutive quarter, with the All Share Index losing 4.2% year to date. Both financials (-7%) and industrials (-9.2%) ended the quarter in negative territory. Resource counters clawed back some of their losses sustained in the second half of 2008 to end up 1.6%. Gold mining (22.8%), platinum mining (9.6%) and pharmaceuticals (22.4%) were the only sectors to gain over the quarter. While general miners (-4.6%) performed broadly in line with the overall market, it was the domestic oriented sectors that fell most, with banks (-9.8%), retailers (-7.6%) and the construction sector (-10.6%) all ending down.

Portfolio review
The Investec Commodity Fund appreciated by 2.8% over the quarter, outperforming the JSE Resources Index, which rose by 1.6%. The fund benefited from its underweight position in the oil sector, through its low Sasol holding. Despite falling by 2% over the quarter, Sasol is still pricing in an oil price significantly higher than its current spot levels. We believe that the level of the Sasol share price is consistent with an oil price of $60 a barrel. Our view is that oil's potential upside is already captured in the share price.

Within the portfolio, the underweight position in the platinum sector detracted from performance. Platinum shares rallied as the metal price itself recovered. These shares already seem to be discounting metal prices at least 30% higher than the current metal price basket. We therefore believe that all the good news is already captured in share prices. Our view is that the significant buying in the platinum exchange traded funds (ETFs) is mainly based on hedge fund activity - aiming to tap into the current reflation trade. Unfortunately, we maintain the view that platinum demand will be lower in 2009 than in 2008 - even with the current hype around increasing car sales and ETF investing. The current high level of the ETF inventory (higher than it was at the peak in May/June 2008) represents a clear and present danger.

Gold shares were the best-performing sector within resources, and rose by 22.8%. The fund's holding in gold counters aided performance. We maintain our positive outlook on the gold price for the following reasons:

· Bullion has attracted safe-haven buying. As an alternative currency, gold is the only currency whose production is going down, not up.
· The outcome of printing money is inflation; gold is an inflation hedge. (Bullion soared in the inflationary 1970s).
· No supply response to high gold prices is anticipated. Mining production is on a declining trend of approximately -1% per year.

We also believe that gold shares still have significant upside as a result of a high and rising gold price and mining costs that have stabilised. A weaker rand further widens margins. Therefore, this is the only market sector which will show strong year-on-year earnings growth. Gold shares appear oversold relative to the gold price and to their valuations.

Portfolio activity
During the quarter we increased our exposure to Anglo American. We bought Anglo as we felt that its valuation discounted a worst case scenario involving the company being forced to raise additional funds through a deeply discounted and dilutive rights issue.

With the recent $2bn bond offering, disposal of AngloGold ($1.3bn) and available cash reserves, the company now has ample headroom to meet near-term refinancing requirements. Furthermore, two of Anglo's key commodities, copper and platinum have rallied substantially year to date. We therefore expect Anglo to re-rate, especially relative to BHP Billiton. We took some profits on Billiton due to its expensive valuation and its commodity mix. The group is more weighted towards the bulk commodities, which we believe have further downside relative to their historical industry cost curves.

We also increased the fund's exposure to platinum, principally by buying more Impala Platinum, the most attractively valued platinum share. We like platinum as we believe the metal's fortunes in the current environment are tied to gold. It is a scarce resource in a consolidated industry and has unique properties. Therefore, it deserves a precious metals premium. Like gold, it is a high-value asset (per unit volume) and demands a safe-haven premium.

Portfolio positioning
We expect commodity prices to remain under pressure for at least the next two quarters, with any sustained recovery only appearing in the latter half of the year. There might be exceptions, especially those commodities that attract some investor demand such as platinum, gold and copper. 2009 bulk materials settlements (April) are expected to result in a minimum 40% contraction in pricing for iron ore and coking coal, with falling sales volumes also a possibility in 2009. Hence, we could see a 60% contraction in sector earnings.

Forecast risk for nearly all companies in our universe is increasing to unprecedented levels. Production unit costs, borrowing costs, sales volumes and commodity pricing transparency are all changing at a rapid rate. Consequently, forward earnings are by no means the only metric we are using for our portfolio construction. Qualitative issues such as margins, net debt and management have become increasingly important.

We thus remain conservatively positioned. Diversified mining companies provide decent leverage without too much operational risk. We continue to be overweight the gold sector for the metal's defensive qualities. SA gold shares should also show strong year-on-year earnings growth. We are avoiding shares solely exposed to bulk commodities which, as mentioned, carry the greatest downgrade risk as current prices are in some instances three times long-term prices.

Market review
The global financial crises and the ensuing slowdown in economic activity left their mark on the domestic equity market. The All Share Index lost 23.2% over the year, all of the losses sustained in the second half of 2008. The market ended 9.2% weaker over the last quarter of the year, with falling commodity prices driving down platinum (-25.8%) and general miners (-15.2%). The construction sector slumped 36.1% in the fourth quarter as companies saw their order books curtailed by weaker demand and foreign investors seemed to lose faith in the sector. Life assurers (-15.9%) continued their underperformance of the general market.

Exposure to falling interest rates and defensive earnings streams dominated the outperformers over the quarter, with banks (-6.1%), healthcare equipment and services (5.6%), food producers (6.6%) and food retailers (16.2%) high up on the performance table. However, it was the gold miners (22%) that took the top spot over the quarter as the dollar gold price held its own and rand weakness and positive production news boosted returns to the sector.

Portfolio review
The Investec Commodity Fund had a difficult quarter, underperforming its benchmark. Within the portfolio, the overweight position in the platinum sector detracted from performance. Platinum shares weakened as the platinum price declined. The precious metal fell as a result of exchange traded fund (ETF) redemptions and much weaker demand forecasts due to slowing auto sales. The platinum price is now well below its marginal cost of production, with many mines now unprofitable. We are bullish on platinum's prospects from here as we believe that the current price is unsustainably low. However, we are still cautious on platinum shares which still have downside should the metal price remain weak.

The fund benefited from its underweight position in the oil sector, via its low Sasol holding. Despite falling by 18% over the quarter, Sasol is still pricing in an oil price significantly higher than current spot levels. Our view is that the level of the Sasol share price is consistent with an oil price of US$60 a barrel. Hence, we believe that all oil's potential upside is already captured in the share price.

Gold remained flat in US dollar terms in the fourth quarter, but the gold price rose by over 10% in rand terms. The fund's holding in gold counters aided performance. We remain holders of gold shares. Until recently gold mining companies battled to translate higher gold prices into higher earnings because of even higher costs and lower volumes mined. We don't see any meaningful volume growth coming from SA gold shares. This is one of the reasons we are bullish on the gold price, but our view is that the tide has turned with regard to earnings. A much weaker rand means that the rand gold price is at an all-time high. Furthermore, cost pressures are easing, led by falling energy prices. We believe that the market has not yet anticipated the earnings upgrades which should materialise for SA gold shares.

Portfolio activity
We cut our exposure to Sasol during the quarter. Sasol's valuation is already discounting a recovery in the oil price and therefore upside is limited. We also sold our shares in Northam as Implats's takeover offer evaporated. We remain positive on gold shares and increased our position in AngloGold as the company restructured its debt.

Portfolio positioning
Our longer-term view remains unchanged. We continue to believe that urbanising economies will put pressure on the metals markets longer term, driving prices higher. The spill-over of credit issues from the financial world, combined with lower metal prices, could lead to an even slower supply response than that which we are currently seeing. This suggests that when demand rebounds, metal prices may well rise sharply. We are, however, struggling to see the catalyst for a 'quick' turnaround:

o Leading indicators point to further weakness.
o Global growth and earnings forecasts are likely to be downgraded in the months ahead.
o The catalyst will probably need to come from the demand side.

Our view is that liquidations/ deleveraging and a decline in demand due to the forecast recession will cause commodities to fall to their marginal production costs. We like commodities, which have fallen far enough to result in supply constraints, and we avoid those commodities which still trade at large premiums to their marginal production costs. These include copper and the bulk commodities, iron ore and coking coal. Although these bulk commodities will remain at contracted prices for the rest of the year, the traded spot markets in these materials suggest large price falls when contracts are renegotiated next year.

We appreciate that some equities are already discounting an outcome worse than this and we are neutral on these companies. Examples include diversified miners Anglo American and BHP Billiton. They produce copper and bulk materials, which can fall further. However, using 'marginal cost' prices for these commodities, still results in these companies trading on fair price earnings ratios. Furthermore, Anglo American and BHP Billiton now show value on a dividend yield basis. Whatever happens to earnings, we are confident that dividends won't be cut due to their high dividend and interest coverage ratios. We would avoid shares solely exposed to bulk commodities which, as mentioned, carry the greatest downgrade risk as current prices are in some instances three times long-term prices.

Platinum shares still have the potential for downgrades, but the metal itself is now oversold and the price is unsustainably low. We are heartened that corporate action has emerged in the platinum sector and are holders of those companies which should benefit from these deals.

Our view is that earnings next year will be significantly better for the miners than the market's expectations, as reflected in current share prices. We acknowledge that there is likely to be more gloomy news in the near term, including negative quarterly views from manufacturers and further broker price commodity price downgrades.