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.

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. 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 Investec Commodity Fund rose by 8.3% over the third quarter, outperforming its benchmark, the JSE Resources Index, which increased by 7.1%. Gold shares underperformed during the quarter and detracted from returns. This occurred despite the strong gold price and reasonably good quarterly results from gold companies. The strong rand, however, weighed on share prices. We believe that gold companies can outperform despite the strong currency, as long as they can keep costs under control. Critical in achieving this will be the ability to arrest the volume declines of the past few years. We believe going forward, that new mines will offset ongoing depletion of ageing mines and will allow volumes to 'flat-line' from here. The fund's large Sasol holding added to performance. We expect the oil price to trade between the OPEC support level and its incentive price for new investment (US$70-US$90 a barrel) during this period of uncertain demand. If these levels hold for Sasol's 2010 financial year, upside risks to the market's earnings per share forecast exist.

Portfolio activity
During the quarter, we increased our tracking error by going more overweight the gold shares and more underweight Kumba Iron Ore. These are both high conviction ideas. Gold Fields remains our favourite play, given the value embedded in South Deep and a more stable and predictable production profile over the next five years. Promising exploration projects in Chile and Peru are likely to deliver further incremental growth in the medium term. Our preference is also supported by favourable valuations as Gold Fields is trading on a forward price earnings multiple of 14 times. The biggest downside risks to our position are costs, which will have to be kept in check through higher volumes or a significant reduction in labour.

Kumba Iron Ore continues to track the rand spot iron ore price closely. The spot iron ore price has recently retreated, as Asian steel prices have stalled and inventory levels of iron ore are high. We anticipate, as a result, that the iron ore price is set to fall from current levels over the next three quarters and, though Kumba Iron Ore is looking better value than for some time, we expect lower iron ore prices to lead to a better buying opportunity in the next six months.

We took profits on Sasol after a good run on the back of a favourably received management road show. The rand oil price has remained flat, however, and Sasol is looking more expensive. Finally, we purchased more Exxaro, being the best way to play our favoured coal exposure.

Portfolio positioning
Commodity prices have been robust, highlighting the strong fundamental position of commodity markets, which enjoy solid investor support. We do not expect a double-dip recession in the US and believe commodity prices will peak in 2012. However, we expect some weakness in stainless steel materials over the next two to three quarters and remain cautious on iron ore. Our view is that the market is factoring lower commodity prices into equity market prices and though there is a risk of lower commodity prices in the short term, we think that this is now reflected in share prices. Global industrial production (IP) in 2011 is expected to post an extremely robust growth rate of more than 5%. Annual consumption growth in base metals is estimated to be approximately 9%. This level of demand growth is not easily met via primary mine production and we expect that copper in particular will fall short. In addition, the underlying level of demand in emerging markets, China in particular, is materialising to be considerably stronger than many analysts had expected, with IP still likely to be north of 13%, and GDP edging up towards 10%. While there are extremely valid concerns of a slowdown in demand in the developed markets, the emerging nations are facing a far more upbeat economic environment. Indications of this are clearly evident, not the least being that global auto sales are near record levels, even though western European car sales are 12% below the levels from last year. US car sales are some 47% down from their 2006-2007 peak levels. This of course, reflects the rapid rise in vehicle sales in emerging markets, China in particular. We remain bullish on the gold price. The broader themes underpinning gold are intact. Currency weakness, sovereign debt risk, turmoil in financial markets and a broader sense of general uncertainty have fuelled investment demand in an effort to preserve wealth and to substitute currencies. Alongside bullish interest rate and exchange rate trends, we believe the precious metals sector is also enjoying new sources of demand in the form of central banks buying gold, private sector inflows into physically backed exchange traded funds and ongoing de-hedging by companies in the gold mining sector.

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
The Investec Commodity Fund declined by 10.4% over the quarter, outperforming its benchmark, the JSE Resources Index, which fell by 11.9%. During the review period, gold shares outperformed, contributing to fund performance. Gold stocks have begun exhibiting share price leverage to the high and rising gold price. We believe that these counters will continue to do so, as long as gold companies can keep costs under control. Critical in achieving this will be the ability to arrest the volume declines of the past few years. The fund's large Sasol holding also added to performance, despite declining in absolute terms. We expect the oil price to trade between the OPEC support level and its incentive price for new investment (70 US dollars to 90 US dollars a barrel) during this period of uncertain demand. If these levels hold for Sasol's 2010 financial year, upside risks to the market's earnings per share (EPS) forecast exist.

Portfolio activity
During the quarter we began reducing our large underweight position in Anglo Platinum by purchasing the share. Anglo Platinum is still expensive (25 times forward price earnings), but should show the best operational performance in its peer group. The company is committed to hold costs flat in nominal terms for the next three years.

Portfolio positioning
The short- to medium-term outlook has been dampened by the prospect of a stalled recovery in developed economies (Europe in particular), and a government orchestrated slowdown in China. Our key concerns are therefore macro in nature:
o A slowdown in China driven mainly by policies designed to cool the property market.
o An anaemic recovery in the US.
o Fallout from the European debt crisis leading to fiscal tightening and causing slower growth in Europe.

If China slows, commodity markets will be dragged down. China produces and consumes about 50% of the world's steel. Much of that is produced from imported iron ore supplied by companies such as BHP Billiton and Anglo American. We've seen spot iron ore move from some 200 US dollars a ton to around 140 US dollars a ton. We think the price could fall further as Chinese steel production decreases. China also comprises about 30% of world copper demand and 35% of world aluminium demand. Earnings downgrade risk for the miners is also of growing concern. Following the significant earnings recovery from April 2009 - April 2010 (+200%), the miners are facing EPS downgrades of up to 20% after the correction in metal prices in May. The biggest downgrade risk is for base metals.

The outlook will become more favourable under the following conditions:
o The news flow on China's property market becomes less negative.
o Lead indicators, which are currently negative, hit an inflection point.
o Iron ore and copper prices find a level. Iron ore moves to 110 US dollars a ton and copper settles at 5500 US dollars to 6000 US dollars a ton.
o There is some positive news flow from Europe regarding credit and the banking system.

For now, we favour the precious metals.

Market review
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
The Investec Commodity Fund appreciated by 1.4% in value over the first quarter, underperforming its benchmark, the JSE Resources Index, which rose by 2.1%. It was a volatile quarter; the resources market corrected in mid January, was range bound in February and then rallied strongly in March. Gold shares disappointed during the review period and detracted from performance. Despite a stable gold price in rands, weak operational updates (lower volumes than anticipated), and the impending Eskom power hikes, resulted in all gold shares underperforming. However, we still maintain our positive outlook for the gold shares. We believe that central banks and individuals are in a phase where they are investing in gold which will result in rising gold prices. In the near term, we see a 10% - 15% upside in the gold price to average $1.250 an ounce for 2010. In general, gold equities outperform during periods of rising gold prices, provided operating costs are kept under control. Gold equities are once again exhibiting strong operational gearing to the gold price. We believe that this will result in share price leverage. Gold companies still face ongoing challenges to maintain organic production levels/manage costs. However, these are less onerous than in the recent past. Gold equity valuations are now relatively attractive, but depend on the strength of the rand gold price. Gold Fields in particular, should benefit from the rising rand gold price leading to substantial rand revenue increases. However, Gold Fields' share price appears to price in failure at the South Deep project. So far, the mine ramp-up appears on schedule, with both underground tonnage milled and grades picking up. The fund's large Sasol holding detracted from performance. Given Sasol's underperformance, we continue to be buyers of the share which now exhibits good value. During 2009, Sasol encountered significant internal and external headwinds, but we believe that the financial issues are now fully discounted. We expect the oil price to trade between the OPEC support level and its incentive price for new investment ($70-$90 a barrel) during this period of uncertain demand. If these levels hold for Sasol's financial year 2010, upside risks to the market's earnings per share forecasts exist.

Portfolio activity
During the quarter we consolidated our gold holdings by buying Gold Fields and selling AngloGold, to better reflect our bullish view on gold. Gold Fields offers maximum leverage to the gold price as it is 100% unhedged, unlike AngloGold. On aggregate, Gold Fields, mines at similar margins with far greater reserve upside, yet, at a nine times forward price earnings ratio (PE), trades at a substantial discount to AngloGold's 15 times PE. We also increased our exposure to African Rainbow Minerals, which offers the most attractively valued play on the very strong bulk commodity settlements. Using the new settlement figures for iron ore and coal, African Rainbow Minerals trades on a seven times forward PE compared to the more expensive 11 times for Kumba Iron Ore.

Portfolio positioning
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. In addition, restocking of raw materials in the western world has become a key theme in 2010 We expect share price performance to be strong for the remainder of 2010. The global economic recovery should gain momentum and supply constraints in many commodities should limit production growth in response to strengthening demand. Our analysis indicates that mining equity valuations in general imply that the market is still not fully discounting the earnings growth potential for this sector and the sustainability of relatively high commodity prices. We believe the drivers of a continuation of the mining sector rally will include rising prices for some key commodities due to major supply constraints and a recovery in OECD demand, and earnings upgrades. Current estimates appear to be too conservative, despite steady positive earnings revisions over the past six months or more. In our opinion, the earnings upgrade cycle clearly has further to go. If we assume current spot commodity prices and currencies for all of 2010, we calculate that consensus estimates would be 40% too low. At current spot commodity prices, we estimate that the sector would be trading at about ten times 2010 earnings. We conclude that earnings momentum for the miners is still positive, and equity valuations for the sector are still low.

Market review
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 Commodity Fund appreciated by 15.3% in value over the quarter, underperforming its benchmark, the JSE Resources Index, which rose by 16.7%. Within the portfolio, the overweight position in the platinum sector added to performance. Platinum shares rallied as the metal price itself recovered. Platinum is our preferred precious metal exposure. It offers a unique combination of leverage to the global economic recovery through the rebound in global auto output, as well as the supportive attributes of a 'precious' metal. The advent of a new US listed exchange traded fund (ETF) is supportive for the metal's investment demand. Nevertheless, valuations for most of the stocks are demanding, leaving Implats as the only stock with absolute upside. We think that the Angloplats' share price recovery is somewhat optimistic, given current conditions of earnings drivers. The fund's large Sasol holding detracted from performance. Given Sasol's underperformance, we continue to be buyers of the share which now exhibits good value. During 2009, Sasol encountered significant internal and external headwinds, but we believe the financial consequences are now fully discounted. We expect the oil price to trade between the OPEC support level and its incentive price for new investment ($70-$80 a barrel) during this period of uncertain demand. If these levels hold for Sasol's financial year 2010, upside risks to the market's earnings per share forecast exist. We continue to prefer Anglo over BHP Billiton. We think that Anglo has more value to be realised from non-core asset sales as well as procurement and asset optimisation benefits. Anglo also has a better production growth outlook through to 2012. Our view is that the failed approach by Xstrata has kick-started a process of change that will continue to bear fruit. We also like the fact that Anglo has exposure to a number of late cycle commodities that did not perform in 2009. BHP Billiton is more fully valued in our view and there remains a risk that the company will make an acquisition, though cash flow remains strong. Anglo is trading on 11.5 times 2010 and 7.5 times 2011 earnings, which is an attractive level. In addition, there are a number of underperforming businesses in the portfolio and we think that the global recovery will boost precious group metals, industrial minerals and diamonds. These business units have remained under pressure and as margins return and profits normalise, we expect Anglo to continue to perform. We still struggle to find value in Exxaro and Kumba Iron Ore as both are trading at premiums to our net present value and are more expensive that most of the other stocks in 2010. African Rainbow Minerals has been heavily dependent on manganese in previous years. However, the company's recent expansion projects in other commodities have put it in a position where the manganese, platinum and iron ore businesses will be more or less on par in terms of contribution to earnings over the next three years. Volume growth in nickel will start to contribute later to earnings. For calendar year 2011, African Rainbow Minerals is estimated to have the lowest price earnings ratio in the South African resources universe (7.2 times). This, combined with the company's ability to increase output quickly at various operations, its strong volume growth in the medium term, its blue sky in base metals and its overall 10% discount to net present value, means that we are still bullish on the stock. Gold shares disappointed during the quarter and detracted from performance. The gold price was very strong over the review period. However, a stronger rand, weak operational updates (lower volumes than anticipated), and the impending Eskom power hikes, resulted in all gold shares underperforming. Whilst we don't believe that the gold price will perform as well in 2010 as it did in 2009, we maintain our positive outlook for the gold shares. We still expect the gold price to rise steadily through 2010 and into 2011 as gold prices correlate more strongly with real interest rates than US dollar exchange rates over time. Combined with expected ETF inflows and likely net buying by central banks, we expect gold demand to remain supported.

Portfolio activity
During the quarter, we increased our holdings in both Sasol and BHP Billiton. Sasol offers good value, given our oil price outlook, and trades at under ten times forward earnings. BHP Billiton offers less absolute upside than Anglo. However, BHP Billiton is no longer overvalued, given our expectations for higher bulk commodity settlements (iron ore and coal) later this year.

Portfolio positioning
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 We expect share price performance to be strong once again in 2010. The global economic recovery should gain momentum and supply constraints in many commodities should limit production growth in response to strengthening demand. Our analysis indicates that mining equity valuations in general imply that the market is still not fully discounting the earnings growth potential for this sector and the sustainability of relatively high commodity prices. We believe the drivers of a continuation of the mining sector rally will include rising prices for some key commodities due to major supply constraints and a recovery in OECD demand, and earnings upgrades. Current estimates appear to be too conservative, despite steady positive earnings revisions over the past six months or more. In our opinion, the earnings upgrade cycle clearly has further to go. Equity valuations for the sector are still low, despite strong share price performance over the past year.