Market review
The FTSE/JSE All Share Index closed the third quarter down 5.8%, with significant rand weakness partially offsetting the sharp fall in commodity prices. The index lost 21.3% in US dollars. Significant dispersion marked the quarterly performances, with sectors most exposed to the SA economy generally outperforming the broader market. The food and general retail sectors fared particularly well, closing 6.4% and 1.7% higher, respectively. Banks lost 3.3%, while short-term insurers gained 6.9% over the three months. The health care sector, up 2.5%, continued its recent strong performance. Commodity-exposed rand hedge stocks fared poorly over the quarter, but even here there was significant dispersion. Diversified miners lost 17.3% and platinum miners shed 9.7%. The gold sector posted one of its strongest relative performances, gaining 19.5% over the review period.

Portfolio review
The Investec Commodity Fund declined in value by 6.7% in the third quarter. The fund's benchmark, which is a composite of the FTSE/JSE basic materials, oil and gas, and construction and materials indices, lost 10.2% over the review period. Against the backdrop of falling industrial commodities and resilient precious metals, our long-held overweight position in gold shares (Gold Fields, AngloGold and Durban Deep) served the portfolio very well, as did our underweight positions in steel (ArcelorMittal), and paper (Sappi and Mondi). The portfolio's neutral exposure to platinum equities (platinum being both an industrial and a precious metal), also added alpha. Our overweight position in Anglo American Platinum (Amplats) and our underweight holding in Impala Platinum (Implats) benefited the fund, as Amplats outperformed. The portfolio's other long-held overweight position in Sasol also contributed, as the stock displayed its rand hedge resilience.

Portfolio activity
During the quarter, we increased our overweight position in Anglo American. We believe near-term production growth from Barro Alto nickel, Kolomela iron ore and Los Bronces copper could provide decent cash flow kickers over the next two years. We therefore forecast Anglo American's free cash flow yield at 13% for the 2012 financial year. In our view, Anglo American has a more sustainable platform for revenue growth than its peers, since its commodity basket price (supported by platinum group metals, diamonds and thermal coal), could fall less than those of its peers as it provides exposure to late cycle commodities.

The increased Anglo American weighting was partially funded by selling down some BHP Billiton, whose high exposure to bulk commodities and financial gearing (debt-to-equity ratio of 25%) do not stand it in good stead as we enter an industrial slowdown.

Portfolio positioning
We see several factors that are likely to support commodity prices over the medium term. These include continued urbanisation and industrialisation of populous and fast-growing emerging markets; loose monetary policies globally; potential for commodity intensive fiscal stimulus; supply constraints caused by project and infrastructure delays and potential for higher demand for commodities due to their inflation protection properties.

We continue to position the portfolio based on our earnings forecasts relative to consensus expectations. We are gratified to see that earnings are being upgraded for the equities in which we are overweight, and downgraded for those in which we are underweight. This is in accordance with our commodity price views and company modelling work, which pre-empted these revisions by the market. We are hopeful that the spate of earnings revisions being made by the market in response to the resilient gold price, weaker industrial metals prices and sharply weaker rand, will lead to continued outperformance of the equity positions held in the fund. To summarise:

o Sasol remains a high conviction overweight holding. This position is premised both on our global energy outlook as well as on micro research into Sasol's valuation. We expect Sasol to earn R43 in the 2012 financial year, ahead of the market's consensus earnings. This earnings forecast implies a 28% share price upside, should Sasol trade at its historical forward price earnings ratio (PE) of 10 times.
o We are neutral to slightly underweight the platinum sub-sector. Amplats remains our preferred share. We expect the rand basket price of platinum group metals to rise. Being higher cost and with net debt, Amplats offers more operating and financial leverage to a rising basket price than Implats. We also believe that Implats shares will be weighed down by continued uncertainty over Zimbabwean indigenisation plans.
o We maintained our overweight position in gold shares, Gold Fields and AngloGold, by buying into weakness. In our view, there is still a bull case for ongoing gold price strength, as demand for safe haven assets remains elevated. We expect ongoing market uncertainty around the ability of European policymakers to deliver a credible solution to the sovereign debt crisis. The yellow metal is further supported by perceived risks of holding depreciating fiat currencies, an extended period of negative real interest rates and central bank activity, indicating net purchasers of gold.
o Gold Fields remains our favoured exposure, given the value embedded in South Deep and a more stable and predictable production profile over the next five years. Like Amplats, new lower cost ounces (from the more mechanised South Deep mine), will improve the 'mix' of overall gold mined even as legacy South African assets face challenges.
o All SA gold miners should benefit operationally from the sharply higher rand gold price (up 17% quarter on quarter). At the same time, these shares offer valuations at unprecedented low levels. We expect continued outperformance initially on the back of earnings momentum stemming from operating gearing, followed by a rerating.

Market review
The FTSE/JSE All Share Index closed 0.6% lower over the review period, with the market falling 2% in June. Resources were the biggest detractors, with gold miners and platinum stocks down 13% and 7.7% respectively. Diversified miners lost 3.3%. Health care (6.9%), food producers (4.5%) and telecommunication (5.4%) performed well. Banks gave up 0.9%, with flat returns year to date. Sasol, the only oil & gas sector constituent, fell 8.5% in the second quarter after a strong first three months of the year.

Portfolio review
The Investec Commodity Fund declined by 5.7% in value for the three months to the end of June. The market had a weak quarter as fears of a global economic slowdown took hold, caused by continuing debt concerns in Europe, China reining in its economy and US economic data signalling that growth was starting to falter. Commodity prices weakened, resulting in earnings downgrades from both weak price realisations and production hiccups.

Portfolio activity
There was little portfolio activity during the quarter, as we believe that the fund is largely correctly positioned. Our major activity during the quarter was to increase the fund's tracking error. To this end, we continued to add to our high conviction Sasol holding. This overweight position is based both on valuations and our global energy outlook. The purchase of Sasol was partially funded by taking profits on our Exxaro overweight position. Exxaro's share price has rallied by over 70% since its 12-month low, and we see a lack of near-term catalysts for further outperformance. Highly elevated iron ore margin expectations pose a downside risk to earnings. Furthermore, infrastructure constraints are also likely to dampen near-term growth. We retained our underweight position in Kumba Iron Ore (KIO), but built up an overweight position in African Rainbow Minerals (ARM). During the quarter ARM underperformed its peers (Assore/Exxaro), yet we believe that ARM offers strong production growth, large reserves, favourable cost positioning of its assets and a strong balance sheet. We are neutral to slightly underweight the platinum sub-sector. Japan accounts for 15% of global platinum group metals (PGM) consumption. In the wake of the Japanese tsunami and higher oil prices, PGM prices have been weak (particularly in rands). However, we still see strong relative value in Anglo Platinum (AngloPlat) and remain overweight. We also maintained our overweight position in gold shares (Gold Fields and AngloGold), by buying into weakness. Our bull case for the gold price relates to our belief that real interest rates will remain negative or close to zero globally as inflation trends higher. Furthermore, India and China are now cumulatively the world's largest gold consumers and rising income levels in these countries are positive for future demand.

Portfolio positioning
We believe the outlook for commodities is broadly bullish. This is based on three core beliefs: emerging market growth will remain strong, the US Federal Reserve's efforts to stimulate US growth will be successful, and physical fundamentals in many commodity markets are tight. The mining industry was critically affected by the global financial crisis, and this generally delayed investment activity massively. The lack of supply growth is a key factor supporting metals at comparatively high levels.

However, we believe the financial system remains fragile and that macroeconomic uncertainty will intermittently contaminate sentiment for risky assets such as commodities. Sovereign risk in Europe and rising inflation in emerging markets are of most concern. We continue to position the portfolio based on our earnings forecasts relative to consensus expectations. In an environment of rising commodity prices, we prefer miners that are more sensitive to changes in commodity prices, as they will benefit more as margins expand. For example, KIO is less sensitive to rising commodity prices than Anglo American.

To summarise:
-The portfolio remains overweight in the mining houses, Anglo American, ARM and BHP Billiton. We are ahead of the market in terms of earnings for all of these companies, largely due to our bullish copper and coal views. We prefer the general miners over the next 12 months, as they offer superior cash-flow returns, and trade at an average price earnings ratio (PE) of 8.2 times over the next two years.
-The portfolio is overweight Sasol. We expect Sasol to earn R43.75, ahead of the market's consensus earnings.
-The portfolio is overweight gold producers. We expect gold prices to continue to rise from current levels as real interest rates should remain low. Our gold price forecasts are ahead of the market and we believe that gold companies can beat earnings expectations despite the strong rand, as long as they can keep costs under control.
-The portfolio is underweight KIO. We believe that the market is too optimistic on this share's earnings. Longer term, we forecast significant downside to current iron ore prices and KIO's margins. The company's highly elevated margins are unsustainable in our view due to the looming iron ore oversupply. We see an asymmetric risk reward for iron prices at ~$180/t.
-The portfolio is overweight AngloPlat. We believe there is still upside to the platinum and palladium prices, given our fundamental supply and demand outlook. AngloPlat has lagged increases in PGM prices and recent results show that cost increases are under control.

Market review
Local equities mimicked global market volatility, recovering January's losses and ending the quarter marginally higher (1.1%). Resource counters performed best, with Sasol, the only oil & gas producer constituent in the index, rising 13.1%. Diversified miners closed 3.2% higher while paper stocks added 15.5% over the period. Platinum stocks lost 10.5%. Both the industrial and financial sectors underperformed the broader market, closing down 0.3% and up 0.7%, respectively. Again, there was substantial dispersion amongst the various sub-sectors, with construction (-25%), food producers (-4.3%) and pharmaceuticals (-11.5%) underperforming, while mobile telecommunication (3.9%), life insurance (6.4%) and industrial metals (14.5%) enjoyed strong returns.

Portfolio review
The Investec Commodity Fund rose by 4.6% in value over the first quarter of 2011. Resources had a volatile quarter, with plenty of global events occupying the investor's mind. These included turmoil in the Middle East and North Africa region, leading to a Libyan war, and the devastating earthquake and tsunami in Japan with the resultant nuclear risk and production stoppages. Platinum miners bore the brunt of the fallout, as the platinum price came under pressure due to concerns over motor industry production stoppages in Japan, and the Zimbabwean government issuing a statement demanding local ownership of 51% of foreign-owned mines. The fund's underweight position in the underperforming platinum sub-sector therefore added to relative performance. The political unrest in the Middle East contributed to Brent crude oil rising by 24% for the quarter. This massive tailwind assisted Sasol, which contributed to the fund's relative performance, owing to an overweight position. Gold shares, however, proved to be the largest detractor of relative performance. Gold miners as a whole rose by 2% for the quarter as the gold price rally continued, yet hindered performance due to our stock selection. Harmony rose by 22% and the fund's underweight position in the counter cost us relative alpha (outperformance). Floods in Queensland during the quarter had a positive effect on both coking and thermal coal prices. The Queensland area supplies 51% of coking coal and 7% of thermal coal to the seaborne market. Furthermore, concerns over nuclear power, after the Japanese tsunami, should drive coal-fired power plant demand and consequently thermal coal prices. Exxaro is most leveraged to thermal coal prices and rallied during the quarter. Our overweight position in this share was hence our largest contributor to relative performance.

Portfolio activity
Our major activity during the quarter was to purchase more Sasol and further increase our overweight position. This purchase was partially funded by taking profits on our Anglo American overweight position. We also trimmed our position in African Rainbow Minerals. The company offers strong volume growth potential of 35% by 2015, but highly elevated near-term margins pose downside risk to earnings forecasts. Instead, our preferred mining house is now BHP Billiton, in our view the premium value creator in the sector. We maintained an underweight position in Kumba Iron Ore.

Portfolio positioning
We believe the outlook for commodities is broadly bullish. This is based on three core beliefs: emerging market growth will remain strong, the US Federal Reserve's efforts to stimulate US growth will be successful and physical fundamentals in many commodity markets are tight. However, we believe the financial system remains fragile, and that macroeconomic uncertainty will intermittently contaminate sentiment for risky assets such as commodities. Of most concern is sovereign risk in Europe and rising inflation in emerging markets. We continue to position the portfolio based on our earnings forecasts relative to consensus expectations. In an environment of rising commodity prices, we prefer miners that are more sensitive to changes in commodity prices, as they will benefit more as margins expand. For example, Kumba Iron Ore is less sensitive to rising commodity prices than Anglo American. To summarise:

-The portfolio remains overweight in both major mining houses, Anglo American and BHP Billiton. We are ahead of the market in terms of earnings for both these companies, largely due to our bullish copper and coal views. We prefer the general miners over the next 12 months, as they offer superior cash-flow returns, and trade at an average price earnings ratio (PE) of 8.2 times over the next two years.
-The portfolio is overweight Sasol. We expect Sasol to earn R43.75, ahead of the market's consensus earnings. Sasol could well stand to benefit from an increased focus on internal oil/ energy generation in both the US and China. ?The portfolio is overweight gold producers. We expect gold prices to continue to rise from current levels as real interest rates should remain low. Our gold price forecasts are ahead of the market, and we believe that gold companies can beat earnings expectations despite the strong rand, as long as they keep costs under control.
-The portfolio is underweight Kumba Iron Ore. We believe that the market is too optimistic on this share's earnings. Longer term we forecast significant downside to current iron ore prices and Kumba Iron Ore's margins. The company's highly elevated margins are unsustainable in our view due to looming iron ore oversupply. We see an asymmetric risk reward for iron ore prices at ~$180/t, driven by a seasonally strong period for demand in China and the export ban in India.
-The portfolio is overweight Anglo Platinum. We believe there is still upside to the platinum and palladium prices, given our fundamental supply and demand outlook. Anglo Platinum has lagged recent increases in platinum group metal prices, while recent results show that cost increases are under control.

Market review

After a volatile first three quarters of 2010, risky assets responded to prospects of an improved economic outlook and ended the year firmly in positive territory. During the fourth quarter, investors switched out of bonds into equities. Global equities added 8.8% over the period, while global bonds lost 1.8% in US dollars. Local bonds could not shrug off the global bond sell-off, ending up only 0.7% over the quarter. Cash, as measured by the STeFI, returned 1.6% for the three months to the end of December. The best performing asset class over the past year was the listed property sector. The sector continued to show strong returns, despite weak property fundamentals. Listed property gained 3.1% in the fourth quarter to rise by 29.6% for the year. Local equities participated in the global equity rally. The FTSE/JSE All Share Index rose 9.5% in the fourth quarter on top of the 13.3% gain over the prior three months, ending the year 19% higher. Resources (16.5%) proved to be the top performing sector, with financials flat and industrials up 7.8% for the period. Amongst the resource counters, diversified and platinum miners (both up 19.2%) did best, while short-term insurers (15.4%) and some smaller industrial sectors (media and support services) beat the overall market. Stocks predominantly focused on the South African economy fared worse. Construction ended the quarter 3% higher, banks closed flat, while food and general retailers added 2.9% and 6.2% respectively.

Portfolio review
The Investec Commodity Fund rose by 13.9% in the fourth quarter, underperforming its benchmark, the JSE Resources Index, which increased by 16.5%. Gold shares underperformed and detracted from performance. 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 the sector can outperform despite the strong currency, as long as costs are kept under control. Critical in achieving this will be the ability to arrest the volume declines of the past few years. In the future new mines should offset ongoing depletion of ageing mines, and will allow volumes to "flat-line" from here. The fund's large Sasol holding enhanced performance. We expect the oil price to trade between the OPEC support level and its incentive price for new investment ($80 - $100 a barrel), during this period of uncertain demand. If these levels hold for Sasol's full year 2011, upside risks to the market's earnings per share forecast exist.

Portfolio positioning
In addition to our long-standing overweight holding in BHP Billiton, we have continued to add to our Anglo American holding. We believe Anglo has further value to be realised from non-core asset sales, as well as margin expansion from exposure to lower margin consumer-orientated commodities. BHP Billiton offers value as a defensive exposure.

Anglo remains exposed to the attractive copper, platinum group metals (PGM) and iron ore markets, and is growing production in nickel, copper and iron ore over the next three years as well as selling non-core assets. The company is bolstering its balance sheet, which will allow for additional approved growth projects and potentially even higher capital returns or mergers and acquisitions over the next couple of years.

Among the mid caps, we favour African Rainbow Minerals (ARM), Metorex and Exxaro over Kumba Iron Ore. Exxaro continues to enjoy strong earnings growth; a turnaround from the heavy minerals business will be positive for earnings momentum and sentiment. ARM has one of the strongest production growth profiles in the industry, with volume growth in iron ore, nickel and PGMs the key drivers. It also retains a defensive balance sheet, and thus has the flexibility to make acquisitions of distressed assets. PGMs have been trading at historically low margins, and we think that a recovery in margins will be a key catalyst. We remain bullish on gold. 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. These include central bank buying, private sector inflows into physically backed exchange traded funds, and ongoing de-hedging by companies in the gold mining sector.

Gold Fields remains our favourite stock, 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 further 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 need to be kept in check through higher volumes or significant reductions in labour.

We believe the outlook for commodities is broadly bullish. This is based on four core beliefs: emerging market growth will remain strong, the Federal Reserve's efforts to stimulate US growth will be successful, European sovereign risk will eventually be contained and physical fundamentals in many commodity markets are tight.

2011 should be characterised by fresh investment inflows into the commodities complex. The sector's appeal reflects investor appetite for exposure to emerging markets, as a hedge against tail events, and against future inflation. Moreover, investors will be able to gain direct exposure to an increasing array of commodities such as uranium, iron ore and coal which have previously been unavailable to the private investor.

However, we believe the financial system remains fragile and that macroeconomic uncertainty will intermittently damage sentiment towards risky assets such as commodities. Sovereign risk in Europe, rising inflation in emerging markets and a disorderly sell-off in global fixed income markets are serious concerns. Our view is that China remains a bullish factor for commodity markets, despite short-term risk from monetary tightening. In 2010, the country became an even greater source of demand for commodities such as thermal coal, silver, soybeans and cotton. While industrial metals demand has the highest correlation to credit growth and consequently is the most sensitive to monetary tightening measures, we believe the underlying growth outlook in China remains positive.