The mid and small-cap sectors had a very strong month returning 4.8% against the overall market, which was down 0.6%. The theme remains the same in that companies exposed to the local economy continue to show very strong earnings growth. This month the fund managers had results from Afgri, Oceana, Wetherly's and Seardel - all of whom met or exceeded expectations. Price performance has been earnings driven and there has been very little re-rating. As a result, valuations remain undemanding. The portfolio benefited from strong price movements in SA Chrome, Tourvest, Ozz and AECI, which are core holdings. During the month, new positions were established in Rebserve and Tongaat. The current Rebserve price is discounting no future growth. Current contracts provide an annuity stream to earnings and the fund managers believe Rebserve is well placed to gain an additional facilities maintenance contract.

Susan Butler was today appointed as portfolio manager of the Investec Emerging Companies Fund.

The portfolio showed a 0.4% positive return for the month, despite the fact that it lagged its benchmark.

The mid and small-cap indices outperformed the overall market, supported by good local fundamentals which shielded the sector from the volatility and negative sentiment that is plaguing global markets. We continue to see positive earnings surprises driven by strong consumer spending, and increased export and construction activity.

In particular, we are encouraged by the very strong tourist activity that has been experienced since late last year. South Africa is now being viewed as a safe and cheap destination and expectations are for a record tourist season this year. The fund will benefit via its holdings in Tourvest and City Lodge.

Fund performance was negatively impacted by IT holdings as the sector continued to be battered by negative news flow.

On a positive note, the portfolio benefited from the very strong performance in Energy Africa, Seardel, African Rainbow Minerals, Hudaco and Peregrine.

While the universe of shares lagged the overall market, the fund showed positive absolute returns for the month but marginally under performed its benchmark.

Positions in Tourism and GDFI related stocks performed strongly during the month with companies in these sectors showing positives earnings surprises. Despite strong price performance, ratings remain undemanding and the fund managers believe the positive earnings momentum will continue. Unfortunately these strong performances were offset by poor performance from IT holdings where earnings momentum and news flow continues to be negative. During the month position in Prism and AST were reduced due to sustainability concerns. While stocks in this sector appear to be cheap, it could be some time before the news flow and earnings show a positive turn. The fund managers will continue to take a more cautious stance in this area.

Looking forward, while continued volatility is expected in equity markets, we have seen strong earnings growth in companies exposed to the local economy and we continue to believe that companies in the mid and small cap area are showing great value.

The fund had a mixed second quarter. Although it delivered good positive absolute returns (more than 5%), it under-performed its benchmark. The relative under -performance was to be expected given the very strong performance of the fund over the last 2 quarters This element of the fund's positioning is being addressed and the fund managers are making the necessary changes. (i.e. by selling marginal holdings that are not working, adding to positions that are and by switching into other opportunities that may have arisen in the recent volatility). As communicated earlier, on a macro level, we were underweight Gold, to overweight Resources (despite being significantly underweight the benchmark), and underweight Consumer Cyclicals and Financials. The fund managers have increased exposure to the two latter sectors by increasing exposure to Weatherly's, Edgar's and Truworth's, and by re-introducing Capital Alliance. Gold continues to be a conundrum, but we reduced our negative bet when we partook in the African Rainbow Minerals placing at R45 (cheap insurance against a continued U.S Dollar decline, equity market instability, continued geopolitical uncertainty and an 'option' on growth in the context of the new mining legislation). Aspen continues to be our top stock pick. The fund managers continue to believe that it is fundamentally undervalued with superb earnings momentum over the next couple of years. As a summary, the fund managers are happy holders of most of our bigger holdings: OZZ; Netcare; AECI; Tiger Wheel and Tyre; OcFish; Nuworld; OTK; Nail Media; Mcubed; and Tourvest. Similarly, we are happy with most of the smaller holdings (for example, Seardel and Hudaco).

In conclusion, small- mid-caps are one of the few sweet spots in the market (cheap, local versus offshore, and the Rand is going the right way). Expect continued volatility as investors' world-wide try to resolve when the recovery will really come, whilst simultaneously digesting more corporate scandals in the US and its impact on markets in the medium to long-term.

The Fund performed poorly over the last month although it delivered good positive absolute returns.

The relative under-performance was expected, given the very strong performance of the Fund over the last 6 months. The fund manager correctly anticipated that some sectors and stocks would bounce back significantly from what were obviously very oversold levels.

The under-performance was largely driven by the under-weights in Financials, Technology, Consumer Cyclicals and from having Resources despite being underweight. In particular the biggest active returns, from held positions, came from NuWorld, Prism, and OTK. The biggest negative active returns came from Southern Mining, Energy Africa and SA Chrome. From assets not held, the fund lost most by not having Avmin, Western Areas and AVI, and gained the most by not having Naspers, NIBH and Durban Deep.

On a macro level, the fund was too long continued rand weakness, still short Gold (having taken profits too early), and too short high beta (risk) small caps. The fund manager has taken remedial action on the first two issues but remain cautious of the latter. Given the sensitivity of the repositioning on a stock specific level he prefer to comment once the changes have been effected and will, therefore, do so at quarter end.

In conclusion, two things have come to pass that the fund manager anticipated would change the absolute and relative performances of small/mid caps versus large caps: the resources pull back, driven by rand strength, and increasing rate of consolidation in the asset class. The fund manager therefore expects small and mid-caps to perform very well until a sustained, and relatively strong turnaround in the US and world economy is not only a consensus but borne out by earnings.