The Investec Emerging Companies Fund showed average performance in September with the fund recording a 2% return over the month. This was below the mid and small cap index returns of 6% and sufficient to place the fund in position five out of eight funds in the sector.

Performance in September was negatively affected by an earnings disappointment from Datacentrix which resulted in the stock falling 20% - a material drag on performance given that it makes up nearly 3% of the fund. Over the month we introduced new holdings in AMAP, Kagiso Media, Lewis and Murray and Roberts.

After rising 29% over the last six months, it is not surprising that the market is currently experiencing a bout of profit taking (At the time of writing the All Share Index has fallen 5% so far in October). While a correction from an overbought level was inevitable, the timing of the correction is a little strange to us in that world equity markets are falling as the oil price is falling - certainly we would have thought $70 oil of a month ago was the catalyst for a correction rather than the current sub $60 oil price. What is probably concerning the markets more than the oil price are more hawkish statements coming out of the US central bank. It appears as if these international concerns are resulting in local investors also beginning to factor in a chance of an interest rate rise in South Africa. We believe this to be very unlikely in the next six months given that inflation is not above the inflation target and on our figures is not expected to go above the inflation target over the next three months.

Adding to our sense of comfort is the short term drop in oil prices together with the fact that even under a hawkish US interest rate scenario; the US is three quarters through its interest rate tightening process.

Given our above mentioned sanguine outlook on interest rates, we remain bullish on the local market and believe the current sell off to be a much needed correction and not the beginning of a bear market. While the overall market PE of 15 times is not especially cheap, it should be noted that as of today, the average PE of the Emerging Companies Fund's top 10 holdings (which make up 45% of the fund) is only 11 times - an attractive valuation level given the quality of the stocks in the top ten and current levels of interest rates.

Kagiso Media is the new addition to the portfolio which we are most excited about. Our acquisition price of 1170c (which was cum a 44cps dividend) results in an historic dividend yield of 7.3% - an extremely generous yield considering the quality of the counter (80% of earnings is generated by the radio operations - strong cash generators with moderate growth prospects and high barriers to entry). Despite F2006 EPS growth to be negatively affected by the 'down' year for their exhibition division (caused by bi annual exhibitions) we still expect real EPS and DPS growth in F2006.

Moving to rand-sensitive industrials

Fund manager Andrew Joannou has taken a more cautious stance on the outlook for consumer shares than his peers in the sector or other managers at Investec. He has sold Lewis Stores and trimmed Truworths. He likes niche financials such as Brait and Cadiz, which he regards as late cycle companies, as well as rand-sensitive industrials such as Illovo, Tiger Wheels and Oceana.

Financial Mail - 26 August 2005

So far 2005 hasn't been an easy year for the average South African active fund manager. The market has been remarkably rational. While there have been phases of exuberance & panic, the extent has been minor and the period short. Without sufficient irrational sentiment, stock prices don't deviate from their true economic value and without this deviation the opportunity to outperform is limited. The performance of the larger equity funds highlights the current situation, with almost none of the active equity funds beating the JSE All Share Index (ALSI) performance year to date. The mid & small cap experience has been similar.

Your fund over the last six months achieved a return of 7.2%. This compares fairly well with its peers, placing the fund in the sector's top quartile over the period. The quarterly performance was less robust with the fund under-performing the average peer performance by 0.3%. As mentioned above, the environment over the last six months has been difficult for active managers with none of the small cap unit trusts being able to outperform the 'market cap weighted mid & small cap' index's return of 8.4%.

The road ahead looks no easier than the path that has been. While the absolute fundamentals look encouraging, with both business prospects & valuations still looking positive, the relative out-performance of the benchmark still seems challenging. In an environment where relative valuations are fair & the macro-economic data is volatile, we feel it is best to focus on the basics. We will therefore continue to try and find well managed firms with favorable economic characteristics, trading at less than what we think they are worth. This approach has helped your fund achieve fair results over the last six months and should the market show signs of irrational behavior, hopefully even better results going forward.

As has become customary, the fund's current valuation metrics are shown below. These are still attractive and bode well for the future long term return of the fund.

The fund's current valuation metrics are as follows:
o Weighted PE (Price to earnings) is approx. 9.9
o Weighted DY (Dividend yield) is approx. 4.0%
o Weighted PB (Price to book) is approx. 2.5
o Weighted ROE (Return on equity) is approx. 25.1%
o Weighted +12 (Expected earnings growth over the next 12 months) is approx. 21.3%.
o Weighted average 'Long term Expected Return' is approx. 15.9%

December bought to a close what was another good year of performance for the Investec Emerging Companies Fund, with the fund closing up 56.0% for the 2004 calendar year. This return placed your fund 9th out of all unit trusts and 6 th amongst its small cap peers. It should also be noted that this is the 3rd consecutive year of good performance and that your fund has delivered the 6th best 3 year return (a compound growth of 34.7% p.a.) out of all the South African unit trusts.

The previous year saw the South African economy come into its own. This combined with the strong Rand led to most domestic stocks doing very well, especially the more interest rate sensitive, demand driven stocks. Your fund participated in this run throughout the first half of the year, with retail shares making up a significant amount of the portfolio. As the year progressed however, and these shares started reaching new all time highs not only in price but returns and profitability, the fund started to down-weight these holdings. Although this decision didn't help the fund keep up with the amazing returns achieved by its peers during the latter part of the year, I am happy that it was the prudent thing to do and will prove correct in the long term.

Your fund enters the new year with the following valuation metrics:
o Weighted PE (Price to earnings) is approx. 10.3
o Weighted DY (Dividend yield) is approx. 4.0%
o Weighted PB (Price to book) is approx. 2.8
o Weighted ROE (Return on equity) is approx. 25.1%
o Weighted RP (Implied risk premium) is approx. 7.1%
o Weighted +12 (Expected earnings growth over the next 12 months) is approx. 18.7%.
o Weighted average 'Implied Risk Premium' is approx. 7.2%

Given the metrics above and the positive outlook for the South African economy, I am happy that there is a good probability that your fund will continue to generate a robust long term real return.