September was a disappointing month for the Emerging Companies Fund with the fund's 1.2% return lagging the average small cap fund's 2% return. Over the third quarter the fund's 6.7% return lagged the average fund's return of 9.6% principally as a result of the fund's nearly 20% exposure to the retail sector which underperformed as the market continued to grapple with the prospect of higher interest rates. Over the month we added to holdings in Brait, Trencor, Mustek and Foschini as well as introducing new holdings in Nampak and the Dialogue Group (a new listing involved in the call centre business). Over the month we took profits in AECI and Bytes and were obligated to sell our holding in African Bank as a result of the stock being in the ALSI 40 Index.

While returns have been muted over the last six months, we remain convinced that we are correctly positioned in low PE stocks which will continue to deliver real EPS growth. The average PE of the top ten stocks is under 10 times - excellent value given the quality of the top ten stocks. We are especially excited about the prospective returns from the retail sector - the stocks in your portfolio are trading on PE's of around 9 times with a 5% dividend yield. We think this valuation implies that the market is expecting further interest rate increases of at least 300bp - a scenario which we believe is unlikely. In the event of our expectations of another 150 bp of interest rate increases being met, we think retail stocks offer excellent medium term value. Note that at current levels SA retail stocks are trading at a nearly 50% discount to the average Emerging Market retail stock and that they are amongst the cheapest retail stocks in the world - a valuation we think is incorrect given the relatively positive medium term outlook for the SA consumer.

June was a poor month for the Emerging Companies Fund, with the fund's -6.9% return lagging the average small and mid cap fund's return of -4.8%. This performance offset what had been a good April and May and as a consequence the fund performed in line with its peer average at -6.1% for the second quarter.

Over the month we added to your holdings in Consol and used the panic selling in retailers at the end of the month to buy small stakes in both Massmart and Foschini. We took profits in Dawn, Mustek and Murray and Roberts and as a result of our cautious view on the market at current levels, increased our cash holdings.

Looking forward, we believe the combination of higher interest rates, the high probability if lower dollar commodity prices and uncertain global markets will make it difficult for our market to advance meaningfully over the short term. On the other hand, we believe that valuations remain low and consequently we do not believe this to be the start of a bear market but rather a period of sideways movement. With respect to the fund's positioning, we are happy that we remain invested in low PE stocks with earnings that are well underpinned and should prove resilient in the case of a sideways to downward market. The average PE for the top 10 stocks in your portfolio remains attractive at under 11 times earnings.

The Investec Emerging Companies Fund performed strongly both in absolute and relative terms in March, with the fund's 3.6% return outperforming the average small and mid cap fund's return of 3.3%. This was sufficient to place the fund in position three out of seven funds. Over the first quarter the fund returned 17.3% - while impressive in absolute terms it was slightly disappointing relative to peers with the average small cap fund showing a return of 18% over the quarter. We attribute our slightly below average performance number to the fund's bias towards 'value' stocks - a bias which tends to result in the fund lagging slightly over periods of very strong upward moves in the market.

Over the month we added to our positions in Lewis and Brandcorp while taking profit in Reunert and Cashbuild.

Looking ahead, despite the fact that last quarter's 17% return has left most stocks overbought and in need of some short term correction, we remain optimistic with respect to longer term real returns from the equities in your portfolio. It is important to note that despite recent strong real returns, the average PE for your fund's top 10 holdings is still only 12.5 times - a rating which we continue to believe does not fully reflect long bond yields at 7.2% and real growth prospects of more than 4% for most of the stocks in the portfolio.