Market review
The All Share Index (ALSI) closed 3.4% up over the quarter, losing some of its earlier gains as inflation fears gripped global markets. Substantial dispersion in performance across the sectors was evident as resources gained 13.4% over the quarter, while the Financial and Industrial Index lost 6.4%. General mining led resources higher, closing up 18.1% over the three months to the end of June. Banks and general retailers shed close to 15% over the quarter, while the defensive food retail and telecommunications sectors ended up 3.2% and 3.4%, respectively. The telecommunications sector was buoyed by corporate activity as MTN sought a potential merger with an Indian telecoms company.

Fund performance
The second quarter proved to be a very tough period for small and mid cap shares as investors sought refuge in the greater liquidity of Top 40 counters. Despite declining 4.8% over the quarter, the Investec Emerging Companies Fund enjoyed a strong relative period, outperforming its peer group average by 3.9%. For the 12 months to the end of June, the fund returned -8.2%.

Within the resource sector, the fund favoured those commodities where South Africa dominates global reserves or where global supply will take significant time to react to the current tight market conditions. Two of the fund's primary beneficiaries of this strategy in the second quarter were Merafe Resources and Assore Mining. Both these shares surged as settlements with Chinese steel producers drove ferrochrome and iron ore prices sharply higher. It was encouraging to note that after a slight lull in the early part of 2008, the portfolio's gross domestic fixed investment-focused shares (including Aveng and Allied Electronics) performed strongly over the quarter. A number of the sector's counters released statements reflecting strong order book growth. The fund's underweight position in consumer-oriented, interest rate sensitive stocks continued to bear fruit. The existing weakness in furniture and clothing retailers spread to the likes of the casino sector (Sun International) and packaging (Nampak).

Defensively positioned sectors including food retailers (Shoprite, Spar) and healthcare (Aspen, Medi-Clinic) fared well over the quarter, which detracted marginally from relative performance. Although we view many of these as solid companies, we feel that their ratings are too demanding to justify significant investment at this stage.

Portfolio activity
Despite minimal exposure to interest-rate sensitive counters, we further lightened our exposure to these counters, as evidenced by intra-quarter sales of Foschini, Peregrine Holdings and African Bank. The opportunity was also taken to bank profits on certain resource counters, which have held up exceptionally well in recent months. These include Omnia, Grindrod and Merafe Resources. We continue to seek out attractively-priced fixed investment opportunities and this drove our purchase of B&W Instrumentation as well as an increase in exposure to quality construction counter WBHO.

Portfolio positioning and market outlook
Brent crude oil prices having risen an extraordinary 35% over the past three months. Locally and globally there is economic pressure as central banks grapple with the combination of higher inflation and weaker growth. Debt markets remain tight as global banks look to recapitalise their balance sheets. These uncertainties have translated into greater investor risk aversion with some market participants seeking to sell shares (illiquid ones in particular) at seemingly any price. This environment, often driven by emotion rather than objective investment analysis, creates excellent opportunities for the fund to buy quality businesses on extremely attractive multiples. Indeed, quality is one of the key characteristics that the fund seeks out right now. Companies with sound business strategies and strong management teams differentiate themselves from the pack in tight market conditions. We also continue to favour those industries where earnings visibility remains good and where results could exceed market expectations (e.g. construction). Despite the more challenging market conditions, valuations remain extremely compelling, as illustrated by the portfolio's forward price earnings ratio of 7.2 times and forward dividend yield of 4.6%.

Market review
Equity markets ended the first quarter sharply lower driven by fears of a US recession, general risk aversion and a massive downward revision to earnings. The MSCI World Index declined by 8.9% over the quarter, outperforming the MSCI Emerging Markets Index, which closed down 10.9% (in US dollar terms).

The FTSE/JSE All Share Index retraced the losses sustained towards the end of 2007, closing the first quarter up 2.9%. Resources were the clear winners, returning 17.6% as commodity prices reached new highs and earnings were aggressively revised upward. The domestic focused FTSE/JSE Financial and Industrial Index lost 8.5% over the quarter, depressed by tougher trading conditions and poor sentiment towards rate sensitive sectors. Banks, tainted by global credit market woes and local policy uncertainty, closed the quarter down 10.7%, while general retailers lost 14.3%. The construction and telecommunications sectors were less affected by the slowing domestic consumer environment, losing 7.6% and 4% respectively.

Fund performance
Domestic growth concerns were dented further when Eskom commenced forced load-shedding, disrupting general industry and the mining sector in particular. Market sentiment turned sharply negative, with South Africa's small and mid cap shares being particularly hard hit with indiscriminate selling and extreme intra-day volatility characterising sector trade. Markets corrected from oversold positions in February with the resources sector in particular benefiting from the potent cocktail of surging commodity prices and a weaker rand. However, this recovery was not sufficient to prevent the mid cap and small cap sector ending the quarter in negative territory. The FTSE/JSE Mid Cap Index lost 10.8% and the FTSE/JSE Small Cap Index shed 10.2% over the quarter. After a challenging January, the Investec Emerging Companies Fund enjoyed a particularly strong absolute and relative month in February, finally ending the quarter 8.5% lower, against the peer mean return of -12.2%. For the year to the end of March, the fund returned 4.4%, while the peer mean return over this period was 0.5%.

The fund benefited from its select exposure to quality resource counters. Assore continued its share price surge, driven by another round of favourable iron ore price settlements. Despite concerns over lower volumes on the back of electricity shortages, platinum shares rose sharply. South Africa's dominance of global platinum supply sparked a surge in the dollar price of the metal, which boosted platinum shares. The fund's preferred platinum counters, Eastern Platinum and Northam Platinum, were among the market's primary beneficiaries, contributing significantly to portfolio alpha over the quarter. It was also rewarding to note that two recent fund additions, Merafe and TWP Holdings, also enjoyed a strong quarter.

Market concerns over slowing domestic GDP growth and a potential increase in unemployment weighed heavily on one of the fund's largest holdings, recruitment consultant Adcorp. Our view differs from the market in that we continue to believe that this high-yielding share will show solid growth going forward as corporates continue to seek out candidates from a very limited local skills pool.

Portfolio activity
February's market recovery brought with it an improvement in sector liquidity and we took the opportunity to trade those shares which had either over- or under-reacted to January's extreme market movements. Certain shares were exited completely. Sales included Coronation Fund Managers, Santam and Astral Foods - the latter on the back of the current oversupply in the domestic chicken market. We used some of the proceeds of these sales for purchases of automotive component manufacturer, Metair Investments, as well as to obtain attractively priced IT exposure in the form of Pinnacle Technology and Datatec.

Portfolio positioning and market outlook
At the end of 2007, we cautioned that South Africa's earnings growth was set to slow in the coming year. Unfortunately the current electricity crisis is likely to accentuate this trend. Despite this, we feel that the current portfolio mix represents an appealing blend of growth at compelling valuation levels, as evidenced by the portfolio's forward price earnings ratio (PE) of 8.6 times and forward dividend yield of 4.1%. Construction counters continue to find favour in the portfolio with the expectation that earnings growth will further surprise on the upside. We remain cautious towards interest rate sensitive shares and retailers in particular, as the local consumer struggles against stubbornly high inflation and a protracted period of higher interest rates. Although global and domestic uncertainties could result in further volatility in the short term, we believe that the Investec Emerging Companies Fund's sectoral exposure and attractive valuation metrics position it well for capital growth going forward.

Market review
Domestic equities came under pressure during the fourth quarter, with the All Share Index closing down 3%, but achieving respectable returns of 19.2% for the year as a whole. The losses were concentrated towards the end of the period as both resources and financials became victims of the uncertain global growth outlook and continued negative sentiment associated with the global banking sector. Gold miners ended the year as the market's worst performer, losing 14.1% over the quarter and 20.6% over the year. The construction sector continued its strong run, to end the year 77.3% higher as the best performing sector.

Fund performance
At the end of the third quarter we commented that the small / mid cap sector was likely to be characterised by further volatility during the remainder of 2007. That is exactly what transpired as the market continued to be unsettled by credit and inflation concerns which were then compounded by uncertainties surrounding the ANC presidential race. A strong October saw the sector rally more than 6%, but subsequent market weakness in November saw the majority of these gains wiped out with the sector eventually closing the quarter marginally in the black. On a relative basis, the Investec Emerging Companies Fund experienced a satisfactory quarter with a disappointing November being flanked by two strong months in October and December. Overall, 2007 proved to be a solid year for the Investec Emerging Companies Fund on both an absolute and relative basis. The fund's 12-month return was 31.9%, which was a respectable second-quartile performance relative to sector peers. For the three months to December the fund returned 1%.

Two of the fund's larger resource holdings, Assore Mining and Eastplats, were amongst the biggest contributors to relative performance over the quarter. Despite both counters enjoying stellar share price performances over the past twelve months, the fund's exposure will be retained heading into 2008. Fundamentals for iron ore and platinum remain favourable and they are also set to derive significant benefit from volume increases during the course of the upcoming year as they ramp up production at their respective operations.

On the downside, our underweight position in food retailers Shoprite Holdings and Spar detracted from performance. Both shares rallied hard in the final quarter on the back of strong sales growth driven by the current environment of high food inflation.

Portfolio activity
In line with our continued preference for attractively priced gross domestic fixed investment (GDFI) and resource counters, two new shares were introduced to the portfolio early in the quarter, namely WBHO and Merafe Resources. The former has an enviable long-term track record in the construction sector and when its peer Group Five enjoyed a strong rally in October, the opportunity was taken to switch our exposure into Wilson Bailey. Merafe, on the other hand, is an appealing investment because of South Africa's dominance of global chrome resources and the positive outlook for chrome's downstream derivative, stainless steel.

The fund also continues to take selective positions in new listings and to this end a stake was bought in TWP, a specialist consultant focussing on the high growth mining and construction industries. With scarce professional skills at its core, this company is likely to enjoy strong demand for at least the medium term, which should drive a significant step-up in its earnings profile in the next few years. These positions were established at the expense of counters such as Brait, Cashbuild, Comair and African Glass, all of which were exited from the portfolio over the quarter.

Portfolio positioning and market outlook
The past five years have seen an exceptional rally in small / mid cap shares with the Investec Emerging Companies Fund returning close to 40% p.a. over that period. This performance was driven by a combination of a strong domestic economy and corporate earnings as well as an underlying re-rating of the sector.

Looking forward to 2008, the interest rate hikes of the past 18 months are likely to slow economic activity (and hence earnings growth) with the bulk of the impact to be felt in consumer-oriented sectors. Hence, we remain cautious towards retail shares, but are cognisant that pockets of value are starting to emerge. Stock picking remains key and continued volatility (driven by global and domestic uncertainties) is likely to create valuable opportunities to buy and sell mispriced shares. Attractively priced counters focussed on domestic fixed capital formation will retain a core exposure within the portfolio. Overall, we remain positive about the year ahead, but caution that a high earnings base and slowing earnings growth are likely to see the small / mid cap sector's returns moderate from the exceptional levels experienced in recent years.