Market review
During the quarter, low interest rates and further quantitative easing continued to support financial assets. Low nominal cash yields have drawn investors into riskier asset classes. Emerging market equities, along with commodity prices and emerging market currencies, were the clear winners. The MSCI Emerging Markets Index rose 18.2% over the quarter while the MSCI World Index gained 13.9%. Local economic activity moderated, with GDP expanding by 3.2% in the second quarter, down from 4.6% in the first quarter. Concerns about the global economic recovery and subdued demand locally, coupled with the favourable inflation outlook, motivated the South African Reserve Bank to further reduce the repo rate to 6%. The August inflation number of 3.5% was the lowest since mid-2005. The rand was one of the strongest emerging market currencies over the review period, gaining more than 10% against a weak US dollar. Bond yields fell sharply, boosted by foreign investor demand and continued downward pressure on inflation. The All Bond Index ended the quarter 8% higher, behind listed property (13.7%), but well ahead of cash which returned 1.7% over the period. The FTSE/JSE All Share Index rose 13.3% over the quarter. The non-resources sector led the market higher, with a significant increase in mergers and acquisitions globally spilling over into the local market. Old Mutual confirmed that it was in discussions with HSBC on its stake in Nedbank. Nippon Telegraph proposed a cash buyout of Dimension Data and Wal-Mart made a cash offer for Massmart. Both the gold and platinum sectors ended down over the quarter, with platinum miners losing 2.3% while gold mining gave up 1%. Consumer services, which include the general retail sector, gained just shy of 25% over the same period. Food retailers, banks, life insurance and personal goods continued to perform well ahead of the broader market.

Portfolio review
July's impressive gains were partially reversed in August, before a strong September rally saw the market end the period materially higher. The domestic small- and mid-cap sectors also participated in the market's surge upwards, albeit at far less volatility than the resource-heavy Top 40 Index. The Investec Emerging Companies Fund enjoyed a strong quarter in both absolute and relative terms. The fund returned 11.2% over the three months which represented a first quartile performance, outperforming its peer universe by 2.5%.

Cyclical counters with divisional exposure to Europe, including Steinhoff, Mondi and Imperial had impacted fund performance negatively during the second quarter, as regional sovereign debt concerns had weighed heavily on sentiment. However, our resolve to maintain and in certain cases increase exposure to these counters paid dividends over the most recent period under review. As global investor attention shifted from Europe back to the United States over concerns about further quantitative easing, all three of these counters rebounded strongly, outperforming the market handsomely. Coronation, Metair and Famous Brands continued to enjoy strong earnings upgrades over the quarter, which proved to be a firm catalyst for further share price appreciation and alpha generation. Blue Label Telecoms, the cellular airtime and utilities payment solution provider, delivered a solid set of results which stimulated buyer interest, thereby removing an overhang of shares in the marketplace. In the six weeks subsequent to results, the share surged a dramatic 47%, making it a material contributor to fund performance for the quarter.

Despite having reduced exposure in recent months, Howden Africa detracted from fund alpha for the period when the share came under pressure post its interim results. Activity levels had softened at certain of Howden's industrial clients, hurting its environmental control business in particular. Despite this short-term setback, longer term market trends such as the ramp-up of South Africa's new-build power station programme as well as an increased emphasis on pollution control are positives which will aid this well-run business to build on its enviable growth track record in coming years. Portfolio activity Volatility in the marketplace provided a number of trading opportunities as relative value gaps emerged. Buying activity continued to focus on those interest rate-sensitive sectors which have thus far failed to react to the dramatic decline in inflation and interest rates. Purchases included furniture retailer JD Group, electronic accessory supplier Ellies and domestic appliance distributor NuWorld, all of which are set to benefit from the pending rebound in household goods expenditure. Phumelela and Hospitality B shares were also introduced to the portfolio, in anticipation of a recovery in leisure spend channelled towards the gaming and hotel sectors. These trades were funded through profit-taking on certain of the fund's existing retail positions including Clicks, which has had an exceptional share price run since mid-2008. Exposure to domestic-oriented construction counters such as Basil Read and Esorfranki was also reduced. Public sector contractor activity has dried up even more than expected post the Soccer World Cup. Private sector work continues to remain sluggish, despite the stimulus of lower interest rates. Tenders are exceptionally competitive, margins are under pressure and hence there is still scope for further earnings disappointment from domestic-focused construction companies going forward.

Portfolio positioning
Uncertainty surrounding the trajectory of the global economic recovery is likely to keep market volatility at elevated levels heading into year-end. The inflation and interest rate outlook continues to surprise on the downside, as the market underestimates the dampening effect of the stronger rand on domestic pricing. The door therefore remains open for further cuts in interest rates, which are now expected to stay lower for longer. This ultimately bodes well for the earnings growth and hence capital appreciation of domestic small- and mid-cap counters, especially those that are not significantly reliant on a weak rand for export activity. Valuation levels remain attractive despite the recent rally, as evidenced by the Investec Emerging Companies Fund forward price earnings ratio of 8.4 times. Fund returns are underpinned by a solid forward dividend yield of 4%. Neglected counters, particularly at the small market capitalisation end of the spectrum, continue to provide stock-picking opportunities where quality shares can be acquired at extremely appealing valuation multiples. Overall, the environment remains conducive to patient investors achieving meaningful real returns from the sector over the medium term.

Market review
The second quarter of 2010 reminded investors and market commentators that excess global indebtedness, which had resulted in the global financial crises, was not likely to be resolved in a few short months or by some extraordinary policy miracle. The spotlight remained firmly focused on Europe, with certain countries in the region straining under the heavy burden of unsustainable funding requirements. Global share markets headed lower as uncertainty rose around the likelihood of a V-shaped economic recovery. The MSCI World Index dropped sharply, closing 12.5% down over the quarter, dragging this year's returns into negative territory (-9.6%). Emerging markets fared somewhat better, shedding 8.3% over the quarter and 6% year to date. The FTSE/JSE All Share Index lost 8.2%, dragging the year's returns 4.1% lower. The weaker rand detracted from US dollar returns. The local currency depreciated 4.9% over the quarter and 3.5% year to date against the dollar. The rand gained significantly against the euro, appreciating 12% over the first six months of 2010. Resources were worst hit over the quarter, with platinum and diversified miners off 11% and 18.2% respectively. The gold sector was the best performer over the quarter, rising 16.5%. Other defensive sectors also performed admirably: food and drug retailers ended 11.9% higher and fixed line telecommunications surged 10.5%. Industrials lost 7% with general retailers (4.1%) outperforming the local banking sector (-9.9%) by a wide margin. Bonds, cash and listed property provided positive returns over the quarter. Cash returned 1.7%, bonds 1.1% and listed property rose 0.6%. Year to date, listed property remains the best performing asset class (10.6%).

Portfolio review
It was encouraging to note that small/mid caps fared somewhat better over the quarter. The Investec Emerging Companies Fund returned -0.7% over the period, a first quartile performance relative to its peer funds. At the end of the previous quarter, we conveyed our belief that the market was underestimating the geared impact of 2009's market rally upon Coronation's earnings. This was proved entirely correct as two bullish trading statements released in April were followed by results in early May, which reflected that interim earnings had already exceeded the previous financial period's full year results. Consensus expectations for 2010 surged 37% over the quarter. This proved to be a strong catalyst for a rally in Coronation's share price, thereby translating this top ten holding of the fund into significant alpha (outperformance). With sovereign risk and currency woes once again under the microscope, it was not too surprising that gold performed well over the period. The fund's holding in NewGold, which is a listed proxy for the rand gold price, advanced 15% over the period and hence also aided relative performance. Certain of our holdings in cyclical counters such as Steinhoff, Mondi and Imperial endured a challenging quarter from a share price perspective, thereby detracting from fund alpha. However, in all three of the above cases, we are of the opinion that this weakness has been misguided. In fact, all of these companies have come through the recession exceptionally well and are set to deliver solid results when they report during the course of the third quarter. Hence, we maintain our conviction in these exposures as well as our firm belief that they will be strong alpha contributors going forward.

Portfolio activity
As inflation and interest rates have moderated over the past eighteen months, there has been a significant divergence in performance between the various interest-rate sensitive sectors on the local stock exchange. This divergence was one of the motivations for trading activity in the portfolio over the quarter. For example, exposure was reduced to clothing retailers including Truworths and Mr Price which, at the time, were trading near all-time highs. The proceeds of these sales were shifted to other counters which should also be beneficiaries of lower rates, but have thus far not seen this translate fully into share price performance. These purchases included the introduction of household goods distributor Nu-World into the portfolio. In addition, we added to our holdings in Imperial and Metair; these companies participate in the automotive distribution and manufacturing segments, respectively. Other trades which occurred over the period related to profit-taking activity on counters such as Adcock, Altech and AdvTech which have all performed admirably in recent months.

Portfolio positioning
Given the uncertainties prevalent in the marketplace around the sustainability of the global recovery, it is highly likely that global equity markets will remain volatile in the short term. On the domestic front, the inflation and interest rate outlook continues to look benign which bodes well for a rerating in equity over time as the domestic recovery takes hold. Thankfully, the events of the past two years have 'shaken out' many short-term holders within the small/mid cap space. The resultant neglect of the sector has opened the door for long-term players to pick up quality counters at attractive prices. Valuations remain appealing on both an absolute and relative basis as indicated by the Investec Emerging Companies Fund forward price earnings ratio of 7.2 times and forward dividend yield of 4.1%. The valuation gap of small caps relative to their large listed peers remains significant and there is a strong case to be made for this gap to narrow in time. Despite the volatility of the market, a combination of careful stockpicking and attractive valuation levels should see patient investors benefit from exposure to the sector and enjoy meaningful real returns into the medium term.

Market review
Greater risk appetite globally boosted the local equity market. The FTSE/JSE All Share Index (ALSI) provided solid gains in March (7.9%), pushing the quarter's return into positive territory (4.5%). Rand strength, on the back of over R14.5 billion in net equity and bond inflows over the quarter, contributed to the ALSI returning 1.5% in US dollar terms. Financials (9.9%) were well ahead of industrials (4.4%) and resources (2.1%) over the first three months of the year. However, intra-quarter sector rotation saw the All Share Resources Index adding more than 10% in March. Banks (12.2%) and general retailers (17.1%) strengthened over the quarter, on the back of a surprise cut in rates and strong interest from foreign buyers. Gold miners fared poorly during the three-month period, shedding 8.2%. The platinum sector (11.3%) and general miners (12.4%) enjoyed market-beating gains in March, but the platinum sector (2.1%) still trailed the ALSI over the quarter, while diversified miners performed in line with the general market.

Portfolio review
The Investec Emerging Companies Fund enjoyed another solid quarter in absolute terms, returning 4.4%. Two new entrants to the fund's top ten holdings, namely Imperial and Mondi, were amongst the largest alpha generators over the quarter. Imperial was a major beneficiary of the turnaround in domestic auto sales, which have exceeded expectations (albeit off a low base) in recent months. Metair, the local automotive component manufacturer, also rallied on the combined catalysts of the auto sales numbers as well as an impressive, cash-generative set of results. Mondi surged on the back of the improving business and consumer environment in emerging Europe which has bolstered prospects for its uncoated fine paper and packaging segments. On the downside, Datacentrix Holdings, the IT hardware and services provider, released a disappointing trading statement towards the end of the quarter which sent the share price sharply lower, thereby detracting from relative performance. The local IT environment has proved challenging over the past year, with corporate spend being severely curtailed. However, prospects are brighter for the year ahead as local businesses take comfort from the domestic recovery and recommence IT related expenditure. The fund's gold exposure was also a source of relative underperformance over the quarter. A combination of a flat rand gold price and company specific issues held back the fund's exposures in Pan Africa Resources and Durban Deep. Production constraints at both operations have largely been resolved. This should provide considerable tailwinds to these shares in the quarter ahead.

Portfolio activity
It was another active quarter with respect to portfolio trading activity. Besides the above-mentioned trades in Mondi and Imperial, the fund added to its exposures in financial services counters Coronation and Peregrine. We believe that the market is underestimating the geared impact upon earnings of the past year's equity rally. Further exposure was also acquired in Distribution and Warehousing Network (DAWN), the building materials manufacturer and trader. After a challenging eighteen months, DAWN has addressed its balance sheet concerns and dramatically curtailed its cost base. Hence, the business is well positioned to benefit from the residential / commercial property recovery, which should emerge in the medium term as the effects of the significant rate cuts filter through into the economy. These trades were funded through profit-taking on certain counters which had performed admirably since the onset of the global recession. These included interest-rate sensitive shares such as Truworths and Fountainhead Property Trust.

Portfolio positioning
The combination of stronger GDP growth and a benign inflation/interest rate environment bodes well for improving earnings momentum from most small/mid cap companies and is likely to act as a strong catalyst for further sector re-rating in the months ahead. From a stock-picking perspective, we continue to seek out attractively-priced, strategically well-positioned companies led by experienced, astute management teams. We remain cautious towards those counters where balance sheet constraints may force further equity issuances as the economic upswing extends working capital requirements. Small cap valuations remain appealing, as evidenced by the Investec Emerging Companies Fund's forward price earnings ratio (PE) of 7.7 times and forward dividend yield of nearly 4%. A significant small cap discount (vs. large cap peers) remains evident in the marketplace. With risk appetite and liquidity continuing to improve in the small cap arena, a strong argument can be made for this discount to narrow going forward. Overall, prospects remain good for the sector to deliver meaningful real returns over the coming year.

Market review
Improved growth prospects and a higher risk appetite supported domestic equities. The All Share Index (ALSI) ended December on the year's high, returning 2.9% over the month and 11.4% over the quarter. Strong foreign investor interest to the tune of over R75 billion in net equity inflows boosted the market's rating and pushed the year's returns to 32.1%, erasing all of 2008's losses. Over the quarter, the basic materials (17%) and consumer goods (18.7%) sectors recorded similar returns, beating the ALSI. There was a large divergence in the sub-sector performances in the final quarter. The gold sector struggled (-1.2%), but platinum (17.7%) and general miners (23.1%) outperformed. In the consumer goods sector, SABMiller and Steinhoff stood out as strong performers. Food producers (8%), general retailers (3.3%), banks (7.2%) and the life assurance sector (9.7%) all posted positive returns over the quarter, albeit below the overall market. The construction and telecommunications sectors, down 8.2% and 3.2% respectively, continued their underperformance during the year.

Portfolio review
Global stock markets were characterised by two distinct trends during 2009. As the year commenced, global indices headed lower under the combined weight of extraordinarily weak economic data as well as concerns surrounding the potential nationalisation of developed market banking systems. Ultimately though, it was the sheer magnitude of global stimulus packages and cash sitting on the sidelines which wrenched markets from their March lows, driving a strong rally for the remainder of the year. South Africa's economic recovery lagged that of many of its emerging market peers, but it still exited from recession during the third quarter. The more modest local recovery to date saw domestic small/mid cap shares lag the resource-heavy Top 40 Index over the second half of the year. Despite this, the Investec Emerging Companies Fund enjoyed a strong year in absolute terms, returning 27.1% over the period, which was 2.7% ahead of its peer average. Resource shares were among the primary beneficiaries of the growing momentum behind the global recovery evident towards the end of 2009. It was therefore not a major surprise that the fund's preferred platinum counter, Mvelaphanda Resources, was a significant alpha generator over the period. The share returned 29% for the quarter, boosted by a firmer platinum price which reacted to supply constraints and an improvement in the global auto outlook. As was the case in the third quarter, Steinhoff continued its strong rally into year end, as investors shifted their focus from the company's balance sheet to the prospect of stronger earnings growth into the medium term. We remain confident that a further rerating in the share is achievable going forward, adding additional alpha to the portfolio in the process. Adcorp, the specialist recruitment group, endured a challenging quarter which detracted from overall fund performance. The share remained subdued over the period under the combined negative news-flow headwinds surrounding labour broker regulation, the challenging domestic job market as well as internal management conflict. However, at current levels, we believe that the market has more than discounted these concerns. The company also dealt with the internal management conflict swiftly and transparently. Labour broker legislation, which is due for release during the first half of 2010, could actually strengthen the hand of the larger recruitment agencies. Finally, South Africa could return to job growth during the latter half of 2010 and therefore sentiment is likely to turn positive during the course of the year. These factors combined with an attractive valuation, underpinned by a forward dividend yield of 8.6%, make us feel confident that the fund's sizable exposure can derive significant alpha in the year ahead.

Portfolio activity
Trading activity during the final quarter was brisk as the fund sought to take advantage of relative value opportunities. Within the retail sector, exposure was switched from clothing specialists Foschini and Truworths into Clicks, which is benefiting from the structural shift to corporate pharmacies. Profits were taken in building material retailer, Cashbuild, and regional mall owner, Fountainhead. We sold our holdings in commercial fishing operator Oceana, after a strong run since mid 2008. Portfolio purchases generally fell into two areas. Firstly, we favoured quality defensive stocks including Netcare and Pioneer Food Group whose ratings have lagged their respective peer groups. Secondly, we invested in cheap cyclical stocks, which haven't yet priced in the economic recovery. This included counters such as logistics operator Super Group, which has now resolved its balance sheet concerns, as well as financial services counters Coronation and Peregrine which are set to benefit significantly from the equity market recovery.

Portfolio positioning
After an extremely challenging eighteen months, the South African economy looks set for a steady recovery during 2010, driven by inventory restocking and sharply higher commodity prices. Small and mid cap counters, which tend to have a domestic focus, should be the primary beneficiaries of the local recovery. Despite electricity price hikes, inflation continues to ease and hence monetary policy should remain accommodative in the year ahead. This in turn should be positive for asset prices and hence it is reasonable to expect a continued rerating in small/mid cap shares during 2010. Valuations remain highly compelling on both an absolute and relative basis. This is well illustrated by the Investec Emerging Companies Fund's forward price earnings ratio of 7.4 times, which represents a significant 40% discount to the ALSI. Indeed, the small cap discount currently evident in the market is the widest in many years. With liquidity returning to the small cap arena and earnings momentum turning more positive on the back of the domestic economic recovery, the extent of the discount looks increasingly unjustified. Hence, through a combination of careful stock-picking and an attractive valuation environment, the prospect remains good for meaningful real returns from the sector in 2010.