Market review
Weak global economic conditions persisted during the third quarter. A recession or a period of substantially low growth in many parts of the global economy remains a definite possibility. Despite the macro backdrop, risk assets, underpinned by continued support from central bankers, maintained their upward trajectory with the MSCI World Index ending the period 6.8% higher in US dollars. Local equities performed well, adding 7.3% in rands over the quarter and returning 14.8% for the year to date. In an environment of weak demand and no immediate signs of a domestic or foreign inflation threat, the monetary policy committee provided further stimulus by dropping the repo rate to 5%. Local small- and mid-cap counters benefited from the rally in risk assets and more accommodative monetary stance.

Portfolio review
The Investec Emerging Companies Fund enjoyed another strong quarter in both absolute and relative terms. The fund returned 6.6%, which was 2% ahead of its peer average. Investors have enjoyed strong real returns over the past year with the fund returning a first quartile 37.7% since the end of September 2011. Global healthcare provider Mediclinic International - a top ten holding in the fund - was a significant alpha generator for the quarter. The company announced the refinancing of its Swiss debt and the acquisition of the minorities in its Dubai operation through the issue of new debt as well as a fully underwritten rights issue. The debt refinancing improved the medium-term prospects of the business and the market reacted positively to the news. Stock selection within the local food producer subsector also added to relative fund performance. AVI, also a top holding, had another strong quarter. It released an impressive set of numbers and also supplemented its normal dividend with a special dividend on the back of the company's strong balance sheet. AVI materially outperformed its peer, Pioneer Foods, which struggled under the burden of rising commodity input prices. Some of the fund's resource holdings detracted from performance between July and September, but we are positive about the stocks' prospects. Petmin, for example, an anthracite and silica mining business, operates high grade, cash generative ore bodies with excellent logistic access. The management team is well respected, has a material vested interest in the business, and has ensured that its well-capitalised balance sheet can drive expansion and volume growth. We therefore remain optimistic about Petmin's prospects and believe that this share is significantly undervalued at current levels. The fund maintained its minimal exposure to the retail sector. Woolworths and Mr Price continued to rally hard over the quarter, which had a negative impact on relative performance. However, we still believe these counters are above their fair value and are likely to underperform in the period ahead.

Portfolio activity
It was a fairly quiet quarter from a trading perspective. The fund took profit in a number of counters that had performed well, including Assore and Capitec Bank. Assore has had a phenomenal run on the back of strong iron ore prices and impressive volume growth, and Capitec Bank has continued to take market share in niche areas of the local banking industry. We completely sold out of Cipla Medpro South Africa, a local pharmaceutical manufacturer and distributor, as concerns around a clash between the CEO and the company's board weighed heavily on the business's short-term operational prospects. We used the proceeds of this sale to increase our exposure to building materials supplier Dawn and junior gold miner DRDGOLD, amongst others. Gold exposure remains a key component of the fund. The metal continues to be a safe haven, as central banks globally have adopted policies to weaken their respective currencies. Finally, we increased our exposure to resource counter Petmin, for the reasons explained above.

Portfolio positioning
Despite the small- and mid-cap sector's strong recovery since 2009, we find it encouraging that hype about small-cap shares in general is still limited. Less sell-side analyst research and limited press coverage are just two indications of the sense of neglect that currently characterises this space. This gives us confidence that the sector has not become overheated and that we can still achieve meaningful real returns. The fund's forward price earnings ratio rose to 9.4x, which remains undemanding relative to historical levels. Importantly, the fund's return prospects remain underpinned by a healthy forward dividend yield of 4%. In particular, the lower end of the market cap spectrum continues to provide opportunities for stock pickers to acquire quality businesses at attractive multiples. Overall, the environment supports the continued performance of small- and mid-cap counters.

Market review
The FTSE/JSE All Share Index made modest gains over the quarter (+1%) while in June, the index rose 1.9%. General miners performed well over the month, gaining 5.6% (-1.6% over the quarter). May's strong returns from gold miners were partially reversed in June, with the sector shedding more than 9% over the month. While the sector only lost 2.2% over the quarter, it has recorded the weakest performance for the year to date (-16.7%). Healthcare added 10.9% over the quarter, general retailers rallied a further 7.3% and food retailers closed 9.2% higher. Construction (-11.3%), household goods (-10.4%) and the personal goods sector (-5.7%) were weaker over the 3-month period. Small/mid cap returns slowed from their surge in early 2012, but they remained positive and ahead of the resource-heavy Top 40 Index.

Portfolio review
The Investec Emerging Companies Fund enjoyed another strong quarter in both absolute and relative terms. The fund returned 2.9%, a first quartile performance relative to its peer funds, which rose 0.7% on average. Investors have enjoyed strong real returns over the past year, with the fund returning 25.4% since mid-2011. The fund's exposure to the vehicle tracking and fleet management sector through its holding in Mix Telematics, proved to be a considerable alpha generator. The company released a strong trading update in May, followed by an exceptional set of results in June. This proved to be the catalyst for the share to hit all-time highs by the end of the quarter. Prospects for Mix Telematics continue to look bright, given its expanding domestic and offshore contract base. Stock picking in the mining sphere was also a positive contributor. The fund's overweight exposure to Assore (iron ore) and underweight exposure to Northam (platinum) and Palamin (copper) proved to be the correct positioning in terms of both commodity and company operational performance. Three other recent portfolio favourites, namely PSG Group, Life Healthcare and Cashbuild - all backed by exceptional management teams - also made a significant contribution to portfolio performance over the period. The fund's underweight position in domestic retail shares continued to detract from performance between April and June. Retail counters extended their strong run of recent years, predominantly on the back of further purchases by foreigners. The retail sector's relative price earnings ratio (PE) remains at multi-year highs, despite the fact that growth is decelerating due to slowing public sector wage inflation and government grants. Consequently, even though we see these companies as solid companies, we believe that they currently do not offer good investment opportunities. We retain our conviction underweight position and are confident that it will provide a source of significant alpha going forward. .

Portfolio activity
It was another active quarter from a trading perspective. Profits were taken in a number of counters that outperformed, including Coronation Fund Managers, Imperial and Life Healthcare. We sold AECI, Ellies and Nampak and we used the proceeds to increase exposure in the building materials segment. Additional purchases were made to Iliad and Dawn, where management have successfully realigned the respective companies' cost bases. With less competition in the sector, after a challenging few years, these two companies are well positioned to achieve improved returns on shareholder capital going forward. The fund also added to its positions in well-priced defensive counters, including Reinet and Zeder Investments, which are exposed to the global tobacco (through British American Tobacco) and agriculture sectors respectively. Portfolio positioning Despite the small/mid cap sector's strong recovery since 2009, we find it encouraging that hype about small cap shares in general is still limited. Less sell-side analyst research and limited press coverage are just two indications of the sense of neglect that currently characterises the current small cap space. This gives us confidence that the sector has not become overheated and that meaningful real returns can still be achieved. The fund's forward PE has risen to 9.1 times, which is still undemanding relative to historical levels. Importantly, the fund's return prospects remain underpinned by a healthy forward dividend yield in excess of 4%. In particular, the lower end of the market cap spectrum continues to provide opportunities for stock pickers to acquire quality businesses at attractive multiples. Overall, the relatively benign outlook for inflation and interest rates in the year ahead creates an environment in which small/mid cap counters can continue to perform.

Market review
Events in Europe and the US again took centre stage during the first quarter of 2012. Asset markets remained resilient despite continued macroeconomic uncertainty and serious doubts about the ability and willingness of failing southern European economies to meet their austerity obligations. A strong take-up of emergency funding from the European Central Bank (ECB) by hundreds of European banks boosted sentiment, driving equities higher and strengthening commodity currencies. At the margin, economic data also continued to improve in the US, where stabilising house prices and rising employment levels boosted the prospect of positive but muted growth. Local shares took their cue from rising global exchanges with small/mid cap counters performing particularly well. The FTSE/JSE All Share Index gained 6% in the first quarter, but most of the positive performance came in January. Resource shares lagged the rally and gold miners (-14.9%), Impala Platinum (-8.9%) and Sasol (-3.9%) were notable underperformers. Financials gained 12.8% and industrials added 10.5%, driven by strong performances from consumer goods and consumer services.

Portfolio review
The Investec Emerging Companies Fund maintained its momentum of late 2011, enjoying another strong quarter in both absolute and relative terms. The fund returned 15%, exceeding the mean of its peer funds by 2.6% over the period. The fund's exposure to the automotive sector continued to be a strong source of alpha. Metair Investments once again delivered exceptional results in March. It simultaneously announced the acquisition of a Romanian battery operation that has the potential to launch Metair onto the world stage of the development of stop/start batteries, a development that could revolutionise the automotive industry in the next decade. Imperial, another top ten holding, continues to perform well on the back of impressive results from its local automotive import division. This has proven to be a strong catalyst for the counter's outperformance and the company has enjoyed material earnings upgrades in recent months. Coronation Fund Managers, Pinnacle Technology and Capevin Investments also contributed towards the first quarter's strong performance.

The fund's underweight position in retail and construction shares detracted from performance between January and March. Retail shares continued their strong run of recent years, predominantly because of foreign purchases. The retail sector's relative price earnings ratio (PE) remains at multiyear highs, despite decelerating growth fuelled by slowing public sector wage inflation and government grants. Although we view these as solid companies, we believe that they do not currently offer good investment opportunities. Construction counters, unlike their retail counterparts, have endured a distressed period after the downturn of 2008. However, the construction sector rallied over the past quarter as the market took comfort in the renewed growth in orders books, largely brought about by a resurgence in global mining capital expenditure. We differ from the market in that we do not believe margins will recover in the short to medium term. Despite the top-line recovery, profitability will therefore remain poor for some time to come. Overall, we retain our conviction underweight positions in both the retail and construction sectors and are confident that they will provide a source of significant alpha going forward.

Portfolio activity
It was again a very active quarter from a trading perspective. Profits were taken in two of the fund's top performers of late 2011, namely gold miner Pan African Resources and furniture retailer JD Group. The position in Aquarius Platinum was sold as the company grappled with ongoing operational concerns. Proceeds from these trades were re-invested in a number of counters, including several with exposure to the building materials segment. New positions in Ceramic Industries and Iliad Africa complemented increased exposure to existing holdings African Dawn Capital and Cashbuild. Except for Cashbuild, building material companies have endured a particularly challenging period over the past 5 years as the local residential market has come under severe strain. Although residential building is certainly not firing on all cylinders yet, these companies have reset their cost bases, and with fewer competitors remaining, they have far brighter prospects. Most importantly, these counters have lately been neglected by the market and therefore offer an appealing entry point for patient, value-oriented investors.

Portfolio positioning
Despite the small/mid cap sector's strong recovery since 2009, we find it encouraging that hype about small cap shares in general is still limited. Less sell-side analyst research and limited press coverage are just two indications of the neglect that characterises the current small cap space. This gives us confidence that the sector has not become overheated and that meaningful real returns can still be achieved. The fund's forward PE has risen to 9.4x - which is still modest relative to historic levels. Importantly, the fund's return prospects remain underpinned by a healthy forward dividend yield in excess of 4%. In particular, the lower end of the market cap spectrum continues to provide opportunities for stock pickers to acquire quality businesses at attractive multiples. Overall, the relatively optimistic outlook for inflation and interest rates in the year ahead creates an environment in which small/mid cap counters can continue to perform.

Market review
The FTSE/JSE All Share Index added 8.4% in the fourth quarter and rose 2.6% over the year. The broad industrial grouping outperformed both financial and resources over the quarter. Food and general retailers fared particularly well, closing up 20.3% and 15.5% higher respectively. Life insurers added 16.9% over the quarter while the smaller basket of technology stocks rose 12.1%. Gold and platinum miners lagged the overall index, ending flat over the quarter. General miners performed in line with the broader market while Sasol, the only company within the oil and gas sector, ended 18.6% higher.

Portfolio review
The final quarter of 2011 provided little hope to investors that the structural concerns overshadowing the global economy in the post-recession period would dissipate in the near future. European countries, in particular, suffered from downward revisions to growth expectations, deteriorating credit assessments by US rating agencies and renewed fears of deflation. Despite this, the local equity market took its cue from a firmer US market and the weaker rand, to end the year on a stronger footing, with small and mid cap counters also benefiting from the rally. The Investec Emerging Companies Fund enjoyed a particularly strong quarter, both in absolute and relative terms, returning 9.1%, which represented a first quartile performance compared to its peer funds. For the year, the fund delivered 5.2%, which was an encouraging 2% ahead of its peer average.

A number of the fund's alpha generating exposures from the third quarter continued to deliver, heading into year-end. Despite the final quarter's flat rand gold price, the fund's major gold equity exposure, Pan African Resources, continued to rally on the back of expectations that the company would deliver market-topping results in the short to medium term. Another year-to-date outperformer, automotive component manufacturer, Metair Investments, provided a strong trading update during December. This proved to be the catalyst for the share price to hit fresh all-time highs, as Metair rose an impressive 66.7% in 2011. Patience in one of the fund's only remaining retail exposures, JD Group, was finally rewarded during the final quarter. The share rallied on the back of a solid set of results as well as heightened market expectations around efficiencies to be derived from the furniture retailer's closer tie-up with Steinhoff International.

On the downside, the fund's exposure to the leisure sector, through Phumelela Gaming and Leisure as well as Hospitality Property Fund B units, detracted from relative performance. Both counters have suffered from the downturn in domestic and international consumer spending and their fairly illiquid shares have lately been shunned by investors. However, we remain extremely optimistic about medium- to longer-term prospects for both counters. Valuations are underpinned by attractive forward dividend yields in excess of 8% and, aided by the weaker rand of recent months, there are encouraging signs that the cycle is now turning in their favour. Hence, we believe that patience will be well rewarded with material capital upside from current levels. The fund's lack of exposure to food and clothing retailers such as Spar and Mr Price also negatively impacted upon relative performance, but we retain our conviction in these underweight positions, given the extreme nature of the relative ratings of these counters. .

Portfolio activity
The intra-month volatility evident during the final months of 2011 provided numerous alpha-enhancing trading opportunities. Profits were taken on significant positions in Peregrine Holdings and Pioneer Food Group after they both released slightly disappointing results during the period under review. These proceeds were switched into new exposures in the form of Omnia Holdings and Reinet Investments. Omnia is currently benefiting from the upswing in the global fertiliser market as well as the weaker rand, whilst Reinet is predominantly exposed to British American Tobacco, which continues to deliver strong cash flow growth from its global sales platform. Other counters where exposures were increased included Phumelela Gaming and Leisure, Cashbuild and the two hospital groups, Life Healthcare and Mediclinic International.

Portfolio positioning
In the year ahead, shares are likely to continue their tug-of-war between low interest rates (and hence cost of capital) on the one hand and lethargic global and domestic growth on the other. Recent rand depreciation should provide some assistance to local mining and manufacturing operations, but this is likely to be offset by an uncertain volume environment, due to the sluggishness of our developed market trading partners. Given this challenging economic backdrop, we continue to place a strong emphasis on company valuations and demand a high margin of safety to compensate for macro uncertainties. We favour those attractively-priced, well-managed counters which in many cases remain out of favour with the marketplace. The small cap space continues to be characterised by a sense of neglect, allowing patient investors the opportunity to accumulate quality companies at undemanding prices. Valuations remain appealing as evidenced by the fund's forward price earnings ratio of 8.4 times at the end of December 2011. An extremely healthy forward dividend yield of 4.4% complements the total return prospects which continue to indicate that meaningful real returns are achievable from the sector into the medium term.