Market review
Central bank talk dominated financial markets over the past quarter. Investors reacted positively to the Bank of Japan's announcement early in the quarter about its large-scale monetary easing policies. Riskier trades were particularly well supported, and emerging market equities started to retrace some of the earlier losses. However, US Federal Reserve Chairman Ben Bernanke put a damper on rampant asset price appreciation by hinting that the market should recognise record policy accommodation as finite and data dependent. Even though his comments were merely providing guidance, markets responded immediately. Emerging markets saw one of their weakest months on record. Currencies depreciated against the US dollar and local currency debt - which has been a beneficiary of global investment flows for a long time - sold off sharply. Commodity prices followed other risk assets, first up, then down sharply in June, as global economic growth data remained mixed and the road to a rebalanced Chinese economy seemed rocky. South African equities ended almost unchanged in the second quarter, but volatility was high during this period. The sector laggards remain mostly confined to resource stocks with gold (-33.5%), platinum (-23.9%), coal (-10%) and diversified miners (-10.8%) all experiencing double-digit losses in rands. Year to date, the resources sector is trailing the overall market by 19.4 percentage points. Industrial stocks mostly held their ground over the quarter and defensive stocks, on average, achieved strong absolute returns. Financials lagged, with banks down 6.2% and life insurers flat for the quarter after a particularly weak June.

Portfolio review
The fund's sizeable holdings in Mediclinic, Curro and Coronation Fund Managers once again contributed positively to performance. The fact that we have no exposure to African Bank, Harmony and Sibanye Gold also added significant value relative to the fund's benchmark. Unfortunately, these returns were partly offset by the fund's holdings in DRDGOLD, Northam Platinum and Ellies Holdings.

Portfolio activity
We increased our exposure to the African and South African infrastructure expenditure theme through further purchases of Consolidated Infrastructure, DAWN, Bell Equipment and Grindrod. We also acquired a new holding in Calgro M3. We maintained our rand hedge exposure during the quarter by purchasing Sun international and Datatec. This was funded through profits taken in Northam Platinum and BarloWorld. We also added to our holdings in Business Connection, Clover and Peregrine Holdings, primarily funded through profits taken in Palamin, AECI and Coronation Fund Managers.

Portfolio positioning
We continue to believe that many stocks in the mid- and small-market capitalisation sectors must still realise their full rerating potential. This may take many years to materialise, which is therefore supportive of share prices. We believe that the fund is invested in companies that are attractively priced relative to their underlying valuation and/or their forecast growth prospects. We are well positioned to benefit from a recovery in global economic growth, driven by the US, China and Africa, and should therefore continue to generate good returns into the foreseeable future.

Market review
South African equities recorded positive but modest returns in rands over the quarter, with the FTSE/JSE All Share Index closing 2.5% firmer. The rand weakened 9% against the US dollar and more than 6% against the euro. The resources sector's underperformance continued into the first quarter with gold (-17.9%), platinum (-13.5%) and diversified miners (-6.3%) ending sharply lower. The combined financial and industrial index rose 6.2% over the quarter, with industrials in particular performing strongly. There was a wide dispersion of returns within the broad industrial sector. Rand hedge global stocks saw double digit returns, with SABMiller and British American Tobacco rising 24.7% and 18.4% respectively. Meanwhile retailers, favoured amongst foreign shareholders, dropped nearly 10% despite a strong performance in March. Banks marginally underperformed the FTSE/JSE All Share Index, while telecommunications lost more than 7% and healthcare gained 8.8% over the quarter.

Portfolio review
The continuous increase in appetite for risk assets enhanced the fund's performance, with returns exceeding those of the benchmark over both the three-month and twelve-month period to the end of March 2013. The fund's sizeable holdings in Mediclinic, Coronation Fund Managers, DAWN, Grindrod and Metair all contributed to performance. Unfortunately, these returns were partly offset by our holdings in Cashbuild, Pan African Resources, Hudaco and Steinhoff International. However, we remain optimistic about these shares and are keeping their holdings in the fund.

Portfolio activity
In light of the improving global economic growth outlook, we increased our exposure to the commodity-related sectors by increasing our holdings in Barloworld and AECI. We also took profits in Assore and Pan African Resources. We switched our Lonmin holding into Northam. With spending on African infrastructure on the increase, we added Consolidated Infrastructure Group and Rolfes to the fund. The remaining holding in Imperial was switched into Grindrod and Super Group, two companies with growing logistics exposure in Sub-Saharan Africa. The fund made good returns in our food producer holdings and took profits in AVI and Pioneer Food Group. We switched the proceeds into Tongaat Hulett and Clover. We acquired a new holding in Curro, which focuses on providing independent and affordable schooling to the South African youth. The successful execution of Curro's objective offers investors exceptional growth potential. We disposed of the fund's holding in Hudaco.

Portfolio positioning
Many stocks in the mid- and small-market capitalisation sectors have yet to realise their full rerating potential. We believe this may take many years to materialise. The fund is invested in attractively priced companies relative to their underlying valuation and their forecast growth prospects. We are very well positioned to benefit from a recovery in global economic growth, driven by China and the US, and should therefore continue to generate good returns into the foreseeable future.

Market review
The FTSE/JSE All Share Index (ALSI) ended the year at record highs, adding just shy of 27% in rands to the modest gains of 2011. The ALSI rose by 10.3% over the quarter. Resources lagged the general market, recording gains of 7.3% over the 3-month period and 3.1% for the year. The gold mining (-18.4%) and platinum mining (-7%) sectors were the weakest performers in 2012, while diversified miners added 10.9% over the quarter and 12.3% for the year. The industrials sector rose strongly, with general retailers (+50.2%), health care (+59.5%) and global luxury brand Richemont (+64%) - the only constituent of the personal goods sector - seeing exceptional returns in 2012. Mobile telecommunication increased by 32.6% over the year, with the fourth quarter adding 12.7% alone. Financials also saw market-beating returns, gaining 38.1% for the year. Banks closed up 11.8% over the quarter while the life insurance sector added 12.7%.

Portfolio review
The Investec Emerging Companies Fund performed very well over the year, significantly outperforming its benchmark. The fund also had a good quarter, producing returns ahead of its benchmark. Positive contributors to the fund's performance over the quarter included being overweight the health care, mining, and automobile and banking sectors. Unfortunately, the fund's underweight positions in the construction, general retailers, general industrials and life insurance sectors detracted from overall fund performance. More specifically, the fund's large holdings in Mediclinic, Coronation Fund Managers, Assore, DRDGOLD and Metair contributed positively to fund performance. Unfortunately, these returns were partly offset by the fund's holdings in PSG Group, Cashbuild, Dawn and Petmin. We are, however, comfortable with keeping our holdings of these companies.

Portfolio activity
During the quarter, we took profits in shares that had produced stellar performances during 2012 and that were subsequently perceived as relatively expensive. We used the proceeds to diversify the fund into sectors that are likely to outperform in 2013. Due to the improving global economic growth outlook, we increased the fund's exposure to the resources sector by acquiring new holdings in Lonmin, Northam, Palamin and Barloworld, while we also participated in the initial public offering of Master Drilling. We sold our holding in Sappi and the NewGold exchange traded fund. With African infrastructure expenditure on the increase, we bought Consolidated Infrastructure, Ellies, Rolfes and Aveng, and applying similar thinking, we switched the fund's holdings in Imperial to Grindrod and Super Group, both which have growing logistics exposure in sub-Saharan Africa. Having made good returns in our retail holdings, we sold Foschini Group and JD Group due to increasing concerns about the indebtedness and imprudent spending habits of the South African consumer. To maintain some exposure to the consumer sector, we switched the proceeds into more defensive companies like Tongaat Hulett, Cipla Medpro, Clover and Mpact.

Portfolio positioning
Globally, the trend of less investment in equities relative to other asset classes should reverse in 2013, providing support for equity prices. We believe that the fund is invested in companies that are attractively priced relative to their underlying valuation and/or their forecast growth prospects. Many stocks in the mid- and small-market capitalisation sectors must still realise their full rerating potential, which we believe will take many years to materialise. The fund is very well positioned to benefit from a recovery in global economic growth, driven by China and the US, and should therefore continue to generate good returns into the foreseeable future.