The Investec Worldwide Fund underperformed its MSCI World benchmark this month. All sectors produced a negative contribution, apart from Services which was flat. Strong performance from pharmaceuticals (Pharmaceutical Product Development Inc.) and retailers (Aeropostale) was insufficient to offset weak areas including health care in Consumers (Coventry Health Care), specialty finance in Financials (Countrywide Financial) and semiconductors (Micronas) in Technology. All of these reflected stock-specific situations without any overarching unifying theme.

The recovery in world equity markets this year continues to be driven by improvements in corporate profitability as well as by falling bond yields in recent months. Weighing against this is the rising oil price and the damaging effect that a rising short-term interest rate environment will have on the heavily indebted consumer, especially in the US and other Anglo-Saxon economies. However, equity valuations remain attractive, both in absolute returns and relative to bonds. Although the growth in earnings has slowed, there are signs that it has stabilised at satisfactory levels. Consequently, we are optimistic about the outlook for equities.

The Fund's strategy is to focus on high quality, attractively valued companies with improving operating performance, which are receiving increasing investor attention. We still have an overweight position in oil stocks where there are short-term catalysts of strong earnings momentum and attractive technicals, and where selectively some firms have compelling valuations. We also have a large positive bias towards IT services stocks as earnings and stock price momentum remain strong and towards health stocks where valuation continues to be attractive.

Our largest underweights are, as always, in sectors where there are relatively few stocks exhibiting these attractive characteristics, including diverse industrials, food producers, electric utilities, media and chemicals.

The Investec Worldwide Fund significantly outperformed its MSCI World benchmark this month. The only sector to not contribute to positive performance was technology where hardware stocks, most noticeably Japanese electronics, underperformed. The Industrials sector produced a good positive contribution, with strong performance from oil stocks (Canadian Natural Resources, Chesapeake Energy) and continued strength in Asian steel stocks (Bluescope Steel). There was also a positive contribution from the Consumer sector, where the Fund did not hold several large pharmaceutical stocks which did especially badly (Merck). The Financials sector had the strongest overall contribution, especially in banks (Anglo Irish Bank, R&G Financial Corp) and speciality finance stocks (New Century Financial). The recovery in world equity markets this year continues to be driven by improvements in corporate profitability as well as by falling bond yields in recent months. Weighing against this is the rising oil price and the damaging effect that a rising short-term interest rate environment will have on both the heavily indebted consumer and the implication for equity market valuations. Overall, however, we remain positive on equities relative to other asset classes, as we feel that the impact of strong earnings growth has not been sufficiently reflected in share prices.

The Fund's strategy is to focus on high quality, attractively valued companies with improving operating performance, which are receiving increasing investor attention. We still have an overweight position in oil stocks where there are short-term catalysts of strong earnings momentum and attractive technicals, and where selectively some firms have compelling valuations. We also have a large positive bias towards auto stocks as operating fundamentals remain sound and valuations are low, and towards health stocks where momentum and valuation factors continue to be attractive.

Our largest underweights are, as always, in sectors where there are relatively few stocks exhibiting these attractive characteristics, including diverse industrials, food producers, electric utilities, media and chemicals.

The second quarter of the year ended as a modestly positive one for global equity markets, with some volatility brought about by investor concerns regarding the potential impact of rising interest rates. Half way through 2004, world markets are still up on the start of the year but not compellingly so. Although at the aggregate index level markets appear uninteresting, there have been some clear changes with some of the clear-cut themes of the previous twelve months starting to stall. Most notable was the underperformance from smaller companies over the quarter in most parts of the world as well as the deterioration in the performance of emerging market shares.

Both of these trend reversals have hurt the relative performance of your fund recently as we have been exposed to both of these themes. At present we are not overly concerned, however, as the evidence both in terms of current operating performance of the companies involved, as well as their valuations, would lead us to continue to favour both of these themes.

For almost two years there have been consistent withdrawals from rand-denominated foreign funds. The combination of a stronger rand and weak global equity markets meant many of these funds gave negative returns of 40% or more a year. And it is a lot easier for investors to buy and sell rand-based funds than it is to repatriate money in dollar and sterling-based funds.

But over the past six months, the average returns from foreign general equity funds of 9,86% were actually higher than the 9,17% from domestic general equity.

Investec Worldwide has been one of the most consistent performers in the sector. It is run by Nigel Dutson of Investec's London-based international equity team. It is a bottom-up fund. It does not take macroeconomic views and aims to be neutral in regional allocation and in its spread between the five super sectors - industrials, consumers, services, financials and technology.

All the team's time and resources are used to pick shares from a universe of 4 000 with a market capitalisation above US$1bn. Dutson says that to get into the fund it has to score well on the Sigma proprietary screening tool based on four factors.

They are a higher-than-average spread between company return on investment and cost of capital; a better-than-average gap between fair value and the current share price, increased expectations of current profitability; and current share price strength.

Investec has an unusual combination of value and momentum styles. These are usually seen as contradictory styles but Dutson says it is a misconception dating back to the 1990s tech boom that growth and momentum are the same. He aims to invest in shares which are doing well but still have scope to do better.

Current areas of interest include flat screen manufacturers (Samsung & Eiko Nanao), oil exploration (XTO Energy and Petrochina) and shipping (Mitsui OSK and Teekay). In the short term the fund has suffered from low exposure to large caps such as pharmaceuticals and a full weighting in Asia.

Equity markets have been choppy and trendless for the last five months or so as investors weigh the positive influence of accelerating economic growth against the negative prospect of higher interest rates. Economic growth is great as far as it goes but equity investors are a fickle bunch. Too slow and we worry about the lack of profit growth, too fast and we worry about heavy handed central banks raising interest rates and choking off the growth entirely. As in the story of Goldilocks, the temperature of the world economy must be just right.

The Fund gave back some of the positive returns generated during first quarter through the month of May as some of our bigger holdings in Asia paused for breath after very strong periods of performance. The best returns in May came from large cap high quality businesses in the major markets such as the big multinational pharmaceutical companies. These companies had done very poorly indeed over the prior twelve months and our exposure to them is limited. We are not tempted to increase exposure to this area and expect the negative trends in these kinds of businesses to reassert themselves as the year progresses.

Whatever the overall market sentiment, we continue to find attractive pockets of value and momentum to invest into. Areas of interest for us are currently quite diverse and include oil exploration in the US and Asia (XTO Energy & Petrochina), residential construction in the US and the UK, shipping (Mitsui OSK of Japan and Teekay in the US), healthcare equipment (Zimmer & Bard, both of the US), games software companies (Activision) and flat screen manufacturers (Samsung & Eizo Nanao).

A bit of volatility appears to be creeping into global equity markets now, with the oil price fast approaching $40 a barrel and US employment showing a rapid expansion in that economy, investors appear to have concluded that interest rates are going to have to rise. Stock markets as ever are looking forward and are far more concerned about the future impact of rising interest rates on next years economic growth than they are encouraged by the current rapid rates of growth being enjoyed by most industrial economies. Corporate profitablity may be expanding rapidly, but that won't last forever if rates rise to choke off excess growth. Looks like we are in for a choppy European summer.

The Fund remains fully invested with a bias toward emerging Asian and Japanese markets. This may give us a rocky time of it in the short term as these markets will be particularly exposed to changing sentiment regarding the global economic growth outlook. Valuations are compelling out there, so we will wait for further evidence to emerge before reducing positions.

Equity markets accelerated upwards in December bringing to a close the first positive year for equity investors over the last four years. Markets in US Dollar terms were up around 30% for the year as a whole although Rand strength meant that the South African investor saw only single digit positive returns.

Our own portfolio return has been comfortably above average in 2003 for the third year running. We have been helped by our bias toward mid sized companies and more recently from an exposure to the Far East, which is seen to be a beneficiary of improving global industrial demand. Despite strong performance in our areas of focus we see little evidence to suggest that we should be changing our current stance. The best value still appears to us to be found in mid sized companies and also still in the Far East. On a global sector basis, particular areas of focus remain Construction, Oil Exploration, US Healthcare and Autos. While these companies remain good value and are continuing to enjoy improving operating performance and rising share prices, we will stick with them.