The most significant event of the quarter was the fall in the oil sector where, the price of oil fell back sharply. The main factors put forward to explain this pull-back included an easing of geo-political risks, an absence of hurricanes in the Gulf of Mexico, slowing US economic growth and relatively high inventory levels. These effects seem to have been compounded by speculative selling pressure as the significant 'hot money' that has moved into the commodity areas swiftly moved in the other direction. The near bankruptcy of energy-trading hedge fund Amaranth only served to exacerbate matters. Elsewhere, the rest of the equity market performed relatively well, as investors shifted their attention to the fact that US interest rates may well have peaked for this cycle. Consequently, retailers, as a sector, was the best-performing sector over the quarter, driven by US retailers as investors assumed the US consumer would resume spending.

Performance Review
The Fund marginally underperformed its benchmark during the quarter. This was primarily due to performance in the Industrials sector where the Fund was impacted by holdings in both Oil & Gas and Steel. US refiner Valero was the biggest detractor from performance as the falling oil price is likely to translate into lower margins. Concerns about slowing US economic growth pushed Commercial Metals, a US steel producer, lower even though the company's growth prospects remain strong. The negative performance was offset by the rumoured takeover of AWG (since confirmed) but this was not enough to offset the dramatic move in oil stocks.

Market Outlook & Fund Strategy
At present, our largest overweight position is in the tobacco sector where a combination of attractive valuations, solid cash-flow characteristics and an improving litigation environment have all contributed to drive share prices higher in the sector. Although smoking bans worldwide continue to put pressure on cigarette sales, a combination of strong pricing and effective cost-cutting is ensuring that tobacco companies are still generating robust earnings growth. This remains the case even after the sale of the Fund's Japan Tobacco holding.
The European banking sector is also providing a source of attractive investment opportunities. Many of the larger European banks are undertaking comprehensive restructuring programmes which, when combined with improving economic growth, has created a strong foundation for future profit growth. Many of these companies have the added benefit of strong dividend yields - such as HSBC's 5% yield - reinforcing their strong valuation case.

Overall, we remain positive on global equities. However, with central banks around the world simultaneously tightening monetary policy, we expect to see heightened volatility and reduced returns as investors digest how far interest rates need to rise and whether the US Federal Reserve (Fed) can engineer a soft landing for the US economy. Markets are likely to remain focused on the Fed's actions as a result. However, at present, news-flow at the corporate level remains reasonable and valuations are attractive.

The second quarter proved to be a volatile time for global equity markets even though the MSCI World ended up essentially flat over the period in US dollar terms (down 0.3%). All areas of the capital markets underwent some form of stress. The dollar was weak in April and this then flowed through into bond and equity markets which took fright at comments from various members of the Federal Reserve that inflation has moved out of their respective comfort zones. With interest rising across the world equity investors have focused on one key question - will the Fed now tighten too hard in the attempt to tame inflation and what impact will this have on economic growth?

This will continue to be a recurring question until the Fed believes inflation is under control and, as such, investors should expect more volatility over the coming months than we have seen in recent years. Against this backdrop less liquid, higher risk assets were sold off most aggressively. Emerging markets were the most severely impacted with the MSCI Emerging Markets index falling 4.3% in US dollar terms over the quarter. At the sector level both Industrials and IT underperformed. The Fund underperformed its benchmark by just over 1% over the quarter. Most of this underperformance was concentrated within the Services sector as we were impacted by stock specific underperformance from AmerisourceBergen and Tempur Pedic.

However, we continue to believe their prospects are strong given that these stocks continue to show a strong combination of attractive valuation and excellent growth outlook. Tempur, for example, manufactures mattresses that were designed by NASA and are now being sold to insomniacs around the world. Our underweight position in Utilities also negatively impacted performance. What we did not do over the quarter was change the portfolio to try and time sentiment changes in the market place.

We remain fundamental bottom up investors and, though the evolving economic landscape has created a great deal more noise in the markets, this does not change our philosophy of looking for the same four factors in every stock we buy. Indeed, it is at times of market disruption that we believe a strong process and philosophy is most important. On a bottom-up basis it has, however, been interesting to note that we are seeing an increasing number of large capitalisation and US based names and the Fund has increased its weightings in these areas. The Fund's strategy is to focus on high quality, attractively valued companies with improving operating performance, which are receiving increasing investor attention.

We continue to be overweight Automobiles, an area that many investors have shunned due to the travails of industry giants GM and Ford. These two behemoths are clearly suffering as they have been weighed down by burdensome union demands and poor innovation but, at the same time, Japanese and European manufactures have quietly been tuning their cost bases and generating ever-improving amounts of free cash flow. Although the industry remains competitive, the market share shifts away from the US manufactures has created opportunities. Elsewhere, the European banking sector has been a further source of investment opportunity. Many of the larger European banks are following comprehensive restructuring programs which, when combined with improving economic growth, has created a strong underpinning for future profit growth. Many of these companies have the added benefit of strong dividend yields (for example HSBC at 5%) reinforcing their strong valuation case. Overall, we remain positive on global equities.

However, with Central Banks around the world simultaneously tightening monetary policy we expect to see heightened volatility and reduced returns compared to the strong bull market of the past three years. Though markets are likely to stay keenly focused on the Fed, news at the corporate level remains strong and valuations remain attractive. This should provide a reasonable underpinning to the market even as investors digest ongoing interest rate increases.

Investec has earned its medals in the tough global asset management game. Among its many successful funds is the Investec GSF Global Equity Fund (IGE), into which investments into its rand-denominated Worldwide Equity Feeder Fund are channelled.

IGE is among the leaders in the UK's global equity large-cap blend sector, producing a total return of 50,4% in sterling over the three years to June 30. The sector's 1 526 funds recorded an average total return of 39,5%.

The secret of IGE's solid showing is the "four factor" methodology applied in stockpicking, says London-based fund manager James Hand. He explains that the 11-member four factor team screens a potential universe of about 4 500 shares for four specific factors on which a final investment decision is taken.

Hand says the first two factors a company must display to be placed on IGE's buying list are earnings of a high quality and strong profit growth. As a third factor, its shares must be cheap relative to their intrinsic value and, fourthly, display a positive outlook from a technical analysis perspective.

"We rely on stock selection to add alpha [above-index returns]; the portfolio is made up of a lot of good ideas, not outrageous bets," says Hand.

The result is a portfolio of about 130 shares with a geographic and sector weighting similar to that of the MSCI developed market index, a global fund benchmark. "We are slightly underweight the US and Japan and slightly overweight the UK and Europe," says Hand.

From a sector perspective, Hand says that even in those that are out of favour, there are always opportunities. For example, he says Toyota stands out in the hard-pressed vehicle sector.

IGE is also maintaining an index-weight exposure of almost 9% to resources. "Even if resource prices fall, valuations are not stretched to a point where the sector is risky," says Hand.

Indicative of IGE's potential, research firm Morningstar puts its portfolio's long-term projected annual growth at 13,1%. SA citizens can use offshore allowances to invest in IGE. Benefits include a 1,25%/year management fee compared with the feeder fund's 1,75%.

Financial Mail - 21July2006

The MSCI World continued its strong run into the first quarter of 2006 rising 6.7% in US Dollar terms. A combination of a strong earnings reporting season, increasing M&A activity and robust, synchronous global growth all boosted investor sentiment.

The only factor to dampen bullish investor sentiment has been the gradual tightening of monetary policy around the global. Both the Federal Reserve in the US and the European Central Bank continued to push up interest rates over the quarter whilst the Japanese Central Bank has ended its policy of quantitative easing and set a longer term inflation target.

So far this tightening has done little to dampen enthusiasm for stocks as companies have continued to post strong profit numbers and global growth has shown little sign of slowing down. As a result the best performing sectors over the quarter were those linked into economic growth, namely Industrials and Materials, with the latter benefiting from the inexorable rise in metal prices. The only real standout on the negative side was Consumer Staples where companies continue to be under pressure from rising raw material prices (everything from food prices to metal prices for packaging) as well as the shift in dietary requirements towards more health conscious foods.

The fund performed well against this backdrop rising 10.6% in US Dollars against a 6.7% increase for the MSCI World. Our real standout sector was Financials where our overweight position in European names added significantly to performance. The fund was also helped by three takeovers: Arcelor, Schering and Bellsouth. Although the Arcelor bid is ongoing, as the company fights both a political and economic battle, we have taken profits in the other names as we believe the final target prices were a fair reflection of the long term value in these businesses.

The Fund's strategy is to focus on high quality, attractively valued companies with improving operating performance, which are receiving increasing investor attention. We continue to be overweight insurance companies where a combination of strong pricing growth following Hurricanes Katrina and Rita and attractive valuations make the sector attractive. We have also seen an increasing number of good ideas in the Automobiles sector.

Although many people are currently focused on the travails of industry giants GM and Ford, who are being weighed down by burdensome union demands and poor innovation, Japanese and European manufactures have quietly been tuning their cost bases and generating ever improving amounts of free cash flow.

Although the industry remains competitive the market share shifts we are seeing away from the US manufactures has created opportunities. Elsewhere the European banking sector has been a further source of investment opportunity. Many of the larger European banks are following comprehensive restructuring programs which, when combined with improving economic growth, has created a strong underpinning for future profit growth. Many of these companies have the added benefit of strong dividend yields (for example HSBC at 5%) reinforcing the strong valuation case for many of these names.

Overall we remain positive on global equities. Corporate fundamentals remain good, as suggested by continued upward revisions to global corporate earnings forecasts and the long-term technical trends as measured by moving averages are firmly in place. Valuation remains attractive in many segments of the market and near all time high cash flow return levels confirm the current strategic strength of global corporates. However, we are now three years into a strong bull market and with the largest Central Banks around the world simultaneously tightening monetary policy there is an increasing risk that reduced liquidity could start to make itself felt throughout the financial system.

The fund is now a feeder fund into Investec's (offshore) Global Equity Fund. The bulk of the global equity team walked out of Investec about two years ago but the returns from the funds have remained strong, as the process has remained intact.

Though firms such as Fidelity say they glean huge value from visiting companies, this fund, along with the equally successful Old Mutual Global Equity, is run using a quantitative model. With just 13 analysts in Investec's global equity team, it cannot do the kind of "kick the tyres" research that, say, Fidelity or Capital International carry out. Investec makes a virtue out of necessity. It claims that meeting with management simply creates noise and wastes time. The process is not entirely mechanical, however, as sector specialists are expected to produce one-page reports on the best ideas in their sector and these ideas are discussed at team meetings.

The fund now uses a four-factor approach in portfolio selection. The first factor is strategy: to find companies that have created value for their shareholders in the past ( Nokia, for example). The second factor is value, focusing on the cheaper companies based on the Holt cash flow return on investment model. The third is dynamics, which targets companies whose earnings are being revised upwards by stockbrokers. And the fourth factor is technicals or companies whose share price is already tending upwards.

Companies score one to four points on each factor with a minimum overall score of four and a maximum of 16.

The fund does not have an official portfolio manager, though James Hand, head of research and the four-factor equity team, is the "face" of the fund. Hand used to be called the process champion until he decided that the term might be associated with pork pies.

The fund is comparatively concentrated with 130 shares and a tracking error of 3% to 7%.

It aims to outperform the benchmark MSCI World Index consistently by 2% to 3%. Since inception under the current process in August 2000 it has outperformed the index by 2,9%.

Financial Mail - 10 March 2006