Market review
World equity markets opened the quarter with a roar and ended July in tatters as risk appetite in the fixed income markets evaporated in the face of subprime contagion concerns. This was to dominate news flow and markets worldwide over the quarter and August proved a massively volatile month. A credit crunch forced a substantial deleveraging process, which saw a rush to the safe end of the quality spectrum and a virtual closing of new lending to any part of the market that was perceived to be a potential harbour of credit risk. Action by the central banks to inject liquidity and cut the costs of borrowing engendered a rally in markets over the second half of August. Investors became more confident that the impact of the credit squeeze could be contained in the financial sector and realised that the balance sheet strength of much of the world's industry in the listed markets is at a historically high level.

The US Federal Reserve (the Fed) rode to the rescue once again in September. A larger than expected 50 basis point interest rate cut virtually extinguished worries over the credit crunch and sent investors charging back into equities. The sight of queues of depositors outside Northern Rock branches in the UK and warnings about the impact of marking to market asset-backed bonds from the banking sector forced even the previously aloof Bank of England to take action. The Bank provided funding against a wider range of securities at the three-month rate. Certainly, problems in the money markets persist and it would be unwise to predict a return to normality in the near term. However, it is important to remind ourselves that the price of risk had indeed become hugely expensive and although the money markets may not be functioning quite normally at this point, a repricing of risk to more normal levels has at least been achieved. This can only be assessed as a healthy achievement.

The big question of course is whether or not this healthy adjustment has implications for the wider economy. The Fed's actions have alleviated a bit of this concern but they have also raised the spectre of inflation. As we have said many times, it will be a negative surprise on inflation that will end the current bull market; as yet this has not materialised.

One area of inflationary risk is within commodity prices. Wheat prices moved to new highs, whilst oil is again hovering around US$80. This is partly as a result of supply issues (such as a drought in Australia affecting the wheat harvest), but it also shows that demand remains robust in much of the world. Central to this is China where, given much faster growth, the change in gross domestic product (GDP) is now equivalent to the change in GDP in the considerably larger US economy. Throughout the recent credit crunch, emerging markets - and especially Asia - have therefore been resilient as investors consider that a US slowdown is likely to have fewer repercussions than in the past. The Investec Worldwide Equity Feeder Fund continues to benefit from these trends with investments in Hong Kong (Chinese H shares), Taiwan and Korea all performing well over the month. At the present time, even though the Chinese inflation rate is increasing (mainly due to food prices) and interest rates are going up, the economic picture looks strong.

Fund performance
The Investec Worldwide Equity Feeder Fund gained 3.1% over the quarter in rand terms, well ahead of the MSCI World Index, which returned 0.2% (in rands). The fund achieved top quartile performance (it was ranked second out of 23 funds). The average fund in the sector returned -0.7%. The market fell at the start of the period, driven by concerns over subprime debt and its impact on the financial sector. However, cyclical sectors continued to perform well as earnings, and economic strength, remain solid.

Mining, steel and transport stocks performed well. Within services, the fund was boosted by our holding in Crocs, which was a notable performer over the quarter. The company makes soft, plastic non-slip shoes which look similar to clogs. The firm is seeing huge growth due to the comfort of its product, driving another set of strong earnings. Holdings in Hong Kong such as Angang Steel and China Everbright also performed well as China diverged from global markets. During the three month period, our positions in speciality finance companies were negatively affected by the credit crunch, which weighed on profit expectations.

Portfolio Activity
Significant purchases: Unimicron is Taiwan's largest producer of printed circuit boards (PCBs) by capacity and the third largest globally (from sixth two years ago). Its major shareholder is UMC (20.0%). The company offers integrated circuit substrates and a broad range of PCB products for a diverse set of applications, including handsets, networking and notebook PCs. The customer base includes, Nokia, SonyEricsson, Motorola, STMicro, Amkor, Sony, IBM and Taiwanese handset/notebook ODMs. The company is therefore continuing to benefit from outsourcing to Asia and with a low cost business model is using this strong demand to generate solid earnings growth.

Wright Express, the provider of payment processing and information for vehicle fleets is excellent value against its peer group. It has locked in a large amount of the benefits it derives from a higher US gasoline price for the next few years.

Significant sells: Accenture provides management and technology consulting services worldwide. We purchased shares in the company in 2005 and, despite an interim issue with a difficult NHS contract, the company has performed well. However, this now means that the valuation case is no longer as attractive and as a result the shares were sold from the portfolio.

Zimmer Holdings makes reconstructive implants primarily for knees and hips. The company is benefiting from the long-term ageing global demographic. However, it has nevertheless been suffering from weaker than expected revenue growth in the United States, which appears to be driven by a product transition to gender-specific knees. Not only have these knees hit production issues, but competition appears to be increasing which could affect future pricing power. The company was therefore sold, as the valuation case requires strong growth, which has been called into question by recent evidence.

Market outlook
Global equity markets continue to look reasonably valued despite the turmoil of recent months. With worries building over macroeconomic indicators it is important to focus on the lack of any real valuation extension in global markets (with the exception of China). Our overall view remains that further upward progress can be obtained but that progress is likely to be more volatile than in recent years. We have lost the supporting leg of private equity activity. However, we would anticipate a renewal of activity from the listed sector as companies use their cash piles to solidify their market positions or step up buybacks or dividends to make their balance sheets more efficient.

We will remain focused on companies which offer good value and quality, as well as those receiving upgrades to their earnings estimates and that offer a good share price trend. We believe that a disciplined investment process, combined with an emphasis on those companies undergoing change from outside influences or internal restructuring, will prove rewarding for investors in the long term.

Market review
Global equities advanced steadily through the second quarter despite a significant shift in the outlook for fixed interest markets, which saw global bonds weakening over the three-month period. It is indeed rare for the two asset classes to diverge to the extent seen over the second quarter and, historically, this has often proved a very negative portent for the future direction of equity prices. However, it is evident that the shift to a more positive global yield curve was conditional upon evidence of a stronger than anticipated US economy and a shift in the predicted direction of US short-term interest rates from a decline to stable levels at best.

The reporting season for the first quarter demonstrated that the perceived wisdom of a general, and meaningful, slowdown in the US economy was a fallacy and that companies were still enjoying record levels of profitability and cash generation. The importance of this being that analysts had, in general, been doubting the sustainability of the levels of free cash flow generation seen in 2006 when the combination of buy backs, special and ordinary dividends had seen the S&P 500 Index yield more than 8%. The strength of first quarter earnings suggests that 2007 could again see a situation whereby equities would yield more than bonds over the year.

Despite a tightening in liquidity conditions, the world's equity markets are at historically low levels of valuation, and continue to offer the best value of any of the major asset classes particularly as the momentum for real estate now seems to have dissipated. Furthermore, worries about a slowdown in merger and acquisition activity, sub prime contagion or the bubble that is the Chinese A-share market will not destroy the generally positive market trend. It will take a negative inflation surprise to provoke this.

From a regional perspective, the US is still underperforming, albeit by a lesser margin than before. The Japanese market remains in the doldrums, held back by a weak yen. European companies continue to outperform as return on capital is raised to levels prevalent in the UK and the US. Emerging markets and Asia are still strong. Small and medium sized companies were widely expected to underperform large cap companies this year, but the high level of earnings growth meant that this prediction was not realised. Very large companies are still struggling to overcome diseconomies of scale and a lack of organic growth opportunities. The long-term trend of outperformance by small and medium sized companies looks set to continue.

Fund performance
The Investec Worldwide Equity Feeder Fund returned 4.8% in rand terms over the quarter, compared to 3.8% for the MSCI World Index (rand terms). The second quarter was strong overall, driven by good performance from the financial sector. When bond yields rose, the real estate sector came under pressure. Our underweight exposure to real estate added value. We also benefited from our underweight exposure to large-cap banks, which were hit by the repercussions of the weakening of the US housing market.

We maintain a significant overweight position in the more cyclical industrials, which were strong performers over the quarter. Mining and steel stocks continue to generate substantial cash flow on the back of rising materials prices which gives these companies very attractive options in terms of both corporate strategy and shareholder strategy.

Performance within the services sector was also sound, driven by positions in companies such as river transport firm China Shipping Development Company, which was boosted by strong Chinese demand. We continue to find sound investment ideas in the US and have been closing down our longstanding underweight position. In particular, we like growth companies in the health sector.

Portfolio Activity
Significant purchases: Oriflame markets a range of cosmetics through an independent sales force. The company is focused on the emerging markets where growth in cosmetics is stronger than in the developed world as an increasing number of consumers have the wealth necessary for more luxury products. The company has over two million consultants who sell direct to consumers and the fast paced growth that the company is currently achieving is reflected in the current valuation.

Significant sells: Kinetic Concepts manufactures and sells products that accelerate the healing process or prevent complications. Central to this are their range of vacuum-assisted wound closure products. We believe that Kinetic Concepts continues to be a well-run business in an attractive market, but as it has now reached fair value it was sold from the portfolio.

Market outlook
We still find the world's equity markets an attractive place to invest. Valuations are reasonable and growth expectations appear to be rising. We also recognise that the weakness in the US housing market could have a knock on effect on stock markets and in this context we also anticipate some increase in volatility over the remainder of the year.

Despite some tightening in liquidity conditions, the world's equity markets remain under owned and look particularly good value against the alternatives of fixed income and real estate. We will remain focused on companies which offer good value and quality, as well as those receiving upgrades to their earnings estimates and that offer a good share price trend. It is our belief that a disciplined investment process, combined with an emphasis on those companies undergoing change from outside influences or internal restructuring, will prove to be rewarding for investors in the long term.

Market review
Markets rose fitfully at the start of the year as further tightening measures at the world's central banks added to expectations for a soft landing for the global economy. Despite some pessimistic predictions, profit margins held up during January. Equity markets continued to appear somewhat complacent until the end of February, when official comments regarding the curbing of speculative excess provoked a sharp sell-off in the Chinese A share market. This caused some investors to worry about emerging markets in general. The Japanese yen began to strengthen, unsettling carry traders and increasing risk aversion, in what was little more than an overdue reality check for a complacent market. However, events in the sub-prime lending market in the United States were more worrying. Anecdotal evidence suggested that more than one in five sub-prime borrowers were in default. Fears of further erosion of the country's housing market are increasing. If sub-prime issues lead banks to withdraw credit more widely and those in default are simultaneously forced to sell into a depressed housing market, then the results could be a significant credit crunch. Nevertheless, equity markets rebounded in March as investors seemed to shrug off these concerns, with robust corporate activity and strong levels of private equity supporting share prices. However, worries remain that highly leveraged private equity transactions could fail to deliver, especially in an economic slowdown. The MSCI World Index gained 1.9% (in US dollar terms) over the month and 2.6% over the quarter. The US dollar fell 0.2% against sterling and 0.9% against the euro and the yen over the quarter.

Fund performance
The Investec Worldwide Equity Feeder Fund returned 6.7% in rand terms over the quarter, outperforming the benchmark. The performance over this period was broadly underpinned by results across the sectors. One notable contributor in health care was KCI, whose stock was boosted by good results and ongoing success in surpassing the competition in the vacuum-assisted wound closure market. In the financials sector, our significant underweight position in US banks helped us weather the sub-prime lending worries that have plagued the US over recent months. Industrials also made a strong contribution to returns. Our holdings in steel companies made a positive contribution as they benefited from strong steel prices and ongoing robust global demand. Holding Austrian steel company Boehler-Uddeholm proved fruitful when news emerged of a takeover bid from Austrian peer Voestalpine. Private equity group CVC backed off on news of the all-Austrian tie-up. Petrochina was one of the fund's biggest detractors over the quarter, as the stock felt the impact of weak oil prices at the start of the period.

Market outlook
World equity markets still look appealing on valuation grounds and the recent correction has at the very least reduced the high level of complacency that was pervading global markets. The continued high level of overall liquidity creation and burgeoning mergers and acquisitions activity, particularly from private equity funds, provide support for current price levels. However, the rising level of new equity issuance, especially from China, does give some concern particularly as the quality of the companies offered into the initial public offerings (IPO) market seems to be deteriorating. However, with central banks around the world simultaneously tightening monetary policy we expect to see heightened volatility and potentially reduced returns compared to the strong bull market of the past three years. As investors digest how high interest rates need to go, and whether the US Federal Reserve (the Fed) can engineer a soft landing for the US economy, the markets will remain susceptible to short-term pullbacks if macro-economic data surprises negatively. Markets are therefore likely to stay keenly focused on the Fed and indeed all central banks for the foreseeable future. The recent statement from the Fed suggesting that interest rate rises may now have run their course was therefore understandably taken very well by the market. At the corporate level we continue to see good profit growth and rising returns on capital - the same trends that have driven the market for the past three years (as opposed to a material re-rating of equities). We will, as ever, continue to focus on companies which offer good value and quality, as well as those receiving upgrades to their earnings estimates and increased investor attention. It is our belief that a disciplined investment process will prove rewarding for investors going forward. At present this leads us to overweight positions in steel, insurance and tobacco. In each sector we find examples of companies that are good fits for our bottom-up stock selection methodology. We remain underweight software and pharmaceuticals. At a country level, we remain underweight the US and overweight Europe as we were throughout all of 2006.

Market Review and Portfolio Activity
The MSCI World finished 2006 on an extremely strong note, rising 8.5% in US dollar terms for the quarter. Local current strength undermined this return as the rand firmed, but the overall year stayed in good shape with the MSCI World Index up an impressive 33% for South African investors.

The strength in the markets was broad-based with most sectors posting good US dollar returns. The strong performers were Materials and Telecoms with strong metal prices driving the former and solid free cash flow generation the latter. On the negative side, Healthcare continued its poor performance (it was the second worst performer over the year after IT) as large companies such as Pfizer and AstraZeneca continued to face disappointments in their drug pipelines. With generic pharmaceutical companies continuing to challenge the patents of large companies, the outlook for the pharmaceutical sector remains tough.

Buys
Carolina Group - is the largest manufacturer of menthol cigarettes in the US. The company has followed an effective premium-price strategy which has yielded some of the strongest earnings revisions in the tobacco sector over the past year. This strategy looks set to continue to work well for the company in 2007. With the litigation environment in the US continuing to improve and an expectation of a higher dividend payout in the near future, the stock had a strong combination of cash generation, attractive valuation and improving prospects.

Sells
American Eagle - the company has seen a strong turnaround in 2006 with an impressive range of clothing and increased management focus on improving store sales feeding through into share price performance. However, after this move the valuation case looks less compelling and analysts are not expecting this good performance to continue into 2007 - as a result the risk-reward looks less favourable and the stock was sold.

Performance Review
The fund had a strong quarter, outperforming the benchmark by 2.98%. This caps a very good year for the Fund which was well ahead of target outperformance. Performance for the period was driven by two key sectors - Materials and Steel. Within the materials sector performance was driven by a takeover of Phelps Dodge by Freeport-McMoran and strong performance from all of our metals names. Steel names also benefited as investors became increasingly confident that the US Federal Reserve has engineered a soft landing for the US economy, suggesting that global steel demand should remain strong.