Market review
Record prices for food and energy have already translated into increased expectations of inflation across the developed and developing world. Higher inflation was reported in China, India, Europe and the US during the second quarter. Central bankers in the west now have to grapple with the threat of inflation in an environment of slowing economic growth. Interest rates are now widely expected to rise in coming months in Europe and the US.

American economic data releases offered little comfort to investors as unemployment rose at the fastest rate in 22 years in May and consumer confidence continued to decline. There was also little to cheer about in the housing market, with data in the US, UK and Spain all demonstrating continued pain in the sector.

With concerns over rising inflation and the state of the global economy at the fore, the equity market rally over the first part of the quarter could not be sustained. Global equities gave back all of their early gains to end the quarter down -1.4%, in US dollar terms.

There was however, considerable divergence of returns between different sectors of the world economy. Financials and the banking and insurance sectors were again the worst performers as write-downs on asset-backed securities continued and many of the world's largest banks sought to raise new capital from investors. The consumer sector also performed poorly.

Whilst many sectors suffered rising costs because of higher commodity prices, many industrial companies benefited from this situation with mining and oil & gas unsurprisingly amongst the strongest sub-sectors.

Fund performance
The Investec Worldwide Equity Feeder Fund returned -3.6% over the second quarter, against the MSCI World Index return of -5% (in rand terms). Over the 12 months to the end of June, the fund returned -1.2%, against the MSCI World Index return of -0.3 %( in rand terms). The Investec Worldwide Equity Feeder Fund achieved top quartile performance over two, three, five and seven years to the end of June (annualised returns).

Over the second quarter performance was delivered through good stock selection, particularly in the financial and industrial sectors. In financials we were underweight banks, which have consistently underperformed on fears over further asset write-offs and loan losses. Within industrials we were overweight steels, oil & gas and mining, three of the best performing sub-sectors in the market. The portfolio's worst performing sub-sector in the quarter was carriers, where our stock selection modestly detracted from performance. We have taken corrective action.

Our most significant overweight positions are in speciality finance, where we have exposure to the brokerage companies rather than to the investment banks, and steel where we have a geographically diverse exposure. We are most underweight banks, which are still suffering earnings downgrades, and diverse industrials - several companies have warned of negative outlooks.

Portfolio Activity

Significant purchases
Petro-Canada is Canada's largest integrated oil company. Its principal businesses are refining and marketing petroleum products, and undertaking oil and gas exploration. North America accounts for 70% of the world's proven oil reserves, of which 30% is in oil sands.
The company has demonstrated good reserve replacement. Strong commodity prices, stable margins of approximately 30%, with spot oil and gas prices well above brokers' estimates are driving earnings upgrades.

IAWS Group is an Irish producer and distributor of breads and snacks. The share was added to the portfolio on the basis of an attractive valuation relative to the peer group and good positive earnings revisions. With organic growth running at around 10% the shares look due for a re-rating.

Significant sells
America Movil is the largest Latin American mobile telephone operator. Despite its dominance of many Latin American markets, the faster growth rates that it has experienced appear to be waning. This reduces the future value of cash flows that the company is expected to generate. With earnings downgrades coming through and the valuation case less compelling, the decision was made to sell the stock.

BlackRock, the international asset management company, was sold following a disappointing earnings number on the back of lower revenues from their hedge funds. Although the group remains well placed within the fund management industry, the valuation premium seems unjustified if earnings do not materialise as expected.

Market outlook and portfolio positioning
Equity investors are currently focused on economic growth, resulting in a bearish tone to markets. The recent easing of price caps on gasoline in several Asian countries led to a sharp sell-off in the markets. There are concerns that increases in interest rates, to ward off inflation pressures, will negatively impact economic growth. Investors are also focused on financial stocks, which remain weak. Provisions against non performing loans are rising, impacting banks' balance sheets. While it will take time for these concerns to work through the market there are many factors to be positive about.

Share valuations are reflecting a lot of bad news and some quite sharp falls in earnings (profits). The extent of further earnings downgrades are unknown but there is currently a disconnect between analysts' expectations and returns implied by market valuations. Companies' balance sheets, with some exceptions, are in good shape. Quality companies are still being rewarded by investors.

Our view remains that equity prices can still make progress over the medium term, despite the macroeconomic headwinds. We will continue to focus on high-quality stocks that offer good value and are likely to benefit from improving conditions.

Market review
The first quarter of 2008 was dominated by the financial market fallout from a faltering US housing market. Related credit concerns and an interbank market that ceased to function, precipitated aggressive policy intervention over the quarter. A surprise intermeeting interest rate cut of 75 basis points by the US Federal Reserve (the Fed) in January was followed by two further cuts with the federal funds rate closing the quarter a full 2% lower.

Economic data remains weak, while the US dollar continues to hover around all time lows against its major trading partners. European growth has been resilient. However, inflation has risen to its highest level since the inception of the euro, supporting the European Central Bank's reluctance to follow the more accommodative approach pursued by the Fed. The outlook for world growth remains uncertain with risk to the downside as lending standards rise and consumption is likely to feel the pinch from the falling wealth effect and rising unemployment.

Equity markets ended the first quarter sharply lower, driven by fears of a US recession, general risk aversion and a massive downward revision to earnings. The S&P 500 Index fell 9.4%, while the FTSE 100 Index lost 10.6% and the Japanese Topix Index shed 6.9% (in US dollar terms). The MSCI World Index declined by 8.9% over the quarter, outperforming the MSCI Emerging Markets Index, which closed down 10.9% (in US dollar terms).

Fund performance
The Investec Worldwide Equity Feeder Fund had a poor first quarter amid tough market conditions. The fund returned 2.6% over the quarter, while the MSCI World Index returned 8.3% in rand terms. Over the year to the end of March the fund returned 7.4%, lagging behind the MSCI World Index, which gained 9% in rand terms.

Over time, we have found that our process tends to face the greatest headwinds at inflection points, including those times when sector leadership rotates rapidly, and the first quarter showed exactly these characteristics. Underperformance was spread across all of our supersectors.

In industrials, our stock selection in oil and gas, particularly owning the refining companies, detracted from performance. The portfolio benefited from its holdings in Aerospace with L-3 Communications, the supplier of intelligence, surveillance and communications systems, outperforming substantially over the quarter. Amongst the best-performing sub-sectors in industrials was steel & other metals, where we owned Arcelor Mittal, the world's largest manufacturer of steel, and Steel Dynamics, the third largest US steel manufacturer.

The largest single stock detractor over the quarter, however, was in electronic and electrical equipment, where we owned Solaria Energia y Medio Ambiente, a Spanish manufacturer of solar collectors (panels). In the consumer sector, our holding in Merck detracted from performance in the pharmaceutical sub-sector.

Brokers and exchanges added considerable value to the portfolio in 2007, but sold off sharply in the first quarter. Our positions in ICAP (UK) and OptionsXpress (US) contributed to relative underperformance over this period. Zurich Financial Services helped the insurance sub-sector to outperform in the portfolio. JPMorgan made a significant recovery in the latter part of the quarter having purchased the folded Bear Stearns on very favourable terms.

Services were one of the more defensive sectors in the quarter, as the sector includes many infrastructure companies and utilities. Whilst our holding in Wal-Mart performed well, our underweight stance in the sector hurt.

The portfolio benefited from owning Nike, the world's largest athleticshoe maker, after higher international sales helped third-quarter profit exceed analysts' estimates.

Finally, technology had a tough quarter, with declining expectations for both consumer and business spending having a detrimental effect across all the sub-sectors. The portfolio suffered most in telecommunications equipment, but also in software, from owning Microsoft after its expensive bid for Yahoo!

It is clear that the portfolio was adversely impacted in most of the areas in which it was taking active bets. As a result, the first quarter of 2008 was the worst relative quarter that we have seen since we started running the portfolio in January 2000. At times such as these, two things are important; firstly, we must maintain our focus on those types of stocks that we believe will generate the best long-term outperformance, in other words, strong 4Factor stocks which have driven the long-term successful track record of this portfolio. Secondly, we must seek to learn from these exceptional circumstances in order to drive our process forward over time.

Portfolio Activity
Significant purchases
InBev is the world's leading brewer with a strong, balanced portfolio. With a strong valuation, excellent free cash flow generation and a robust balance sheet InBev looked like a strong candidate. Allergan is a global healthcare company providing eye care and speciality products worldwide. The company has achieved solid earnings growth and looks well set to continue this going forward. Despite this attractive story, we believe the valuation is still compelling.

Significant sells JPMorgan is one of the oldest financial services companies in the world. A strong share price reaction to the Bear Stearns deal, combined with the fact that the company looks fairly valued relative to a very cheap financial sector, led us to sell the stock. TomTom markets personal navigation devices for consumers and is best known for its GPS systems that help drivers navigate in countries around the world. With pricing pressure set to continue going forward, and the resulting pressures on long-term profitability, we decided to sell the stock.

Market outlook
Prospects for world markets continue to be very uncertain. It remains to be seen how much bad news has been discounted and whether markets have overreacted to the impact of the credit crunch. Valuations are still very depressed, with extraordinarily high levels of income available across the equity space relative to government bond yields. On the momentum side, it is harder to see relief, with positive earnings revisions increasingly scarce and market technical momentum now poor. Given that some positive news will be needed to drive markets higher, much depends upon the alleviation of tension in the credit markets. The US Federal Reserve (via interest rate cuts and liquidity boosts) and other central banks (mainly via liquidity boosts) have done much this quarter. However, only when investors acknowledge that the financial system has adequately provided for its bad debts and properly marked to market its securities holdings, will we truly see an end to the current crisis.

We will continue to focus on stocks that are high quality, good value and set to benefit from improving operating performance and increasing investor attention. We believe that these characteristics will deliver superior returns over the longer term.

Market review
Against a backdrop of substantial volatility and heightened uncertainty, global equity markets fared poorly over the final quarter of 2007. The ripples from the collapse in values of structured financial instruments backed by subprime US mortgage debt continued to affect sentiment. All major indices closed down sharply led by the US S&P 500 Index (-3.3% in US dollars) and the Japanese Topix Index (-5.9% in US dollars). MSCI Europe outperformed other developed markets, declining by 0.4% in US dollars. The Global MSCI composite lost 2.3% over the fourth quarter (in US dollars). Emerging markets held up admirably on the back of domestic currency strength and somewhat different local growth dynamics. The MSCI Emerging Markets Index gained 3.7% over the quarter (in US dollars).

The dollar rose 2.3% against sterling, but fell 2.8% against the euro, 3% against the yen and 0.9% against the rand. Exchange rates were responding to interest rate cuts by the Federal Reserve in the United States and the Bank of England. Central banks cut interest rates to inject more liquidity into a banking system that had virtually ceased to function as banks reserved cash on their balance sheets rather than place money into the market and risk a major institutional failure. This followed write-downs in valuations of off-balance sheet structured investment vehicles (SIVs). By the end of the quarter, markets had a good understanding of the extent of each major banks exposure to the problem debt with write-downs totalling around US$44 billion. Several major financial institutions such as Citigroup, Merrill Lynch, Morgan Stanley and Bear Sterns have shored up their balance sheets with capital injections totalling US$18.5 billion from sovereign funds in Dubai, Singapore and China.

The rising cost of credit, as a consequence of the banks charging more to borrow money, along with rising commodity, energy costs and inflation increased the probability of slower economic growth. This caused investors to sell the more cyclically exposed sectors and buy the perceived defensive sectors. The best performing sectors in global markets in the quarter were utilities, consumer staples and energy. The poorest performers on a sector basis were financials, consumer discretionary and industrials.

Fund performance
The Investec Worldwide Equity Feeder Fund returned -3.1% over the quarter in rand terms, slightly ahead of the MSCI World Index, which returned -3.2% (in rands). Over the year to December the Investec Worldwide Equity Feeder Fund returned 11.8% in rand terms, ahead of the MSCI World Index, which gained 6.2% (in rands).

During the three-month period, a large overweight position in UKbased interdealer broker ICAP plc made a positive contribution to portfolio performance. ICAP was one of several financial stocks that we held during the period, which was well positioned to benefit from the increased volatility in the markets and higher trading volumes. The stock reached a record high due to increased trading in currencies, bonds and their derivatives. Among financial stocks, having no exposure to US mega bank Citigroup provided a major boost to relative results as the group was badly hit by the ravages of the ongoing credit crunch. The bank reported US$6.5 billion in losses and write-downs in the credit markets and now has a new CEO who will attempt to shore up the company's balance sheet.

Conversely, NutriSystem detracted from returns after its shares fell in October when the company cut its annual revenue forecast. It added fewer new customers than expected during the third quarter, and anticipated a 20% drop in new user numbers during the fourth quarter. NutriSystem operates an online weight loss community, which provides members with a weight management programme.

WellCare Group's shares also dropped in October after the firm's headquarters were searched by Federal investigators. A former employee had brought a lawsuit against WellCare, alleging that the company had defrauded Florida's Medicaid programme of millions of pounds.

Crocs, the US manufacturer of plastic shoes, disappointed the market after it forecast 2007 sales that fell below analysts' expectations. The company attributed the slower-than-expected sales on delayed shipments to Europe as the company switched to a larger distribution centre in Europe.

Engineering and machinery stocks were the main detractors from results on a sector level, with an overweight exposure weighing on results when these stocks performed poorly over the period. General retailer stocks also had an adverse impact on portfolio performance during the fourth quarter, with NutriSystem and Sotheby's the greatest detractors. Sotheby's was hit by the poor performance of art auctions in November, as the credit crunch impacted high spenders' willingness to purchase increasingly expensive art. In turn, the company was hit by further losses after it guaranteed prices to sellers.

Portfolio Activity Significant purchases over the quarter were Chevron, Suez and OptionsExpress. Significant sells over the quarter were Inbev, Alfa Laval and Sotheby's.

Market outlook
The fund has continued to see a reduction in volatility as we favour stocks displaying greater earnings stability. We are avoiding the more cyclical offerings, where we have detected both negative earnings revisions and poor technical momentum. The environment for equity markets remains challenging as uncertainty over the direction of earnings increases. However, markets remain good value and it would take a substantial move down in profitability expectations to take multiples back to historical norms.

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. In our opinion 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.