Quarter 3 was the second quarter of this funds new active mandate. Prior to that, the fund was managed as an index tracker against the All Share Index. The fund performed exceptionally in Q3, posting a return of 22.6% - the second best in the General Equity Sector. Over the six months since inception, the fund ranks in the 1 st Quartile with a return of 26.9%.

One of the advantages of a quantitative investment approach is that it keeps negative emotion at bay. Losing streaks are unavoidable, no matter how good your process. What's important is how you respond to them. Pain avoidance is a natural (and usually healthy) human response, but it has no place in portfolio management. When a position moves against you the instinctive response is to avoid further pain and cut your position. The majority of times this is exactly the wrong thing to do, and capitulation is a sure way of locking in a loss. The comfortable trade is usually the wrong trade - the market doesn't pay you to take the comfortable position; to make money you need to go against the heard.

Quantitative trading makes this much easier to achieve. Your decision making process is designed in advance, away from the emotion of the moment. When the time comes to trade, the decisions have already been made; all you need to do is to implement - no procrastination, no capitulation, no second guessing yourself - just trade.

Our position in Kumba provides a good example of this. In March we built up a large position in Kumba, predominantly on the basis of a widening valuation gap.

The share was relatively cheap and although earnings were being upgraded, the share price was under pressure. Initially the position worked against us as the valuation gap continued to widen on negative sentiment. In quarter 2's comment we noted that Kumba was one of the largest detractors, but that we felt it was oversold. We maintained our position, and were well rewarded. Kumba was the top performing share of all 160 stocks in the All Share Index this quarter (up 76%!). In hindsight, it may seem obvious that it was oversold and due for a recovery, but if you had allowed yourself to get caught up in the emotion at the time, it would have been easy to capitulate. A quantitative process provides a great way of remaining objective.

31 March marked the end of this funds record as an index fund. The second quarter of 2005 marks the first quarter of management under the funds new active quant mandate. Under this mandate we utilise a quantitative model to predict stock returns and position the fund accordingly. This process has proved effective in similar institutional funds, and we are optimistic about future returns.

Over the quarter the fund posted a return of 3.8%. Although, in absolute terms, this is a respectable quarterly number, we did lag the benchmark (SWIX) return of 7.4%. Market returns in Q2 were driven primarily by a few large Rand hedges. Six stocks alone (Sasol, Richemont, Amplats, Anglo, Implats & Anglo Gold) accounted for almost half the SWIX benchmark's return, and we were not correctly positioned for this.

Further, two of the commodity stocks we do hold (Mittal and Kumba) were adversely affected by declining steel prices. We continue to believe that many of the Rand hedges are overpriced - extrapolating the recent Rand weakness too far, and that both Mittal and Kumba are oversold at these levels.

Looking forward, we continue to apply our quantitative model, which has a proven track record over the long term. The basic philosophy behind the model is to buy stocks that show value relative to long term fundamentals while benefiting from improving medium term sentiment. We are confident that despite short term volatility, this approach will deliver benchmark beating performance over the long term.

31 March marked the end of this funds record as an index fund. In April we have aligned the fund with its Active Quant strategy. Under this mandate we utilise a quantitative model to predict stock returns and position the fund accordingly. This process has proved effective in similar institutional funds, and we are optimistic about future returns.

The key to the consistent long-term performance has been the disciplined application of our quantitative stock selection model. The model draws on four major sources of alpha generation; Fundamental, Technical, Behavioural and Quantitative. Fundamental, Technical and Behavioural predictors are combined to forecast relative stock returns. A systematic and disciplined Quantitative approach binds the model together. Quantitative methods drive each step of the process from stock selection through to portfolio construction, risk management and implementation. The model does not stand still; we refine the model, continually researching more powerful predictors and more efficient portfolio construction and risk management techniques.

Looking forward, we do not agree with the sector rotation out of domestic stocks in favour of resources and Rand hedges we have witnessed in the first quarter of 2005. We remain fairly sector neutral, preferring to focus on the stock specific opportunities identified by our quantitative model. Our favourite stocks currently are Kumba, Brait, Santam, Grindrod and Naspers.

We are confident that our stock selection model will continue to differentiate prospective winners from losers and that our portfolio construction, risk management and implementation skills will ensure that the alpha opportunities identified are translated into benchmark beating performance over the long term.

New year, new portfolio. Looking at first quarter stock and sector performances, this seems to have been the prevailing attitude in the market. A hint of Rand weakness, or perhaps a review of 2004's performance may have sparked it off. Whatever the cause, we saw aggressive sector rotation throughout the quarter. Investors sold last years winners, Domestic Financials & Industrials to fund buying of Resources. In the first quarter of 2005 Resources returned 16.9%, while Financials (1.1%) and Industrials (0.2%) effectively stood still. Driven by this strong Resources push, the JSE All Share Index (ALSI) returned 6.0%, posting a new all time high of 13704 in mid March. This is a complete reversal of last year's situation where Resources were the laggards. Three months into the New Year, Resources have made up most of last years relative losses. Rather than relying on Rand weakness alone (from a very strong Dec 04 base), this Resources run has been additionally fuelled by improving global commodity prices and solid results from Anglo and Billiton in February.

This quarter marks the end of this funds record as an index fund. From the second quarter, the fund will be managed against its new active quant mandate. Under this mandate we utilise a quantitative model to predict stock returns and position the fund accordingly. This process has proved effective in similar institutional funds, and we are optimistic about future returns.

Effective from 1 April 2005, the Investec Index Fund has changed its name to Investec Active Quants Fund. The performance history was lost

In December, the JSE All Share Index (ALSI) continued its determined march upwards. December's 1.4% return brings the Index level to 12 657, a new all time high and the 2004 return to an impressive 25.4%. While 25% is more than respectable, Resources held the market back returning -5% while Financials (52%) and Industrials (47%) delivered stellar returns.

From a foreigner's perspective, the Rand's appreciation enhances the ALSI return even further (+47.4% in US$). This puts our stock market amongst the best performing markets in 2004. Only 11 markets - Austria, Norway, Mexico, Poland Czech and Hungary being the largest - eclipsed this performance. The power of the currency was a critical driver to these gains. The Rand was the 3 rd strongest in the world during 2004, beaten only by the Polish Zloty (+24%) and the Columbian Peso (+18%).

For the SA Economy, 2004 was a great year. GDP growth nearly doubled from 1.9% to around 3.1%, inflation continued to be subdued allowing nominal interest rates to fall sharply, consumer confidence soared along with the Rand and property prices rose 32%.

The funds tracking error is 1.5% annualised, on a rolling 36-month basis. The correlation coefficient over the same period is 0.997. The Fund makes use of equities, index futures and money market instruments in tracking the ALSI.