Market review
The third quarter was dominated by the subprime housing crisis in the United States, widespread credit concerns and the growth prospects of the US economy. The general reluctance of banks to lend to each other was not confined to the US, and global banks saw a severe squeeze in liquidity. A full-blown implosion of the US credit market was narrowly averted when the US Federal Reserve (the Fed) first cut the rate at which it lends to commercial banks and later the benchmark federal funds rate, from 5.25% to 4.75%. Amid the turmoil, global equity markets ended the quarter well in positive territory to reach record highs, bouncing off their intra quarter (August) lows. The MSCI World Index gained 2.5% in US dollar terms over the quarter. The MSCI Emerging Market Index extended its positive performance (up 14.5% in US dollars) over the quarter, mainly on the back of a very strong performance out of Asia (up 19%).

Global events reflected in the SA market, causing bonds and the currency to weaken and equities to sell off as risk appetite waned and uncertainty with regard to the global outlook grew. However, the bears seemed to lose the battle yet again as US Federal Reserve governor, Ben Bernanke, provided some monetary relief. Equities recovered strongly from their August lows, gaining 6.7% over the quarter. The local market was led higher by resources (up 13.5%) and industrials (up 3.3%). Financials, which were caught up in global credit concerns were down 1.6% over the quarter. Bond and property yields pushed lower and the currency gained strongly against a falling dollar. Over the quarter the All Bond Index was 3.4% higher, listed property rose by 9.5% and cash (as measured by the STeFI) earned a return of 2.3%.

Fund performance
Performance was disappointing this quarter. The fund returned 1.8%, which although positive did lag the SWIX benchmark return of 4.3%. Year to date, the fund (18.3%) remains broadly in line with benchmark (18.5%). The largest detractors over the quarter were overweight positions in Sappi and Woolies as well as underweight positions in Sasol and Anglo. On the positive side, overweight Billiton and Grindrod were the largest winners.
Portfolio activity
A perfectly optimal portfolio is a theoretical concept. Our expected returns change continuously as new information arrives and the market digests that information. A pragmatic approach is to maintain a near optimal portfolio by trading periodically. We rebalance the portfolio every three to five weeks depending on market volatility. Turnover at these rebalances is typically 10% - 15%. The most significant buy side trades this quarter were Sappi, Woolies, Anglo, Mittal and Exxaro. On the sell side we were most active in Amplats, Billiton, Telkom and Implats. The result of these trades at the sector level is that we have maintained our sector positioning of overweight resources and financials and underweight industrials and property. It is important to note that we do not take explicit sector views; rather these positions are the result of bottom-up stock specific trades.

Market outlook
For a quantitative approach such as ours there are three dimensions of value add:

1. Find more factors. They must have predictive power and be relatively uncorrelated with existing factors. That is, they must contain new and useful information.
2. Combine existing factors more optimally to produce better composite expected returns.
3. Improve portfolio construction and implementation to maximize returns while controlling risk and costs.

We continue to focus our research efforts along these three dimensions. Looking forward, 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 meaningful returns for your portfolio.

Market review
The domestic inflation outlook has deteriorated over the quarter. Rising yields globally and domestic inflation concerns resulted in the local government debt curve rising sharply. Over the quarter the benchmark R153 and R157 peaked at 9.15% and 8.58% respectively. The All Bond Index lost 1.7% over the three months ended June. We expect CPIX inflation to remain firmly above the targeted inflation band until year-end. This is likely to force the South African Reserve Bank (SARB) to tighten rates further. However, early signs of some moderation of consumption led growth, coupled with a potentially negative impact of the recently implemented National Credit Act are likely to moderate the SARB's stance on the extent of further tightening. Rising bond yields and deteriorating inflation expectations put pressure on domestic listed property. The sector was up marginally over the quarter (0.3%) but remains firmly in the black year to date at 16.1%.

After a strong first quarter, domestic equity market returns moderated slightly over the past three months. The FTSE/JSE Index gained 4.3% since the end of March. The market was driven higher by general mining (up 12.5%), oil and gas (up 9.9%), construction (up 9.9%) and life insurance (up 6.9%). Interest rate sensitive counters, in particular banks were down 6.9% and retailers lost 6.7%. This reminded investors of a similar occurrence last year, when diminishing global risk appetite coupled with higher domestic borrowing costs, caused a massive sell-off in domestic oriented sectors.

We remain positive, yet cautious, on our equity outlook over the next few quarters. Increasing volatility and fluctuations in sentiment should not deflect from a global and domestic backdrop that remains supportive of continued earnings growth and above average equity ratings.

Fund performance
Over the quarter the performance of the Investec Active Quants Fund was steady, adding a further 2.8% return to a strong first quarter. Year to date the fund returned 16.2%. This compares favourably against the benchmark (SWIX) return of 13.6% year to date. For the quarter, sector and style exposures contributed positively while stock selection detracted marginally. Notable winners were overweight positions in Merafe, Grindrod, Murray & Roberts, Billiton and an underweight position in Anglogold. Detractors were overweight Sanlam, JD Group, Implats and underweight Sasol and SAB.

Portfolio activity
A perfectly optimal portfolio is a theoretical concept. Our expected returns change continuously as new information arrives and the market digests that information. A pragmatic approach is to maintain a near optimal portfolio by trading periodically. We rebalance the portfolio every three to five weeks depending on market volatility. Turnover at these rebalances is typically 10% - 15%.

During the quarter, the most significant trades were buys of Old Mutual, Sanlam, Amplats, Merafe and Billiton. On the sell side we were most active in MTN, Liberty, Murray & Roberts, Anglos and African Rainbow Investments. The result of these trades at the sector level is that we have increased our financials exposure at the expense of industrials. We remain overweight resources and financials and underweight property and industrials. It is important to note that we do not take explicit sector views; rather these positions are the result of bottom-up stock specific trades.

Market outlook
For a quantitative approach such as ours there are three dimensions of value add:

1. Find more factors. They must have predictive power and be relatively uncorrelated with existing factors. That is, they must contain new and useful information.
2. Combine the factors more optimally to produce better composite expected returns.
3. Improve portfolio construction & implementation to maximize returns while controlling risk and costs.

Last quarter we added two additional factors and implemented a dynamic weighting scheme. This quarter we have made some refinements to existing factors and started data analysis on two additional factors. Provided they stand up to the back testing process they will be introduced during the third quarter. Further, we have upgraded our transaction cost model, improving market impact estimates. During portfolio construction it is important to estimate transaction costs as accurately as possible since expected returns should be net of all costs.
Looking forward, 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 meaningful returns for your portfolio.

Market review
Goldilocks economics held sway among investors in the opening days of the new year. However by the end of February it seemed quite plausible that the US housing market might go into crisis mode. All the major data releases disappointed the markets. Almost overnight, everyone heard about the appalling abuses of the subprime lending market. Global equity markets did not take kindly to the deterioration in the macroeconomic backdrop. By mid March most markets were 5% to 10% down from their earlier highs but by month end, equity markets had bounced back. The MSCI World Index gained 1.9% (in US dollar terms) over the month and 2.6% over the quarter. The JSE saw heightened volatility in March. Local equities declined very sharply but as global risk aversion eased, stocks bounced back strongly. By month end the JSE had broken convincingly through its earlier February highs. The FTSE/JSE All Share Index returned 6.4% in March. This rally raised the first quarter return to 10.4% and the 12 month return to 37.6%. For the quarter, resources were up 15.2%, financials 6.5% and industrials 5.6%. The bond market had a difficult month, losing 0.4%, which trimmed the quarterly return to a meagre 1.6%. The rand weakened by 4.1% against the US dollar and 4.6% against the euro over the quarter.

Fund performance
The Investec Active Quants Fund performed well in the first quarter, returning 13%. This was better than benchmark (SWIX = 10.7%) and competitors (Peer mean = 10.3%). The fund now has a two year track record, and the numbers compare favourably against competing funds in the general equity sector. The two year return is 47.1% (annualised) which puts the fund eighth out of 49 funds. For the quarter, sector, style and stock specific exposures all contributed positively to performance. The largest winners were overweight positions in Metorex, Brait and Murray and Roberts and underweight positions in SAB and Anglogold.

Portfolio activity
A perfectly optimal portfolio is a theoretical concept. Our expected returns change continuously as new information arrives and the market digests that information. A pragmatic approach is to maintain a near optimal portfolio by trading periodically. We rebalance the portfolio every three to five weeks depending on market volatility. Turnover at these rebalances is typically 10% - 15%. During the quarter, the most significant trades were buys of Impala Platinum, Metorex, African Rainbow Investments, Murray and Roberts and Steinhoff. On the sell side we were most active in Mittal, Remgro, Brait, Grindrod and Ellerines. The result of these trades at the sector level is that we have increased our exposure to resources at the expense of financials and industrials. Relative to benchmark we are now overweight resources, neutral financials and underweight industrials.

Market outlook For a quantitative approach such as ours there are three dimensions of value add:

1. Find more factors. They must have predictive power and be relatively uncorrelated with existing factors. That is, they must contain new and useful information.

2. Combine the factors more optimally to produce better composite expected returns.

3. Improve portfolio construction & implementation to maximize returns while controlling risk and costs.

During the quarter we have made improvements to the first two stages. We have introduced two additional factors, one long-term fundamental, and the other an analyst sentiment indicator. Both show significant predictive power in back tests and bring new information and power to the overall model. In addition, we have introduced an optimisation scheme to dynamically adjust the factor weightings on a monthly basis. Back testing shows this approach to be superior to static factor weights. Looking forward, 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 for your portfolio.

The strength of the SA Equity Market continues to confound the bears. Despite a fairly severe correction mid year, the market has powered ahead to post new all time highs this quarter. The current bull trend, now almost 4 years old has taken the ALSI from 7 360 in April 03 to 24 915 at year end, a 275% return after including dividends. Returns for the quarter and year were 11.8% and 41.2% respectively.

Despite a fairly steady return through the year at the overall market level, in terms of sector leadership it's a story of two very different halves. In H1 Resources lead the market higher, returning 37% (RESI 20) against 7% (FINDI 30) from the Financial and Industrials. After Commodity prices peaked in May, FINDI stocks took up the mantle of sector leadership, producing 30% while Resources drifted sideways (+5%). The fund has followed a similar performance profile through the year. In H1 the fund outperformed both the benchmark and peers and in H2 gave it all back. For the year the fund returned 38.4% against the SWIX benchmark's 39.3% and the average General Equity Fund's 36.9%. It has not been simply a case of overweight Resources, although this is part of it. The quant model we use is designed to identify and trade on stock specific anomalies - relative opportunities based a mix of fundamental and technical factors. Recently the market has been dominated by concerns at the macro level - Global Growth, Commodity Cycle and Currency. Stock specifics have been sidelined while the big picture macros have dominated. Under these conditions our model has not performed well. This is, however, a relatively short term adjustment period and we expect the model to return to long term steady state performance.
On a stock level, the two biggest losers over the quarter were overweight positions in BHP Billiton (BIL) and Durban Roodepoort Deep (DRD). Billiton, although already discounting a correction in base metal prices, was sold off aggressively as Copper prices broke key technical levels. We cut our overweight position early in December, feeling that although the stock looked cheap it could still fall further with declining metals prices. Overweight DRD was hedged with underweight positions in other gold counters. The underperformance though was due to a series of unfortunate stock specific events; disappointing results, an underground fire at Blyvooruitzight, and then the closing of their Vatukoula Mine in Fiji.
Looking forward, we continue to diligently apply our statistical arbitrage model, and as always are striving to improve our process. By researching opportunities to better forecast returns, control risk, construct efficient portfolios and minimise implementation costs, we believe we can further enhance returns.