Market review
The domestic equity market took its cue from global markets, which benefited from the improvement in the global growth outlook and a higher risk appetite. The All Share Index added 13.9% in the third quarter and has gained 18.6% this year. Over the quarter, the All Share Resources Index (11.1%) lagged the overall market, with gold miners earning a disappointing 6%.

Domestic-oriented and interest rate-sensitive sectors enjoyed good gains. Construction (19%), general retailers (19.1%) and banks (14%) stood out as strong performers, with foreigners particularly active buyers. Telecommunication (3.8%) and short-term insurers (6.1%) underperformed the market.

Portfolio review
The performance of the Investec Active Quants Fund was broadly in line with the benchmark over the third quarter. We remained defensively positioned relative to the benchmark throughout the quarter, keeping relative sector positions small and maintaining a forecast tracking error of less than 4%. As always, we focused on generating alpha from stock specific positions around the benchmark.

On a stock level, the overweight exposure to counters such as Kumba Iron Ore, Foschini, Datatec and Group Five contributed positively to relative performance. On a sector level, the portfolio was rewarded for its overweight positions in mining, general retailers and household goods.

Portfolio activity
Our expected returns and therefore our optimal portfolio, change continuously as new information arrives and the market digests that information. The returns we expect to gain from trading to our optimal portfolio have to be offset by the transaction costs incurred. A pragmatic approach is to maintain a near optimal portfolio by trading periodically, using a sophisticated transaction cost model to ensure that trading costs are kept to a minimum. We typically rebalance the portfolio once a month, depending on the volatility of the market. Turnover at these rebalances is usually between 10% and 15%.

The most significant buy-side trades this quarter were Anglo American and BHP Billiton, which have had significant upward earnings revisions and have started to gain some momentum. We have also added Netcare to our portfolio and have increased our holding in Lewis. These counters were bought at the expense of Kumba Iron Ore and Anglo Platinum. We have also lightened our positions in MTN and SABMiller. The result of these trades at the sector level is that the portfolio remains underweight resources and industrials and overweight financials. The overweight position in financials can be attributed to overweight positions in some life assurance and real estate counters, while we maintain our underweight position in banks.

Portfolio positioning
We continue to favour companies that enjoy positive exposure to those factors, shown by our research, to provide positive riskadjusted returns over time. In addition to the factors used in our model, we also focus on a range of other quantitative factors that could be driving stock returns. During the last quarter, as well as year to date, we have seen that value and risk factors have been the star performers, which is typical of this stage of the economic cycle. These are also the factors that suffered the most during the downturn.

On the other hand, earnings revisions and price momentum, which are generally strong predictors of returns, performed poorly at the beginning of the quarter. Our view is that once a market has fully re-rated after a crash, these factors should become more prominent again. This already started to happen towards the end of the quarter.

We are confident that our stock selection model will continue to differentiate prospective winners from losers. Our disciplined portfolio construction, risk management and implementation skills should ensure that the alpha opportunities identified are translated into meaningful returns for your portfolio.

Market review
While company profits remained under pressure, equity markets rerated significantly as signs of an improvement in the global economy buoyed risk assets. The local equity market had a positive quarter (8.6%), its first in 12 months, despite giving up some of its gains during the month of June (-3.1%). Year to date, the All Share Index closed 4.1% stronger. The market's foreign currency returns for the three month to the end of June, were boosted by the rand's appreciation against the US dollar (24.1%) and the euro (16.7%). Over the quarter, the financial and industrial composite (13.4%) outperformed resources (2.8%), with gold miners (-16.2%) the largest underperformers. Other sectors lagging the composite over this period included fixed line communications (-0.8%), travel and leisure (6.6%) and food producers (7.7%). General retailers (15.6%), banks (13.8%) and the construction (16.6%) sectors all ended the quarter well above their March levels. The platinum (9.5%) and general mining (8.9%) sectors performed in line with the overall market.

Portfolio review
The second quarter of 2009 was a mixed bag for the equity markets. The strong rally off the March lows stalled in April, then continued in May before reversing in June. For the quarter, the equity market gained 8.6%. We are glad to report that the portfolio remained ahead of benchmark throughout this period. Given the uncertainty in the equity market, we remained defensively positioned relative to benchmark throughout the quarter. Tracking error was relatively low (3%) and relative sector positions were small. As always, we focused on generating alpha from stock specific positions around the benchmark. On a stock level, the overweight exposure to counters such as Old Mutual, Aveng, Tiger Brands and Foschini contributed positively to relative performance. On a sector level, the portfolio was rewarded for its overweight positions in construction, life insurance and general retailers.

Portfolio activity
Our expected returns, and therefore our optimal portfolio, change continuously as new information arrives and the market digests that information. The returns we expect to gain from trading to our optimal portfolio have to be offset by the transaction costs incurred. A pragmatic approach is to maintain a near optimal portfolio by trading periodically, using a sophisticated transaction cost model to ensure that trading costs are kept to a minimum. We typically rebalance the portfolio once a month, depending on the volatility of the market. Turnover at these rebalances is usually between 10% and 15%. The most significant buy side trades this quarter were Anglo Platinum, Metropolitan, Liberty Holdings and Steinhoff. These counters were bought at the expense of Impala Platinum, Old Mutual, Telkom and African Bank. The result of these trades at the sector level is that the portfolio remains underweight resources and industrials and overweight financials.

Portfolio positioning
We continue to see significant downward revisions in earnings forecasts and dividends cut or passed altogether, as companies focus on strengthening their balance sheets. While our quantitative model continues to favour companies with improving earnings at a reasonable valuation level, the emphasis is also on defensive characteristics such as certainty of forecast earnings. With markets volatile and the economic outlook still weak, we are maintaining a cautious stance with reasonable exposure to the defensive sectors. Looking forward, we are confident that our stock selection model will continue to differentiate prospective winners from losers and that our disciplined portfolio construction, risk management and implementation skills will ensure that the alpha opportunities identified are translated into meaningful returns for your portfolio.

Market review
Local economic news continued to deteriorate over the quarter. The release of fourth quarter GDP numbers confirmed the sharp slowdown experienced in the second half of 2008. Domestic demand remained under pressure in the first three months of 2009. Weak employment prospects and the slump in the manufacturing sector continued to bear down on retail spend and vehicle sales. Policy makers responded with two interest rate cuts of 100 basis points each during the quarter. The second meeting, held earlier than initially scheduled, indicated somewhat greater urgency on the part of the South African Reserve Bank to respond to the extremely weak global backdrop and evidence that the local economy was unlikely to escape a recession. The outlook continues to favour more rate cuts. Equities weakened for the third consecutive quarter, with the All Share Index losing 4.2% year to date. Both financials (-7%) and industrials (-9.2%) ended the quarter in negative territory. Resource counters clawed back some of their losses sustained in the second half of 2008 to end up 1.6%. Gold mining (22.8%), platinum mining (9.6%) and pharmaceuticals (22.4%) were the only sectors to gain over the quarter. While general miners (-4.6%) performed broadly in line with the overall market, it was the domestic oriented sectors that fell most with banks (-9.8%), retailers (-7.6%) and the construction sector (-10.6%) all ending down.

Portfolio review
The first quarter of 2009 was another volatile one for equity markets, where two negative months were followed by a strong rally in March as growth expectations and risk appetite improved. We are pleased to report that the Investec Active Quants Fund managed to stay ahead of the market throughout this period, outperforming its benchmark over the first quarter. The portfolio was defensively positioned during the review period. Given the continued volatility in financial markets and the style factors that drive these returns, we refrained from taking large sector positions, but rather focused on generating alpha (outperformance) on smaller stock-specific overand underweight positions. On a stock level, the overweight exposure to counters such as AngloGold, Impala Platinum, African Bank, Illovo and Standard Bank contributed positively to relative performance. On a sector level, the portfolio was rewarded for its underweight position in banks and general mining.

Portfolio activity
Our expected returns, and therefore our optimal portfolio, change continuously as new information arrives and the market digests that information. The returns we expect to gain from trading to our optimal portfolio have to be offset by the transaction costs incurred. A pragmatic approach is to maintain a near optimal portfolio by trading periodically, using a sophisticated transaction cost model to ensure that trading costs are kept to a minimum. We typically rebalance the portfolio once a month, depending on the volatility of the market. Turnover at these rebalances is usually between 10% and 15%. The most significant buy side trades this quarter were Impala Platinum, Standard Bank and Old Mutual. These counters were bought at the expense of Anglo Platinum and FirstRand. We also purchased more Telkom, Sasol, Foschini and Aveng. These purchases were funded by cutting back on our overweight position in MTN, trimming our holdings in BHP Billiton and Anglo American and selling our holdings in Murray & Roberts and Wilson Bayly. We have also cut back on our overweight property position. The result of these trades at the sector level is that the portfolio is underweight resources and industrials and overweight financials.

Portfolio positioning
During the past quarter, we saw significant downward revisions in earnings forecasts and dividends being cut or passed due to deteriorating market conditions. While our quantitative model continues to favour companies with improving earnings at a reasonable valuation level, emphasis is therefore also being put on defensive characteristics such as the certainty of forecast earnings. With markets volatile and the economic outlook still weak, we are maintaining a cautious stance with reasonable exposure to the defensive sectors such as gold, life assurance and cash retailers. Looking forward, we are confident that our stock selection model will continue to differentiate prospective winners from losers and that our disciplined 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 global financial crises and the ensuing slowdown in economic activity left their mark on the domestic equity market. The All Share Index lost 23.2% over the year, all of the losses sustained in the second half of 2008. The market ended 9.2% weaker over the last quarter of the year, with falling commodity prices driving down platinum (-25.8%) and general miners (-15.2%). The construction sector slumped 36.1% in the fourth quarter as companies saw their order books curtailed by weaker demand and foreign investors seemed to lose faith in the sector. Life assurers (-15.9%) continued their underperformance of the general market.

Exposure to falling interest rates and defensive earnings streams dominated the outperformers over the quarter, with banks (-6.1%), healthcare equipment and services (5.6%), food producers (6.6%) and food retailers (16.2%) high up on the performance table. However, it was the gold miners (22%) that took the top spot over the quarter as the dollar gold price held its own and rand weakness and positive production news boosted returns to the sector.

Portfolio review
In the last quarter the performance of the Investec Active Quants Fund was uncharacteristically poor, but the longer-term track record remains competitive. The overweight exposure to interest rate sensitive counters such as Standard Bank, Foschini, New Clicks and Mr Price contributed positively to relative performance as inflation expectations moderated over the quarter. The de-rating of the construction and life assurers sectors hurt the portfolio as a result of overweight positions in Aveng, WBHO and Old Mutual.

Portfolio activity
Our expected returns and therefore our optimal portfolio, change continuously as new information arrives and the market digests that information. The returns we expect to gain from trading to our optimal portfolio have to be offset by the transaction costs incurred. A pragmatic approach is to maintain a near optimal portfolio by trading periodically, using a sophisticated transaction cost model to ensure that trading costs are kept to a minimum. We typically rebalance the portfolio once a month, depending on the volatility of the market. Turnover at these rebalances is usually between 10% and 15%.

The most significant buy side trades this quarter were African Bank, Standard Bank, FirstRand, Shoprite and SABMiller. On the sell side we were most active in African Rainbow Minerals, Grindrod, Sasol and Santam. The result of these trades at the sector level is that we are overweight in financials and underweight in resources and industrials. However, given the current macro-economic environment and the fact that we see opportunities more evenly spread through the market, we are aiming for a well-diversified portfolio and the sector bets are therefore less pronounced than in the past.

Portfolio positioning
Although performance was disappointing this quarter, we regard these market conditions as quite exceptional. Our composite quantitative model has shown significant predictive power over time. Therefore, we are confident that once markets settle, our model will return to its prior profitability.