Market review
During the quarter, low interest rates and further quantitative easing continued to support financial assets. Low nominal cash yields have drawn investors into riskier asset classes. Emerging market equities, along with commodity prices and emerging market currencies, were the clear winners. The MSCI Emerging Markets Index rose 18.2% over the quarter while the MSCI World Index gained 13.9%.

Local economic activity moderated, with GDP expanding by 3.2% in the second quarter, down from 4.6% in the first quarter. Concerns about the global economic recovery and subdued demand locally, coupled with the favourable inflation outlook, motivated the South African Reserve Bank to further reduce the repo rate to 6%. The August inflation number of 3.5% was the lowest since mid-2005. The rand was one of the strongest emerging market currencies over the review period, gaining more than 10% against a weak US dollar. Bond yields fell sharply, boosted by foreign investor demand and continued downward pressure on inflation. The All Bond Index ended the quarter 8% higher, behind listed property (13.7%), but well ahead of cash which returned 1.7% over the period.

The FTSE/JSE All Share Index rose 13.3% over the quarter. The non-resources sector led the market higher, with a significant increase in mergers and acquisitions globally spilling over into the local market. Old Mutual confirmed that it was in discussions with HSBC on its stake in Nedbank. Nippon Telegraph proposed a cash buyout of Dimension Data and Wal-Mart made a cash offer for Massmart. Both the gold and platinum sectors ended down over the quarter, with platinum miners losing 2.3% while gold mining gave up 1%. Consumer services, which include the general retail sector, gained just shy of 25% over the same period. Food retailers, banks, life insurance and personal goods continued to perform well ahead of the broader market.

Portfolio review
Equity markets rallied strongly during the third quarter of 2010. In hindsight, our portfolio was a bit too defensively positioned and we were not able to capture the full upside the market offered. Benchmark relative attribution is mostly a story of stock specifics with no particular theme or sector having a large impact on performance. This is encouraging since we aim to allocate the majority of our risk budget to stock specific risk. The largest positive contributors were underweight positions in Anglo Platinum and SABMiller as well as an overweight position in Imperial Holdings. On the negative side, overweight Liberty Group, Harmony Gold and Metropolitan all detracted as these stocks underperformed the market.

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%.

During the quarter, we added to our Sasol and BHP Billiton holdings, while reducing our exposure to Anglo and Harmony and disposing of Lonmin. In financials, we were net buyers of life assurance stocks through Liberty Holdings, Sanlam and Old Mutual, while reducing bank exposure through Standard Bank and Absa. Other significant trades were purchases of Imperial Holdings and PPC. The result of these trades is that the portfolio is running at a tracking error of approximately 3% to the SWIX All Share Index. While relative sector positions remain small, the portfolio is still overweight resources and financials, and underweight industrials.

Portfolio positioning
As always, we focus on generating alpha from stock specific positions around the benchmark. Given the uncertainty in the equity market, we remain cautiously positioned, keeping the risk of the portfolio below that of its benchmark. Factor returns have been predictably noisy this quarter, given the volatile swings in the underlying market. Over the last year defensive strategies such as dividend yield, quality and earnings certainty have been the most reliable performers. Risk factors have been punished and cyclical value factors have also performed poorly. Our quantitative model continues to favour companies with improving earnings at a reasonable valuation level. There is also an emphasis on defensive characteristics such as the certainty of forecast earnings. Looking forward, we are confident that our sophisticated quantitative stock selection methodology 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
The second quarter of 2010 reminded investors and market commentators that excess global indebtedness, which had resulted in the global financial crises, was not likely to be resolved in a few short months or by some extraordinary policy miracle. The spotlight remained firmly focused on Europe, with certain countries in the region straining under the heavy burden of unsustainable funding requirements. Global share markets headed lower as uncertainty rose around the likelihood of a V-shaped economic recovery. The MSCI World Index dropped sharply, closing 12.5% down over the quarter, dragging this year's returns into negative territory (-9.6%). Emerging markets fared somewhat better, shedding 8.3% over the quarter and 6% year to date. The FTSE/JSE All Share Index lost 8.2%, dragging the year's returns 4.1% lower. The weaker rand detracted from US dollar returns. The local currency depreciated 4.9% over the quarter and 3.5% year to date against the dollar. The rand gained significantly against the euro, appreciating 12% over the first six months of 2010. Resources were worst hit over the quarter, with platinum and diversified miners off 11% and 18.2% respectively. The gold sector was the best performer over the quarter, rising 16.5%. Other defensive sectors also performed admirably: food and drug retailers ended 11.9% higher and fixed line telecommunications surged 10.5%. Industrials lost 7% with general retailers (4.1%) outperforming the local banking sector (-9.9%) by a wide margin. Bonds, cash and listed property provided positive returns over the quarter. Cash returned 1.7%, bonds 1.1% and listed property rose 0.6%. Year to date, listed property remains the best performing asset class (10.6%).

Portfolio review
Concerns about the sustainability of the global recovery and debt contagion weighed heavily on equity markets during the quarter and the South African All Share Index showed negative returns for all three months. The return of the portfolio, although also down for the quarter, outperformed the broader South African equity market over this period. On an overall industry level, the resources sector was a significant underperformer relative to both financials and industrials during the quarter. Our overweight exposure to the resources sector, mostly through our position in basic materials, hurt performance. Risk aversion was a dominant theme this quarter and the positive contribution to the portfolio's performance was therefore largely as a result of exposure to defensive sectors. Our position in the gold sector through Gold Fields and Harmony Gold added value. The portfolio's holdings in general retailers and the health care sector through positions in Woolworths, Lewis and Netcare also contributed to returns. Conversely, concerns around global growth were expressed most in high beta investments, and our holdings in commodity counters such as BHP Billiton, Exxaro and African Rainbow Minerals detracted from performance. Despite their recent poor performance, we still believe that these stocks have good growth prospects at reasonable valuation levels. We continue to be holders of these counters.

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%. During the quarter, we trimmed our positions in BHP Billiton and Anglo American and disposed of our holdings in African Bank and Impala Platinum in favour of Exxaro, FirstRand Bank and African Rainbow Minerals. The portfolio's holding in Gold Fields was also switched into Harmony. The result of these trades is that the portfolio is running at a tracking error of approximately 3% to the SWIX All Share Index. While relative sector positions remain small, the portfolio is still overweight resources and financials and underweight industrials.

Portfolio positioning
As always, we focus on generating alpha from stock specific positions around the benchmark. Given the uncertainty in the equity market, we remain cautiously positioned, keeping the risk of the portfolio below that of its benchmark. As the market moved into defensive mode, it is no surprise that defensive strategies such as dividend, quality and earnings certainty were the strongest performers during the past quarter. Similarly, risk factors were punished and cyclical value factors also performed poorly. Our quantitative model continues to favour companies with improving earnings at a reasonable valuation level. There is also an emphasis on defensive characteristics such as the certainty of forecast earnings. Looking forward, we are confident that our sophisticated quantitative stock selection methodology 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
Greater risk appetite globally boosted the local equity market. The FTSE/JSE All Share Index (ALSI) provided solid gains in March (7.9%), pushing the quarter's return into positive territory (4.5%). Rand strength, on the back of over R14.5 billion in net equity and bond inflows over the quarter, contributed to the ALSI returning 1.5% in US dollar terms. Financials (9.9%) were well ahead of industrials (4.4%) and resources (2.1%) over the first three months of the year. However, intra-quarter sector rotation saw the All Share Resources Index adding more than 10% in March. Banks (12.2%) and general retailers (17.1%) strengthened over the quarter, on the back of a surprise cut in rates and strong interest from foreign buyers. Gold miners fared poorly during the three-month period, shedding 8.2%. The platinum sector (11.3%) and general miners (12.4%) enjoyed market-beating gains in March, but the platinum sector (2.1%) still trailed the ALSI over the quarter, while diversified miners performed in line with the general market.

Portfolio review
Asset prices were higher over the first quarter of 2010, amid confirmation that the global economic recovery is gaining traction. As always, we have focused on generating alpha from stock specific positions around the benchmark and are glad to report that the portfolio also continued to deliver consistent performance throughout the quarter. The general financial and life insurance sectors did well over the review period. Our overweight position in these sectors through our holdings in African Bank and Metropolitan contributed positively to returns. On the other side of the coin, telecommunications was one of the few sectors to have significantly negative returns for the quarter and our underweight position in this sector also contributed to relative performance. On a stock level, our holdings in Absa, Foschini and Lewis Group continued to add value. Shares that detracted from performance included Steinhoff and Gold Fields. After a very strong price performance during 2009, Steinhoff had a slow start to the year. While we have trimmed our position in this stock, it is still attractive and we continue to be holders of the counter. Gold Fields remains our preferred pick in the gold sector.

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 Kumba Iron Ore, Woolworths and Old Mutual, which were funded by trimming our positions in Steinhoff, Absa and Discovery. We have also closed our positions in Naspers and Aspen. The result of these trades is that the portfolio is running at a tracking error of approximately 4% to the SWIX All Share Index with overweight positions in resources and financials, and an underweight exposure to industrials.

Portfolio positioning
It has been a strong quarter for our quantitative model with nearly all factors showing positive returns. Momentum and analyst sentiment have been particularly strong, which is typical of this stage of the economic cycle. Where the market was driven by macro factors in 2008, risk factors were the star performers of 2009. We believe that this high beta rally has neared its end and that the performance of different factors and market sectors will be more evenly spread in the coming year. Recently, we have also seen a decrease in the correlation between the different factors used in our quantitative model. We believe that in this type of market, fundamental stock selection models and quantitative funds in particular should be able to add significant alpha. 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
Improved growth prospects and a higher risk appetite supported domestic equities. The All Share Index (ALSI) ended December on the year's high, returning 2.9% over the month and 11.4% over the quarter. Strong foreign investor interest to the tune of over R75 billion in net equity inflows boosted the market's rating and pushed the year's returns to 32.1%, erasing all of 2008's losses. Over the quarter, the basic materials (17%) and consumer goods (18.7%) sectors recorded similar returns, beating the ALSI. There was a large divergence in the sub-sector performances in the final quarter. The gold sector struggled (-1.2%), but platinum (17.7%) and general miners (23.1%) outperformed. In the consumer goods sector, SABMiller and Steinhoff stood out as strong performers. Food producers (8%), general retailers (3.3%), banks (7.2%) and the life assurance sector (9.7%) all posted positive returns over the quarter, albeit below the overall market. The construction and telecommunications sectors, down 8.2% and 3.2% respectively, continued their underperformance during the year.

Portfolio review
The South African equity market had another strong quarter. We are pleased to report that the portfolio also continued to deliver consistent performance throughout the last quarter of the year, comfortably outperforming its benchmark. As market risk and volatility decreased throughout the year, we gradually increased the tracking error of the portfolio and maintained a tracking error of approximately 4% during the quarter. As always, we focused on generating alpha from stock specific positions around the benchmark. The healthcare sector did well over the quarter and our overweight position in this sector through our core holding in Netcare contributed positively to relative performance. Basic materials had a strong quarter and our overweight holdings in Anglo American, BHP Billiton and Metorex were rewarded. On a stock level, Steinhoff and Old Mutual also contributed to returns.

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, Absa, Steinhoff and Anglo American, which were funded by trimming our positions in Old Mutual, Impala Platinum and SABMiller. We have also closed our positions in Group Five, Shoprite and Growthpoint. The result of these trades at the sector level is that the portfolio is now slightly overweight resources and financials and underweight industrials. The underweight position in industrials can be attributed to underweight positions in construction and telecommunication. We still maintain an overweight position in healthcare and food producers.

Portfolio positioning
We continue to favour companies that enjoy good exposure to those factors shown by our research to provide positive risk-adjusted returns over time. During this quarter, momentum and analyst sentiment have been the best-performing factor groups. While in the longer term, these factors have also been very strong indicators of future performance, they had a fairly lacklustre performance during the first three quarters of the year. However, research shows that these factors provide the strongest results during an economic recovery and we therefore anticipate that these factors will continue to exhibit strong predictive power. On the other hand, after exceptionally strong returns from value factors since the market bottomed, these factors did not perform well this quarter. We believe that the performance of value factors this year was mostly driven by an increase in investors' risk appetite and the fact that stocks that were sold down heavily through the market downturn were the ones to recover the strongest. Our view is that this rerating has now run its course and while we still expect value factors to continue being predictive, this performance will most likely be more muted than it was during 2009. 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.