Market review
South African equities ended almost unchanged in the second quarter, but volatility was high during this period. The sector laggards remain mostly confined to resource stocks with gold (-33.5%), platinum (-23.9%), coal (-10%) and diversified miners (-10.8%) all experiencing double-digit losses in rands. Year to date, the resources sector is trailing the overall market by 19.4 percentage points. Industrial stocks mostly held their ground over the quarter and defensive stocks, on average, achieved strong absolute returns. Financials lagged, with banks down 6.2% and life insurers flat for the quarter after a particularly weak June.

Portfolio review
The volatility in US Treasuries, caused by a change in the market's expectations of the US Federal Reserve's monetary policy, had severe knock-on effects across financial markets globally. The sell-off was indiscriminate, with the FTSE/JSE Shareholder Weighted Index (SWIX) losing 9% during June before recovering in the last week to close flat for the quarter. Our portfolio tracked this performance, ending the quarter slightly behind the SWIX. The biggest contributors to performance were our positions in the diversified miners and rand hedges (Richemont and Sasol). On the flip side, the biggest detractor was African Bank. The bank lost almost half its value over the quarter, following a very weak trading update.

Portfolio activity
We significantly scaled back our exposure to pure-play gold and platinum companies to less than 1% in favour of the global diversified miners, which now account for 15% of our portfolio, up from 9%. The proceeds were used to fund increases in more defensive sectors (telecommunications) and rand hedges (Sasol) to make up for the ongoing rand weakness.

Portfolio positioning
One advantage of the broad-based market panic in the last part of the quarter is that it has created potential value in certain sectors. Our portfolio is well positioned for this, as most of our biggest holdings are in sectors that are trading at discounts to the overall market. Rising yields are also likely to benefit financials, the sector to which we have the biggest exposure, accounting for close to a quarter of the portfolio. This benefit would take the form of improving net interest margins for the banks and improving solvency ratios for insurers. Throughout the quarter we have favoured cyclicals, with the sector weighting split 65% cyclicals and 35% non-cyclicals. The biggest risk to this positioning would be if China's economic growth disappoints. This would negatively impact our sizeable exposure to the mining sector, which includes Anglo American, Assore, Kumba Iron Ore and BHP Billiton. To hedge against this, we also maintain a material holding in defensives, which includes Aspen, Vodacom, MTN and British American Tobacco.

Market review
South African equities recorded positive but modest returns in rands over the quarter, with the FTSE/JSE All Share Index closing 2.5% firmer. The rand weakened 9% against the US dollar and more than 6% against the euro. The resources sector's underperformance continued into the first quarter with gold (-17.9%), platinum (-13.5%) and diversified miners (-6.3%) ending sharply lower. The combined financial and industrial index rose 6.2% over the quarter, with industrials in particular performing strongly. There was a wide dispersion of returns within the broad industrial sector. Rand hedge global stocks saw double digit returns, with SABMiller and British American Tobacco rising 24.7% and 18.4% respectively. Meanwhile retailers, favoured amongst foreign shareholders, dropped nearly 10% despite a strong performance in March. Banks marginally underperformed the FTSE/JSE All Share Index, while telecommunications lost more than 7% and healthcare gained 8.8% over the quarter.

Portfolio review
The portfolio had a good quarter, comfortably outperforming its benchmark. Investment styles that usually perform well during the initial stages of an upturn have outperformed year to date. Hence, the low risk, large-cap stocks have given way to cheap and small-cap stocks. The portfolio benefited from its exposure to cyclical value, a composite measure of a company's sales yield and its sales-to-enterprise value, with stocks such as Woolworths, Mondi and Imperial adding to performance. The biggest detractor from the portfolio's performance was the weak performance from the telecommunications sector, largely owing to the negative regulatory news on termination rates.

Portfolio activity
During the quarter, we built a position in Liberty Holdings and increased our holding in British American Tobacco, which has been a strong performer on the back of significant earnings upgrades. We also increased our weighting in Foschini Group, BHP Billiton and Mr Price. On the other hand, we neutralised our overweight position in Sasol and trimmed our holdings in MTN and Standard Bank.

Portfolio positioning
Our portfolio remains positioned for a cyclical upturn in the global economy. Good data from the US continues apace, with industrial production, employment and retail sales all pointing to an expansion. The housing market is also strengthening. Valuations that look at forward and historical earnings, dividends, book and sales yields in aggregate, show that cyclical sectors are more attractively priced relative to defensive sectors. As the cycle recovers, we expect a rotation out of the expensive defensive stocks into the inexpensive cyclical stocks and we thus continue our search for value in this area. In addition to looking for companies that are reasonably priced, we also put weight on a positive earnings outlook where investor sentiment has been improving and price momentum has been positive. We believe that this balanced outlook allows us to provide investors with more stable performance over time. The projected tracking error of the portfolio to the FTSE/JSE Shareholder Weighted All Share Index (SWIX ALSI) benchmark is currently around 3% and we keep the total portfolio risk below that of the market. On a sector level, we have an overweight position in financials, mostly residing in the life assurance and speciality finance sectors. This position is offset by an underweight exposure to the more expensive industrial sector. Within the resources sector, we are underweight oil & gas and general mining counters and overweight gold, resulting in a moderate underweight for the sector as a whole. Looking forward, we are confident that our sophisticated quantitative stock selection methodology will continue to differentiate prospective winners from losers. We also believe that our disciplined portfolio construction, risk management and implementation skills will translate the opportunities to outperform into meaningful returns for the portfolio.

Market review
The FTSE/JSE All Share Index (ALSI) ended the year at record highs, adding just shy of 27% in rands to the modest gains of 2011. The ALSI rose by 10.3% over the quarter. Resources lagged the general market, recording gains of 7.3% over the 3-month period and 3.1% for the year. The gold mining (-18.4%) and platinum mining (-7%) sectors were the weakest performers in 2012, while diversified miners added 10.9% over the quarter and 12.3% for the year. The industrials sector rose strongly, with general retailers (+50.2%), health care (+59.5%) and global luxury brand Richemont (+64%) - the only constituent of the personal goods sector - seeing exceptional returns in 2012. Mobile telecommunication increased by 32.6% over the year, with the fourth quarter adding 12.7% alone. Financials also saw market-beating returns, gaining 38.1% for the year. Banks closed up 11.8% over the quarter while the life insurance sector added 12.7%.

Portfolio review
Even though the Investec Active Quants Fund didn't beat its benchmark, the FTSE/JSE Shareholder Weighted All Share Index (SWIX ALSI), it delivered strong absolute returns over the quarter. During the first 2 months of the quarter the factor performance trends of 2012 continued, with factors based on earnings revisions and price momentum performing strongly, while valuation factors continued to struggle. In December, however, rand exposure was a big determinant of relative stock returns, and the standard style factors didn't play a significant role in predicting returns. On a stock level, investors reacted positively to Coronation Fund Managers' annual results report in November, resulting in this holding being the top contributor during the quarter. Despite strong competition from Cell C, Vodacom also showed a healthy increase in operating profit and contributed materially to the portfolio's performance. We continue to be overweight both these counters and especially favour them for their high dividend yield, which we believe is important in the current environment. On the other hand, Naspers Holdings and Anglo American lagged the rest of the market, and the underweight position in these counters also contributed to relative performance. Performance detractors during the quarter were the overweight positions in Lewis Group and British American Tobacco and the underweight exposure to Shoprite.

Portfolio activity
Our optimal portfolio, which is based on expected returns, changes continuously as we receive new information 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 we incur. A pragmatic approach is to maintain a near optimal portfolio by trading periodically, using a transaction cost model to ensure that we keep trading costs to a minimum. The frequency of portfolio rebalancing depends on the volatility of the market. Turnover at these rebalances is usually between 10% and 15%. During the quarter, we purchased a holding in Richemont, which has seen significant upwards earnings revisions and strong price performance based on remarkable sales growth well ahead of its peers. We also decreased our underweight exposure to the banking sector by adding to our holdings in Standard Bank and Nedbank. Kumba Iron Ore's strong dividend yield is currently offset by negative earnings and price momentum and we have sold out of this counter. We have also exchanged some of our holdings in Aspen Pharmacare for shares in Mediclinic.

Portfolio positioning
The projected tracking error of the portfolio to the SWIX ALSI benchmark remains close to 3% and we keep the total portfolio risk below that of the market. On a sector level, we are overweight financials, mostly residing in the life assurance and speciality finance sectors. This position is offset by an underweight exposure to the more expensive industrial sector. Within the resource sector, we are underweight platinum and general mining counters and overweight oil and gas, resulting in a moderate underweight position for the sector as a whole. As always, we aim to outperform the SWIX ALSI through an active stock selection process using proprietary quantitative techniques. We select stocks on a structured bottom-up basis, favouring companies with an improving earnings outlook at a reasonable valuation level. We are, however, aware of the uncertain macroeconomic environment and maintain a healthy weighting in more defensive factors. Looking forward, we are confident that our sophisticated quantitative stock selection methodology will continue to differentiate prospective winners from losers. We also believe that our disciplined portfolio construction, risk management and implementation skills will translate the opportunities to outperform into meaningful returns for the portfolio.2013. We remain overweight SA corporate bonds, as these instruments offer good yields with low interest rate risk.