The South African equity market continued to perform well in global terms as the surging rand produced a 9.4% return in dollars, compared to a 9% return for the S&P. Local investors however saw a -0.6% return as the market struggled to make headway in rands. The fund managed a 1.6-% positive return over the same period. October brought in some interesting investment ideas. The fund managers could well have seen the peak in the out-performance of SA bonds over SA equities. Bonds have returned 17.3% p.a. over the last 5 years, compared to 10.4% for equities. This period coincides with both tight monetary and fiscal policy in South Africa as the government has reined in the budget deficit, and the SARB has relentlessly focussed on crushing inflation. Whilst the fund managers do not expect any change in the monetary authorities policies, they do think that the fiscal team is now capable of delivering on its spending policies. This, together with the recent trend of providing tax relief to the lower and middle-income classes, will support equities in the medium term and should encourage an asset allocation swing out of bonds and into equities. Globally some of the triggers the fund managers have been looking for appear likely to happen. The Federal Reserve Bank of America will probably cut interest rates in November, and could well be followed by the ECB later on. Oil has fallen from its recent highs, which provides some relief to the global economy. It appears as though the US market has entered a consolidation phase during the month the fund's managers reduced their exposure to Sasol from 10% to 3% of the fund, on the back of concerns over the oil price and a strengthening rand.

It is two years since Investec Asset Management fund managers Gail Boon and Clyde Rossouw took over this fund, and it is comfortably in the top quartile over one year and three years.

Relative to its peer group, the fund has had hefty positions in large caps such as Sasol, Anglo American and Impala Platinum. This underpinned performance strongly in the fourth quarter of 2001, but has been costly for the fund over the past six months, though it remains comfortably in the top half at 19th out of 53.

Recently, Boon and Rossouw have taken profits in anticipation of a weaker global and local economy. Since quarter-end, the Sasol position has been trimmed back from 10% to 4% as oil prices already discount potential conflict in the Middle East. The gold position has been lightened as share prices already price in an optimistic view of gold prices.

The fund's performance over the past six months was carried to some extent by an aggressive position in general retailers, particularly Woolworths, Truworths and Massmart.

But the recent increase in interest rates will bite and the fund has been reducing its holdings and bought into Pick 'n Pay, which is far less sensitive to interest rates.

But Boon remains bullish on some exporters, in particular Tongaat, which has made substantial investments in competitive capacity, particularly in aluminium, but which has not yet experienced a share rerating. Nampak is also expected to beat earnings expectations in the short term, because of past rationalisation and volume growth.

Boon is less optimistic on banks, which don't export and can't benefit from the weak rand. She has started switching from Standard Bank to Nedcor. She says Nedcor got BoE cheap and it finally has an opportunity to build a decent asset management business.

Boon is a recent convert to Liberty, as one of the few life assurers that has been able to grow embedded value. She has sold Sanlam, which is not prepared to tackle a number of fundamental business problems. The fund and its managers have a strong record and it's a good vehicle for broad equity exposure.

The South African equity market proved to be remarkably defensive this month falling -1.5% in comparison to the S&P which fell 11%. The rand fell 3.6% against the dollar over the month, closing at R10.5, but remains within the trading range it has secured since April.

Resources rebounded after the July sell off, driven by the leaked mining bill, rising 3.5%. Our defensive holdings in Sasol, Gold Fields and Harmony benefited the portfolio. Anglo American made a strong comeback, gaining close to 20% as investors realised that the final outcome of the Mining Bill is likely to be more rational than the initial proposal.

We hold no Richemont, MCell or Didata. We have consistently preferred the old economy cyclicals to the new economy cyclicals for close to two years now. These shares have dramatically under performed. Didata and Richemont both have huge operating leverage as they have a lot of excess capacity. In the event of a pick up in global growth, the leverage will lie not with the likes of Sappi and Iscor, which have been more disciplined in their deployment of capital, but with Richemont and Didata. There is, however, currently no evidence that the global economy is gaining steam. Indeed, evidence abounds to the contrary. We remain firmly in a US equity bear market with the S&P at best described as fair value. There is no reason why this market should not trade cheap. Our hope, from a South African equity perspective, is that the US market can stabilise which will allow the value and growth in the South African equity market a chance to unlock. We remain defensively positioned in this regard.

A final concern is that further interest rate hikes will start to put pressure on the South African consumer who is already beleaguered by higher bills for rates, water and electricity. We have therefore reduced some of our exposure to the resource sector.

After one of the worst quarters in global markets seen in over 30 years, it would not be surprising if there was a rebound. A trigger for this could be interest rate cuts by both the ECB and the US Federal Reserve. A steep fall in the oil price due to a resolution of the conflict in Iraq would also be highly stimulatory. We remain vigilant for such triggers.

Following the 15% decline in the All Share Index in July, an event that has occurred only 10 times in the past 40 years, the market has gained a degree of composure, lifting its head by 5%. The fund managers think the market is around 20% below its bottom-up fair value, with only a handful of overpriced shares remaining. The Equity Fund gained 4%, but is still substantially ahead of the All Share Index. Once again the leverage to a weaker currency became apparent and our purchases of Northam and Sasol proved well timed.

As black economic empowerment continues to increase in profile, the fund managers are ready to trade into shares where the market is-prices the risks. Anglo American is an example in this regard, and indeed the fund managerfs have raised the Resources weighting in the fund.

The domestic economy continues to perform above expectations and the strong volume growth, considerable pricing power and strong cash generation of many local businesses make for an enticing stock picking environment. The holdings of both Truworths and Massmart have shown that the consumer remains quite strong and also added significantly to performance in a month that was characterised by results of companies that in 58% of the cases exceeded the consensus earnings expectations.

It is rather curious (and dangerous) that investors have chosen the overvalued bond market as their protective asset against future inflation and believe in the prospect for substantial real returns.

The fund managers accept that some seasonal nervousness might enter the market as the anniversary of 9/11 approaches, but believe that the local economic momentum will be maintained into 2003, providing a platform for continued strong company earnings growth and decent equity price gains.

June proved to be a terrible month for the local equity markets with the All Share Index falling 4.7% led by a 6.7% fall in the Dow Jones Industrial average and a decline of over 10% in the Nasdaq. In this environment the Equity Fund declined by only 2.5%. During the month we sold of a substantial portion of our gold holding as the fund managers took the view that, although we remain positive on the bullion price, the gold shares were discounting a price in excess of $350 per ounce.

The funds sectoral weighting in resources was consequently reduced, although the fund managers added to Iscor and Sappi. We also lightened Sasol, as the fund managers believe that there is more gearing to a global upcycle in the former two
shares. The US economy continues its recovery. There is a substantial disconnect between the US economy and the US stock market. The fund managers expect this to continue for some time, although it is worth highlighting that the S&P (ex technology) is on 17 times this years earnings. Technology shares remain very expensive as earnings collapse and the fund managers continue to hold only the highly defensive share Venfin in the portfolio. The fund managers have increased our weighting in the financial sector, specifically banking shares. With the rand likely to be stable against the dollar as global commodity prices rise and the dollar enters a down cycle, banking earnings could well outperform resource earnings in 2003. With Standard Bank and Nedcor both trading on earnings multiples of less than 7 times, we believe that downside is limited. Insurance shares are also looking very interesting at the moment. The short-term outlook depends largely on the US. Whilst there could well be a final sell off to under 900 on the S&P 500, the second six months of the year will probably see a rebound in the US.

April saw one of the most violent market reversals we have seen in a long time. Aided by a strong rand, up 7% in the month, we saw bank shares race up over 20% in local currency terms while the All Share Index ended up just shy of 1% for the month. The Investec Equity Fund was up some 2% which included the distribution to unit holders . The Fund enjoyed the bulk of the financials rally, and continues to be exposed to the better quality in both the Banks and Insurance sectors, from which we would expect sustainable share price upside. Consequently, the fund did not enjoy the full advantage of some of the extreme moves of the likes of Sanlam, NAC and BOE. The fund manager believes that sustainable longer term performance is more important.

Some of the core holdings had a torrid time, especially the Mining Houses, with the likes of Billiton and Anglos off over 10% each. These moves hurt the fund in absolute terms. The continued strength in the oil price continues to curb economic activity, especially consumer spending, and we expect this trend to continue as long as the uncertainty in the Middle East prevails. Until base metals rally again, and given the near term strength in the rand, we would expect the dual-listed mining stocks to continue to under-perform near term, given that valuations discount a more aggressive recovery.

Both Gold and Platinum behaved quite well over the month, and the fund manager remains constructive on both metals. The US dollar is showing signs of rolling over, and the leading indicators of inflation in the US are starting to flash amber. Long bond yields in the US are probably not correctly priced. Implats and Anglogold look like they have further re-rating potential in their sectors.

Rand hedge industrials also were weak, but we expect that the bulk of the rand move is over and we continue to look for attractive opportunities in these companies. Remgro continues to look very attractive. The share price did not react to a weaker rand in December, and is trading on marginal financials newsflow. BAT in pounds continues to make new highs, and with a discount of over 20% to NAV, more upside can be expected from the share price.

The Investec Equity Fund was 47% invested in Resources at the end of March 2002, as the fund manager believes that resources shares have not yet fully discounted increased dollar based commodity prices.