Despite a marginally negative performance from the JSE All Share Index (ALSI) of -0.6% for the month, the Investec Equity Fund posted a return of 4.6%. During the month Harmony launched an All Share hostile bid for Gold Fields and the Minister of Finance announced further very significant relaxation of exchange controls. We took minor profits in both Gold Fields and Harmony on the announcement of the deal. Gold shares retraced over 8% during the month, despite a higher US dollar gold price.
Locally focussed companies, where the bulk of the portfolio is positioned, benefited from the new found confidence level being displayed in South Africa. General retail shares put in another sound performance rising 8.8% and fixed investment stocks exploded as huge numbers were bandied around on the level of future spending by Transnet and Eskom. We benefited from our positions in Ispat Iscor and PPC. On the negative side, telecommunications shares where we are underweight, rebounded after several months of underperformance. We remain concerned about the deregulation risk in this market.
Bank shares "consolidated" their recent gains with a 4% return for the month. The banking index has now returned 60.7% over the last 12 months.
The portfolio has a weighting of 31% in mid caps and 69% in large capitalisation shares. Over the last twelve months small caps have returned 45.6%, mid caps 33.8% and large caps 21.2%. The stronger rand is the dominant variable in these return differentials. We continue to like the mid cap area of the market as we expect earnings growth to surprise on the upside, but valuation levels are becoming more attractive in the large cap area.

September was a robust month, lead by a 15% rise in banking stocks and a 13.4% rise in general retail shares. The overall JSE All Share Index (ALSI) rose 5.7%. The Investec Equity Fund was well placed in this regard with heavy weightings in both sectors.

The highlight of the month was the announcement by Barclays PLC of their interest in acquiring a stake in Absa. The significance of this, from a national perspective, is hard to over state. South Africa is running a current account deficit, which needs to be financed. When Barclays withdrew from South Africa in 1986, the country was forced to run a current account surplus. This severely constrained the country's ability to grow. With the latest interest rate cut, it finally appears that economic growth is now a priority. It is no coincidence that foreign multinationals are now interested. Hopefully this will allow South Africa to engage on a path of more sustainable growth.

During the month we added to our position in life assurers. We have been negative on this sector for a while and started building a stake in August. It finally appears as though product volumes are picking up and there is potential for capital restructuring.

We are underweight telecommunication shares, due to concerns over how management will deploy the excess cash in the case of MTN, and a more challenging regulatory environment in case of Telkom.

Resource shares should be supported by flat to rising Rand commodity prices. Valuations have become more reasonable and the outlook in Rand terms is now improving. We have a quarter of the portfolio deployed here.

Year-to-date returns for the JSE All Share Index (ALSI) are now at 16% and we anticipate further inflows into equities as the retail investors become more aware of returns.

This is Investec's longest-running unit trust, having been launched in November 1987. There are no restrictions imposed by its mandate and it invests in both growth and value companies.

Though many unit trusts commit to offering top-quartile, longer-term performance , this one has actually managed to sustain it, as shown by the figures in the accompanying table.

The portfolio focuses on established companies as well as those with superior growth potential not yet recognised by the market. Special opportunities, such as share buy-backs, corporate events and restructurings are also sought.

Fund manager Gail Daniel believes the economy could now be entering a cycle of a slightly weaker currency, lower real interest rates and higher economic growth. The portfolio gained 5,9% in August, compared with 8,8% for the JSE all share index. She says resources were increased to 26,5% on the view that "valuations have improved and we could now see rising rand commodity prices for the first time in a couple of years. We have added to Billiton recently - it seems to have a better handle on its business than competitors, and the right commodities for now". The main counters in banking and retail are RMB Holdings, Standard Bank, Edcon, Foschini and Truworths.

Daniel favours the retail sector on the basis that earnings growth has been good and that shares have not re rated much on a forward p:e basis. The shares represent the story being played out in the portfolio. "The scepticism towards SA is represented in the price of local assets; the reality, which is somewhat better, is not," she says. The Massmart holding was trimmed somewhat, but Daniel is still bullish on the stock: "I like the management team," she says.

In relative terms, performance was hurt by being underweight in the large capitalisation industrial groups. Daniel doesn't see the attraction of these counters, most of which she regards as being unfocused conglomerates. The one exception is Remgro.

"It doesn't seem dangerous and ticks up slowly. There is lots of cash, it' s grown the dividend very well over time, and there's a large discount to net asset value."

The portfolio performed well last month, returning 1.3% led by a 5% return from the retail sector and a 2.3% return from the banking sector, compared to a negative return of 2.7% for the JSE All Share Index (ALSI). The Rand once again remained stable over the period. The favourable economic situation for the South African consumer continues, in our view, to be under-appreciated by the market.

Economically, June saw a lower than expected inflation figure, with inflation remaining close to static on a month-on-month basis and the headline CPIX number declining to 4.4%. Wage increases are by and large settling in the 6% - 7% area that will provide a further solid underpin for the local consumer. Our official view is that interest rates are on hold for the foreseeable future. This will, on the margin, favour retailers over banking shares. In addition, rising real wages puts further pressure on the local manufacturing sector that is already beleaguered by the stronger Rand.

Mining houses declined by 18% over the month and are getting to more attractive levels. We are concerned about further earnings downgrades and a peak in global activity that will suppress out performance. We have maintained our position in defensive Rand hedge shares such as SAB Miller and Remgro. In addition we believe it is unlikely that commodity prices will rise sharply in the face of a series of interest rate hikes in America.

May was an exceptionally volatile month in the local equity market. The shift in US rate expectations led to a sell off in emerging market and high beta shares. The irony is that emerging markets are not displaying the unhealthy excesses that the developed markets, principally America, are showing. Valuation levels are still attractive and the fundamentals of the South African economy are sound. The JSE Top 40 is now on a price to earnings multiple of 13.8 times, having peaked at 15.3 times in early March. The JSE All Share Index (ALSI) ended the month up 0.3% and is now up 21.6% over the last year.

Within the equity portfolio, an interesting divergence occurred during May with small and mid-cap shares under performing their large cap counterparts. Small caps fell 4%, mid caps fell 2.3% and the ALSI 40 rose 0.8%. The Investec Equity Fund has a 70% weighting in large caps, with the remainder being in mid caps. We feel that on PE's of 14.5 times, 10.5 times and 9.3 times respectively for the large, medium and small cap indices that the valuation levels are about right. Over the last three months our overweight position in banks has paid off with banks returning 8.9% against a 3.4% decline in the ALSI and a flat return from life assurers. We are overweight general retailers, which have gained 6.1%. We have established a large holding in Sasol which whilst having performed poorly over three months, gained some traction on the back of strong earnings upward revisions last month. We remain convinced that the strong local story is not priced into the local shares.

The JSE All Share Index declined 2.36% in March led by a 7.3% decline in the resource sector with mining houses falling 28.5%. The telecommunications sector also had a rough ride falling close to 10% over the month. These declines reflect an unwind in the global reflation trades as it became apparent that the US Federal Reserve is going to have to raise interest rates sooner than they initially anticipated. The market is now pricing in a rate hike in June.

We have moved more defensive in our positioning within the portfolio. We have a 6% weighting in Sasol on the back of geopolitical concerns and a 6% weighting in Remgro which is an ultra defensive share trading at a 26% discount to NAV. Both of these counters are also Rand hedges. We do not anticipate severe weakness in the Rand/US Dollar exchange rate, but we would be surprised if the Rand makes it back to the R6=1USD level again in the near term. In this regard we have increased our exposure to late cycle commodity Rand hedges and defensive Rand hedges.

We trimmed our telecommunications weighting specifically our holding in MTN in the first quarter of this year. We remain happy with our banking and retail exposure. The dividend yields in these two shares will provide support in the event of a internationally driven sell off, in a similar manner to the way the high rate of interest received on Rand cash is supporting the Rand despite weaker commodity prices.

Weakness in the rand saw a change in leadership in the stock market over the month of December as companies with overseas earnings outperformed more domestically orientated groups. The Investec Equity Fund maintained its top quartile performance for the year as a whole delivering a 34.3% return relative to the benchmark 12.0%.

Our relative underweight in resources held back returns over the month as the sector rebounded, but strong stock selection across all industry groups mitigated the negative impact of this decision.

Looking forward we anticipate a steadier path for the currency over the course of 2004 and envisage growth expectations for the economy beginning to rise as further cuts in the cost of money seem likely early in the year. This should prove a relatively beneficial environment for equity investors.

We have begun to move your portfolio towards companies with overseas earnings outside of the mining sector as we believe a more stable rand will see investor attention move to this area. However, our principal focus remains on companies enjoying strong earnings growth in the retail and telecoms sectors which we feel offer outstanding value particularly in a period when earnings growth expectations are likely to be revised upwards.