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
The past quarter has without a doubt displayed what many felt would be some of the characteristics of a weak global economy. In addition, fears of a double-dip recession coupled with the risk of deflation in the US have risen appreciably. Ironically, the more the US authorities describe their country as being different to Japan, the more the US starts to resemble Japan.

The state of the US housing market has deteriorated, which is reflected in a steadily declining house price index. This has affected consumer sentiment and there are indications that there will be no growth in personal consumption to year-end. However, the financial markets are gaining a degree of hope and optimism from the labour market. The August employment report in the US helped to dispel some concerns about a double dip in economic activity. Stock markets will thrive on an improving trend in hiring and so will consumer spending.

South Africa's data releases have generally been encouraging during the past quarter in respect of the domestic economic recovery. Despite a deteriorating global economic picture, South Africa's GDP growth rate should not be lower than 3% in both 2010 and 2011.

During the third quarter of the year, the Investec Equity Fund showed significant returns in absolute terms, but marginally underperformed the primary domestic equity indices. The main detractor from performance was the allocation to the gold exchange traded fund (NewGold), as rand strength offset the appreciation in the US dollar price of the metal. This position will be maintained, as it provides significant protection against increasing sovereign debt risk stemming from the developed world.

Despite the large allocation to resources and defensive rand-hedge industrials such as SABMiller and British American Tobacco, relative performance was supported by the solid gains from shares such as MTN, Aspen, FirstRand and Clicks. The significant appreciation of the rand and the strong rally in domestic interest rate-sensitive sectors detracted from the portfolio's relative performance. To mitigate this current trend, the portfolio made an allocation to stocks such as Imperial and African Bank. The earnings outlook of both companies has improved significantly.

Portfolio activity
The portfolio's exposure to the large banks (Standard Bank and Absa) was reduced as was the weighting in platinum stocks (Anglo Platinum and Impala Platinum). The big banks have positively rerated and are unlikely to be able to produce earnings in the near future to justify their ratings. We consider the valuations of the platinum stocks high in absolute terms, and relative to the resources sector. Given the current macroeconomic conditions, the rand is likely to remain strong in the near term. Therefore, platinum producers would find it difficult to justify their ratings. We acquired holdings in African Bank, Bidvest and Imperial. These companies' valuations and earnings growth prospects are attractive in an environment of a stronger rand and declining domestic interest rates.

Portfolio positioning
The portfolio's largest positions remain weighted towards resource stocks, telecommunication and defensives with the ability to pay increased dividends in an environment of slower global growth. Gold and gold shares remain in the portfolio as they are likely to continue to have a negative correlation to world equity markets. If there is further sovereign debt risk, the price of gold is likely to appreciate.

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
The Investec Equity portfolio had a difficult second quarter, but managed to outperform the general market. The review period proved to be decisive from an economic point of view, with the G20 meeting revealing diverse policy positions. After this meeting it became apparent that there would be two different approaches in the future regarding the use of monetary and fiscal measures. The US remains committed to solving an anaemic economic growth rate through ongoing stimulation, as the recovery does not seem sustainable thus far. Europe and the UK are of the view that their excessive fiscal deficits need to be addressed through spending cuts and increased taxation. At the same time, China has started to rein in lending, which will also curb economic growth. Despite these policy headwinds for global growth, the IMF has upwardly revised their global economic growth forecasts for 2010 from 4.2% to 4.6%. It is, however, hard to believe that global growth will not be adversely affected by the austerity measures which Europe and the UK intend to implement with immediate effect. A decline in economic growth could have a negative impact on equity markets. Global stock markets began weakening from mid April and continued to fall quite sharply after the G20 meeting on 27 June.

Portfolio activity
Early in the quarter, the portfolio's overweight resources position was pruned by reducing the holding in Kumba Iron Ore and BHP Billiton. These holdings were effectively switched into MTN. The result being that MTN is now the portfolio's third largest position. The reason for making such a switch was to realise some of the positive returns earned during the last nine months in resources, and to reduce the overall market risk of the portfolio. In the current environment we consider Naspers to be a high risk stock and we therefore sold the counter. Naspers's stake in Tencent Holdings represents 72% of its market capitalisation at present. Tencent Holdings' risk is evident in its high market rating of 36.5 times historic earnings and 27.7 times one-year earnings.

Portfolio positioning
Our top ten positions now comprise approximately 63 percent of the entire portfolio. Half of the top ten positions consist of gold and defensive stocks and the other half of high beta shares. Most of the high beta stocks in the portfolio are resource shares, which on a valuation basis appear to be very attractively priced. As these companies continue to grow their earnings, their price earnings ratios continue to compress. Any price increase is being offset by a greater appreciation in earnings for the time being. The defensive stocks generally have significantly higher ratings than the resource stocks; they typically have a one-year forward price earnings multiple of 2.5 times the diversified miners. If global growth continues to surprise on the upside, the higher beta plays such as the resource stocks are likely to outperform in such an environment. In the event of lower economic growth, their valuations should provide a cushion of price support.

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
Markets in general experienced a strong sell-off during February as a result of the unsustainable fiscal position of Greece and potentially other member countries of the European Union. Furthermore, measures taken by some central banks during the course of the year such as an increase in the discount rate by the US Federal Reserve and policy rate hikes by the Reserve Bank of Australia over the last five months, unnerved the market into thinking that collectively central banks were leaning towards tightening. These issues were enough to cause the MSCI World Index to decline by almost 11% between late January and mid February. Interestingly enough, the JSE Top 40 Index recorded a similar loss over the same period. Locally, the South African Reserve Bank (SARB) reduced the repo rate to 6.5% from 7%, surprising markets after the Bank had kept rates unchanged at its last four meetings. The monetary policy statement based the rate cut on a need to reinforce the sustainability of the economic upswing, while inflation is expected to be contained below 6% in the short term. Despite these stimulatory measures by the SARB, consensus growth projections for 2010 have only been revised up to 2.9% year on year from 2% previously, which does not compare favourably to the emerging market constituents with forecasted growth of 6.3% year on year.

Portfolio activity
We maintained an overweight position in resources, financials and foreign-based companies; the portfolio turnover was therefore minimal during the review period. Earlier in the quarter we reduced the portfolio's weighting in AngloGold and sold our entire Gold Fields holding in order to acquire larger positions in BHP Billiton, Sasol and Impala Platinum. We sold our small holdings in Barloworld and Lonmin and acquired a position in MTN (4%) at attractive levels. The stock had fallen quite significantly during the quarter. The 1% position in JD Group was sold in order to increase the Richemont holding. During late March, 1% of the portfolio's Kumba Iron Ore position was switched into Northam Platinum. With South Africa expected to lag the global emerging market recovery, remaining overweight global cyclical stocks and particularly those with emerging market exposure is key. While rand strength relative to developed economies is a concern for companies translating earnings back into rands, other emerging market currencies are also likely to remain firm making broader emerging market exposure all the more important. The portfolio remains focused on recovery and other global stocks in preference to domestic shares.

Portfolio positioning
While multiple expansion underpinned the first part of the recovery during the second and third quarters of 2009, the movement in prices over the last six months has been driven by earnings momentum. It is also very likely that revenue and earnings upgrades will be the main driver of prices in the next upward leg of the market. It is heartening that the general mining sector's price earnings multiple (PE) - twelve months forward - declined 24.2% from 13.3 to 10.1 during the quarter and that the platinum sector's PE fell 32.7% from 32.4 to 21.8.The overall market multiple also declined by some 7.2% from 12.5 to 11.6. These factors provide some comfort that current market levels are not too demanding, particularly when earnings momentum is considered. Resource stocks in particular look cheaper when compared to domestic stocks as their earnings prospects over the next twelve months appear to be superior and their valuations are less demanding. The overall portfolio is currently well positioned to benefit from a continuation in global growth through the exposure to primarily resource, and recovery stocks in various sectors.

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 performance over the quarter was characterised by a robust upward move in global equity markets and commodities and a decline in the value of the US dollar. The continued confirmation and expectation of global growth boosted equity and commodity markets, while the persistent creation of debt through the bond market weighed on the US dollar. The quarter was defined by resource stocks' outperformance which the portfolio is heavily tilted towards, while retail and domestic industrial stocks were relative underperformers.

Portfolio activity
The importance of holding a meaningful position in resource stocks became evident during this quarter. The addition of Northam, Lonmin, African Rainbow and Kumba Iron Ore complimented the portfolio's resources mix. We also increased our holdings in Anglo American, AngloGold, BHP Billiton and Impala Platinum. The portfolio's position in financials was constructively increased through the addition of FirstRand, Old Mutual and Liberty International. Small positions in recovery stocks such as Barloworld and JD Group were also acquired during the quarter. The portfolio's position in retail stocks was entirely liquidated with the exception of Clicks, and the large MTN position was significantly reduced. The portfolio's position in Santam, Capevin and Distell were simultaneously liquidated. The intended outcome of a fairly active quarter was to create a portfolio that comprises a large resource component, and exposure to recovery and other global stocks in preference to domestic stocks.

Portfolio positioning
It is evident that the strength of the rand during the course of 2009 curtailed the performance of most resource stocks as well as other stocks with predominantly foreign operations. Other than the Brazil real, the South African rand was the top-performing currency during 2009. It is quite conceivable that the South African rand deserved some of its status for avoiding the credit crises, but the country still had to face a significant downturn in its economic growth rate. It is our opinion that for the year ahead, markets will look for earnings growth to drive stock prices and currencies will look for growth in GDP. In the case of South Africa, GDP growth is unlikely to be as vibrant as some of the other developing economies. It is for this reason that we would not expect the rand to deliver the same relative performance during the year ahead. There is also a potential threat to most 'carry trades' in the credit and currency space if markets readjust to the exit strategies of the US Federal Reserve as well as the Bank of England. The portfolio is therefore currently positioned with a tilt against the rand, as apart from large holdings in resource stocks there is a meaningful exposure to British American Tobacco, Richemont, Liberty International, Naspers and SABMiller. The portfolio's exposure to the resources market is a position we hold from both an absolute as well as a relative perspective. Furthermore, we expect the prices of resource stocks to be driven by both valuation and growth. There is also the potential effect of mergers and acquisitions (M&A) activity in this sector, as the long-term valuation of stock prices is attractive without the confirmation of a secular bull trend in commodities. The recently proposed takeover by Xstrata of Anglo American can be seen as an example of attractive valuation. As a result of the hostile attempt, Anglo has commenced an efficient restructuring of its business to the benefit of shareholders. Anglo will thus be underpinned by M&A activity as well as the expected growth in earnings at least over the next two years. The overall portfolio is currently well positioned to benefit from a continuation in global growth through the exposure to primarily resource and recovery stocks in various sectors.