Market review
The FTSE/JSE All Share Index closed the third quarter down 5.8%, with significant rand weakness partially offsetting the sharp fall in commodity prices. The index lost 21.3% in US dollars. Significant dispersion marked the quarterly performances, with sectors most exposed to the SA economy generally outperforming the broader market. The food and general retail sectors fared particularly well, closing 6.4% and 1.7% higher, respectively. Banks lost 3.3%, while short-term insurers gained 6.9% over the three months. The health care sector, up 2.5%, continued its recent strong performance. Commodity-exposed rand hedge stocks fared poorly over the quarter, but even here there was significant dispersion. Diversified miners lost 17.3% and platinum miners shed 9.7%. The gold sector posted one of its strongest relative performances, gaining 19.5% over the review period.

Portfolio review
In the third quarter, financial markets faced a US sovereign debt downgrade by Standard & Poor's, a rapid collapse in equity prices, a sharp rise in the yields of European bonds and a drop in US 10-year Treasury yields to below 2%. Several countries are introducing measures to try to revive their economies. The US Federal Reserve recently launched 'Operation Twist', which was designed to force US long-term interest rates to still lower levels. In the UK, the Bank of England is contemplating further quantitative easing, and the European Central Bank has started to buy Italian and Spanish government debt. There is a limit to what monetary policy can achieve. A case in point is the US, where despite more than two years of economic stimulus through monetary and fiscal policy, there has lately been a loss in economic momentum. Continual low rates of economic growth will only make the household and fiscal deleveraging process all the more drawn out and painful.

The South African economy is rapidly losing momentum, as growth in the second quarter of 2011 fell to 1.3% from 4.5% in the first quarter. The manufacturing sector indicated contraction in July and August, while consumption demand, one of the main drivers of activity, also slowed. Over the quarter, the Investec Equity Fund was ahead of the FTSE/JSE All Share Index. The portfolio's large investment in British American Tobacco, South African Breweries, Vodacom and AVI were some of the top performers during the review period. Our large holdings in Anglo American and Richemont weighed on the performance, as did smaller holdings in the gold exchange traded fund and in the gold counters (AngloGold Ashanti and Gold Fields).

Portfolio activity
In an extremely volatile market, the portfolio's holding in Anglo American was reduced at a price of R355 per share and within the quarter, the holding in Anglo American was bought back at an attractive price of R271 per share. In managing what is perceived to be high risk exposure to the euro-zone economy, we liquidated the entire Steinhoff position and reduced the Richemont holding. The portfolio's exposure to the European retail sector, represented by holding both Richemont and Steinhoff, would in all probability be imprudent in the face of a likely period of extremely slow or pedestrian growth, which may be experienced in Europe. The portfolio's interest in AVI and Vodacom was increased with the proceeds of the sale of Steinhoff and Richemont.

Portfolio positioning
The portfolio is essentially a mix of select resource stocks and high dividend shares with low industry risk. The resource stocks represent extremely good value by historic measures, although they do tend to significantly underperform the market during periods of general market weakness.

Global growth looks set to decline further into 2012. While the numbers remain positive, they are not sufficiently robust to suggest we have anything approaching a decent recovery in economic activity. The problems are particularly acute in the developed world where GDP growth rates for 2011 appear to be a little over 1% and much the same for 2012. These figures remain weak primarily as a result of the process of deleveraging (both at consumer and government level) and as time progresses, growing political uncertainty. The emerging countries on the other hand, are not doing so badly. The outlook for China and India remains positive, although it does appear that China has lost some of its momentum. Consensus growth rates for the emerging countries are 6% for 2011 and 5.9% in 2012.

Market review
The FTSE/JSE All Share Index closed 0.6% lower over the review period, with the market falling 2% in June. Resources were the biggest detractors, with gold miners and platinum stocks down 13% and 7.7% respectively. Diversified miners lost 3.3%. Health care (6.9%), food producers (4.5%) and telecommunication (5.4%) performed well. Banks gave up 0.9%, with flat returns year to date. Sasol, the only oil & gas sector constituent, fell 8.5% in the second quarter after a strong first three months of the year.

Portfolio review
The world economy hit some headwinds during the past quarter, which is likely to result in a slowdown in global growth. The effects of being overburdened with debt, largely as a result of running continuous fiscal deficits, have begun to catch up with the developed world. In order to begin curtailing debt levels which can no longer be supported in the developed countries, fiscal deficits are projected to decline by nearly 2% of GDP in the industrial countries in 2012. This fiscal consolidation reflects a phenomenon which may be in motion for at least 10 to 15 years into the future.

The recent Greek accord buys time, but it is by no means a permanent solution. It appears that Greece is insolvent and only a debt restructuring will be able to resuscitate the ailing economy. Meanwhile, another fiscal drama is unfolding in the US. There is likely to be an agreement to raise the debt ceiling, but we should see spending cuts and a provision for the debt ceiling only to be raised until the end of the year. If there is no meaningful progress on the debt ceiling issue and spending cuts, there is a risk of ratings downgrades and pressure on markets. There are indications that earlier policy tightening in China may be working and that inflationary pressures may be fading. If a soft landing can be achieved, the stage is set for a sustained period of growth across the emerging world.

The Investec Equity portfolio's strong absolute and relative performance delivered in the first quarter of 2011, continued in the second quarter. While the domestic general equity market barely showed positive returns in the first half of the year, investors in the Investec Equity portfolio enjoyed solid gains. During the second quarter, the overweight allocations to Richemont, PSG and Exxaro contributed positively to performance. Driven by our assessment of global economic trends, we avoided the platinum and gold sectors which significantly underperformed over this period. This benefited the portfolio.

Portfolio activity
There was little activity during the review period as a result of the changes we made during the previous two quarters. The portfolio's interest in Steinhoff was sold and the proceeds were used to purchase shares in BHP Billiton, FirstRand, Exxaro and Richemont. The position in Nampak was switched into AVI and the portfolio's holding in Naspers was reduced, with the proceeds used to purchase Murray & Roberts shares.

Portfolio positioning
The portfolio's focus is on acquiring companies which are well positioned to benefit from growth in emerging countries. We also favour stocks which are currently on high dividend yields with the potential to increase their dividends further. MTN is the portfolio's largest position. The company has decided to redirect their large free cash flow towards paying higher dividends, as opposed to the previous strategy of acquisitions. It is therefore expected that based on the current share price, the stock is likely to yield around 8% in 2012 as a result of increased dividends. We sold out of Steinhoff, as operating conditions could become very difficult for the company in Europe, resulting in less attractive earnings prospects. The portfolio's largest positions are in Sasol and MTN representing 20% of the total assets under management. Our current top ten positions amount to 63% of the overall portfolio. We continue to be underweight food and general retailers, banks and life assurers as we believe the recovery in domestic economic growth will be muted.

Market review
Local equities mimicked global market volatility, recovering January's losses and ending the quarter marginally higher (1.1%). Resource counters performed best, with Sasol, the only oil & gas producer constituent in the index, rising 13.1%. Diversified miners closed 3.2% higher while paper stocks added 15.5% over the period. Platinum stocks lost 10.5%. Both the industrial and financial sectors underperformed the broader market, closing down 0.3% and up 0.7%, respectively. Again, there was substantial dispersion amongst the various sub-sectors, with construction (-25%), food producers (-4.3%) and pharmaceuticals (-11.5%) underperforming, while mobile telecommunication (3.9%), life insurance (6.4%) and industrial metals (14.5%) enjoyed strong returns.

Portfolio review
It seems paradoxical that amidst a sovereign debt crisis in Europe, the aftermath of an earthquake and tsunami in Japan, structurally high unemployment and a weak housing market in most developed countries, there is in fact positive global growth. The quarter continued to show signs of economic growth on a global basis, and not surprisingly the IMF has forecasted global GDP growth of 4.2% for 2011. The main risk to growth appears to be inflation. However, according to Ben Bernanke, the chairman of the US Federal Reserve, this is well in check as private incomes are growing by 5% per annum and private consumption expenditure is only increasing at 0.9% per annum, thereby creating a healthy margin in order to pay down debt. The risk of runaway inflation at this stage seems unlikely. The risk to equity markets may come as a result of the Federal Reserve concluding its $600 billion bond buying programme in June. It is possible that once the Federal Reserve's quantitative easing programme comes to an end, equity markets might pull back and the natural recipient of the outflow could be the bond market. The G7's move to weaken the yen in the wake of Japan's earthquake has created a monster of speculation in higher yielding assets, driven by an artificially cheap currency. The market's view is that the carry trade is on, which will mean an increased purchase of higher yielding assets, emerging market equities and commodities. In South Africa, the monetary policy committee left the repo rate unchanged at 5.5%, and revised up growth expectations to average 3.7% in 2011 and 3.9% in 2012. The Quarterly Bulletin from the South African Reserve Bank provided further assurance that the consumer recovery is now well entrenched, supporting the growth recovery in the face of global headwinds. Over the first quarter, the Investec Equity portfolio outperformed the FTSE/JSE All Share Index and the FTSE/JSE Shareholder Weighted Index. The portfolio's holdings in Mondi, Exxaro and Sasol were the main contributors to performance. We did not hold Standard Bank, Nedbank, Truworths and Shoprite, which benefited the portfolio.

Portfolio activity
The portfolio's exposure to MTN was raised aggressively during the quarter from 6% to 10%. This was primarily due to an increase in the company's free cash flow as a result of lower projected future capital expenditure. Subsequently, the company has increased its dividend payout ratio significantly, and has indicated that this improved ratio will be maintained. The result is a current dividend yield of 5.8%, and 8.87% for 2012 and 2013 respectively.

Portfolio positioning
The portfolio remains weighted towards resource and large capitalisation industrial stocks, which are mostly global companies. Our underweight position is mainly in banking stocks, which on current valuations appear fully priced and with poor relative growth rates. That said, we have chosen to be overweight FirstRand and Rand Merchant Bank. FirstRand's exposure to the vehicle market and its increasing exposure to the unsecured lending market make it a superior growth company in an unattractive sector. The portfolio also has positions in PSG and African Bank, which exhibit similar qualities. African Bank's exposure to the unsecured lending environment and strong cash generation have resulted in an attractive dividend yield as well as continued growth potential, while PSG has offered a good entry point into quality assets such as Capitec and Paladin. Large cap industrial companies, which make up a significant proportion of the portfolio, continue to offer exposure to a wide array of growing economies whilst allowing for preservation of capital should the rand weaken from current strong levels. Furthermore, these companies are in cash-rich positions with excellent corporate strategy and governance, which are of utmost importance during times of relative uncertainty. The portfolio's largest positions are in Sasol and MTN, representing over 20% of the portfolio. Its top ten positions comprise 64% of the overall portfolio.

Market review
After a volatile first three quarters of 2010, risky assets responded to prospects of an improved economic outlook and ended the year firmly in positive territory. During the fourth quarter, investors switched out of bonds into equities. Global equities added 8.8% over the period, while global bonds lost 1.8% in US dollars. Local bonds could not shrug off the global bond sell-off, ending up only 0.7% over the quarter. Cash, as measured by the STeFI, returned 1.6% for the three months to the end of December. The best performing asset class over the past year was the listed property sector. The sector continued to show strong returns, despite weak property fundamentals. Listed property gained 3.1% in the fourth quarter to rise by 29.6% for the year. Local equities participated in the global equity rally. The FTSE/JSE All Share Index rose 9.5% in the fourth quarter on top of the 13.3% gain over the prior three months, ending the year 19% higher. Resources (16.5%) proved to be the top performing sector, with financials flat and industrials up 7.8% for the period. Amongst the resource counters, diversified and platinum miners (both up 19.2%) did best, while short-term insurers (15.4%) and some smaller industrial sectors (media and support services) beat the overall market. Stocks predominantly focused on the South African economy fared worse. Construction ended the quarter 3% higher, banks closed flat, while food and general retailers added 2.9% and 6.2% respectively.

Portfolio review
The strong advance in world stock markets during the fourth quarter suggests to us that the economic recovery is on track, that growth has resumed, and that employment has turned the corner. However, the macroeconomic concerns of Europe, a tightening of monetary policy in China, structurally and cyclically high unemployment, large government deficits, and more recently rising government bond yields, are all factors that markets continue to digest. The most serious long-term problem is that of continually rising deficits and high rates of unemployment. The most effective way of solving this issue will be achieved by a significant improvement in global growth over a long period of time. It is for this reason that the US Federal Reserve undertook to provide further stimulus by initiating a new round of quantitative easing. If this policy should fail to stimulate the economy, the concerns that would then arise would be far more serious, and the issue of government debt would likely cause another bout of weakness in global markets. China's willingness to allow the slow appreciation of its currency is an encouraging sign, and should help to decrease the trade imbalances that have built up over the last 25 years. Furthermore, it should assist in alleviating some of the growing inflation concerns in Asia. This scenario would be favourable for commodities, consumer stocks in Asia, and US growth. South African GDP growth generally disappointed in the third quarter, particularly after hosting the World Cup. Household expenditure remained strong during this period, which should provide a foundation for a domestic recovery. It is likely that GDP growth accelerated during the fourth quarter to bring full year growth to just below 3% year on year in 2010. The outlook for domestic monetary policy should remain accommodative until the fourth quarter of 2011. The Investec Equity portfolio underperformed the FTSE/JSE All Share Index over the quarter. An overweight position in defensive stocks, such as British American Tobacco and Clicks, negatively impacted returns. The portfolio's overweight position in diversified miners and underweight exposure to banks added value.

Portfolio activity
The portfolio's holding of platinum stocks (Anglo Platinum, Impala Platinum, and Northam Platinum) were sold, as the valuations of platinum counters were considered high relative to the resources sector. Given the likelihood, in the current macroeconomic environment, of a continuing stronger rand, the platinum producers would find it difficult to justify their ratings. The holding in Clicks was reduced as its valuation had become extremely demanding, despite the fact that the company was likely to be able to continue delivering growth in earnings. Our position in the gold exchange traded fund (ETF) has been sold, as it was felt that the opportunity cost of holding gold had become too high relative to an exposure to general equities. Gold serves as an important protection against extreme inflation scenarios, and when financial assets are decreasing in value, gold and physical commodities are a store of value. We believe that the uncertainty surrounding global growth is diminishing and the likelihood of deflation or strong inflation is less than in mid-2010, therefore weakening the argument for maintaining a holding in the yellow metal. A position in Steinhoff has been added. On a two-year forward earnings basis, Steinhoff offers convincing value with a forward price earnings ratio of 7.4 times and a dividend yield of 3.9%, based on an unchanged dividend cover of four times. Furthermore, the company is exposed to the strong performing German manufacturing market, which is benefiting from the weaker euro. Steinhoff also owns businesses, which look undervalued relative to other logistics peers, e.g. Unitrans. This makes the opportunity for favourable corporate action more likely. Small holdings in Tiger Brands, Barloworld, Nampak, Remgro, Bidvest and Richemont were either added to or acquired, as their valuations and earnings growth prospects were attractive.

Portfolio positioning
The portfolio's largest positions remain weighted towards resource stocks, specifically Anglo American, Sasol and BHP Billiton, whereas the underweight positions are in the banking and retailing sectors. Exposure to the diversified industrial sector is also relatively high. Despite the major emphasis being on the resources sector, the number of stocks held within the portfolio has also been increased. The portfolio's diversification has improved as a result.