Market review
Local equities performed well over the third quarter, adding 7.3% and returning 14.8% for the year to date. The resources sector continued to lag the overall market, despite slightly better returns (+2.9%) in the quarter. Platinum counters were the weakest amongst resources companies, losing 3.4% while paper stocks added 11.1%. Industrials (+10.5%) showed substantial variability amongst subsectors, with construction stocks losing 2.1%, while retailers (+10.1%), media (+18.7%), beverages (+11.4%) and mobile telecommunications (+15%) recorded double-digit growth. After a strong first half, banks (+1.9%) lagged the FTSE/JSE All Share Index in the quarter. Short-term insurers (+16.8%) and life insurers (+12.3%) saw strong gains over the period.

Portfolio review
The third quarter was characterised by low levels of market volatility and at times a deafening silence from Europe. Investors cringed over China's slowing growth, not to mention the impending US fiscal cliff issues. In some ways this was another tough quarter, but the South African equity market continued its rally and the portfolio provided investors with solid, above-market returns. Our material underweight exposure to financials and higher than average Richemont and RMI Holdings stakes proved to be the correct positioning. However, the portfolio's underweight position in MTN and marginally overweight position in Exxaro Resources negatively affected performance. Our underweight position in MTN is based on concerns about the increasing pricing pressures and to a certain extent the political ramifications behind the company's exposure to Iran.

Portfolio activity
We decided to add to the portfolio's position in Impala Platinum and to acquire a new position in Lonmin towards the end of the quarter. We did not build a material position in Lonmin because of a potential rights issue the company might have to deal with to avoid breaching debt agreements. A rights issue would present the opportunity of adding to this stake, possibly at a discount to the current price. Xstrata is the largest shareholder in Lonmin, which they acquired 5 years ago at over R500 per share. This would be an ideal time for the company to add to its stake. Adding Impala Platinum and Lonmin to the portfolio and selling and reducing holdings in AVI, Clicks, Foschini and Woolworths to fund these purchases, increased the risk of the portfolio. However, if we look at the respective valuations it is clear that the discrepancies between these valuations are large. The retail sector trades on a price earnings ratio of over 20x on a historical basis and the sector has comfortably outperformed the market over the past 5 years. In contrast, the platinum sector trades at below book value and significantly below replacement value, although it is largely unprofitable at the moment.

Portfolio positioning
Going into the final quarter of 2012, the portfolio is positioned for an ongoing downward trend in resource stocks, a weaker rand coupled with lower domestic growth and more local monetary easing. The two largest holdings, British American Tobacco and South African Breweries have remained an important part of the portfolio for a long time. In a global environment of muted growth and interest rates close to zero, these stocks still produce earnings growth and dividends while maintaining reasonably attractive valuations. They also offer protection against a weaker rand. The risk to the rand has undoubtedly increased as the deficit on the current account has widened to 6.4% of gross domestic product. There are also signs of a widening fiscal deficit. The recent labour problems, which were settled with large wage increases, are not good for the inflation rate going forward. Rating agency Moody's downgrade of South Africa's debt rating at the end of September is also a warning sign. Although the mining sector is currently not profitable, it seems to offer some attractive valuations, based on how much prices have fallen. The price levels of the resource stocks in general will probably be volatile before a new trend starts. Platinum stocks have experienced the most severe sell-off within the resource sector. We believe that, at their current levels, platinum stocks offer the investor the opportunity to earn high absolute and relative returns. The profitability of the platinum mines may be restored over the next 18 months by closing unprofitable shafts, which will probably lead to an increase in the price of platinum due to lower supply. The rand could well weaken against the US dollar during the same time, helping to improve the profitability of the beleaguered sector. While our exposure to platinum may mean more risk and a greater dependency on a weakening rand/US dollar exchange rate, the balance of the portfolio remains largely invested in stocks such as RMI Holdings, FirstRand, Mediclinic and PSG. These companies all have strong management teams that add to their ability to obtain high rates of return on the funds that they employ. In addition, these stocks are generally attractively priced. We raised the portfolio's exposure to physical gold during the quarter, as the metal is increasingly undervalued by global markets.

Market review
The FTSE/JSE All Share Index made modest gains over the quarter (+1%) while in June, the index rose 1.9%. General miners performed well over the month, gaining 5.6% (-1.6% over the quarter). May's strong returns from gold miners were partially reversed in June, with the sector shedding more than 9% over the month. While the sector only lost 2.2% over the quarter, it has recorded the weakest performance for the year to date (-16.7%). Healthcare added 10.9% over the quarter, general retailers rallied a further 7.3% and food retailers closed 9.2% higher. Construction (-11.3%), household goods (-10.4%) and the personal goods sector (-5.7%) were weaker over the 3-month period. Telkom fell 20% in June after the South African government blocked Korea's KT Corp from acquiring a 20% stake in the fixed-line operator.

Portfolio review
The portfolio performed broadly in line with the FTSE/JSE All Share Index during the period under review. Vodacom was the worst performer, although this position had been significantly reduced into strength. The best performer was PSG, which is a position we have held for some time. Other positions that continue to contribute positively to performance include AVI, FirstRand and Remgro. All of these are examples of relatively conservative businesses with good cash flow in preferred industries. The relatively large positions held in AngloGold, Anglo American Platinum and Richemont were some of the negative contributors. However, not owning Growthpoint, Life Healthcare, Shoprite and Sanlam also contributed to negative performance. The commodity cycle seemed to have peaked during February and the Resources Index has followed the same course. The portfolio's position in the resources sector is underweight, as positions were liquidated toward the end of February. Although we have an underweight exposure to the resources sector, the portfolio holds large positions in AngloGold and NewGold. Interestingly, the position in AngloGold detracted from performance during the quarter and NewGold, which is an exchange traded fund (ETF) that holds physical gold, added to performance. With the persistence of the European Central Bank's policy of issuing credit and the US Federal Reserve overriding the price mechanism of interest rates, the global economy is becoming increasingly burdened by fiscal debt. This debt is already reaching the point of failure in some countries where governments can no longer meet their debt commitments. In the event of multiple sovereign defaults it is likely that investors may increasingly switch from fiat money to gold. It appears that the continued slowdown in Europe and the United Kingdom will continue and therefore world growth still depends on China and the US. The general expectation is that Chinese GDP growth will decline to 7% from the current 8%. The US GDP growth figure appears to already be headed for 2% from the expected 3%. South Africa is no exception, as GDP growth looks closer to 2% from the expectation of 3% earlier this year. In general, it is more likely that the rate of growth will decline rather than increase, due to the high sovereign debt levels and excess economic capacity.

Portfolio activity
We significantly reduced our position in Vodacom as it was announced that the company plans to pay a dividend of 90% of headline earnings per share. We therefore felt that there was not much room for improvement in the future. In addition, the company's earnings could come under threat as a price war about cell phone rates gets under way. The position in JD Group was sold and switched into Clicks and the holding in Anglo American Platinum was sold and partly switched into Impala Platinum. We reduced our positions in FirstRand and Standard Bank and topped up our position in British American Tobacco.

Portfolio positioning
We remain positioned for slow (below trend) economic growth with the possibility of further disruption to the global banking industry and credit markets. Our largest positions are British American Tobacco and SABMiller, comprising over 16% of the portfolio. Resource stocks, excluding the NewGold position, comprise 25% of the portfolio, with the largest resource holding being BHP Billiton. From a market technical standpoint it would appear that world markets could well have a further downward leg sometime over the next 12 months, which would indeed coincide with the risky global macro picture. Apart from the portfolio's position in gold shares and physical gold, the emphasis is on fundamentally low risk investments that are expected to outperform in the current economic environment.

Market review
Events in Europe and the US again took centre stage during the first quarter of 2012. Asset markets remained resilient despite continued macroeconomic uncertainty and serious doubts about the ability and willingness of failing southern European economies to meet their austerity obligations. A strong take-up of emergency funding from the European Central Bank (ECB) by hundreds of European banks boosted sentiment, driving equities higher and strengthening commodity currencies. At the margin, economic data also continued to improve in the US, where stabilising house prices and rising employment levels boosted the prospect of positive but muted growth. The FTSE/JSE All Share Index (ALSI) gained 6% in the first quarter, but most of the positive performance came in January. Resource shares lagged the rally and gold miners (-14.9%), Impala Platinum (-8.9%) and Sasol (-3.9%) were notable underperformers. Financials gained 12.8% and industrials added 10.5%, driven by strong performances from consumer goods and consumer services.

Portfolio review
The portfolio performed in line with the ALSI over the quarter, but lagged behind the FTSE/JSE SWIX All Share Index (SWIX). This is largely due to positions in Anglo American, BHP Billiton, Sasol, AngloGold, the NewGold exchange traded fund (ETF), Anglo Platinum, Impala Platinum and MTN. Although the overall market peaked during February, the resources sector reached its top at the end of January. Some of the more severe declines in the stocks mentioned above were due to the realisation that earnings expectations had been overly optimistic, given spot prices of the relevant commodities. Although the portfolio's performance for the quarter was very similar to that of the ALSI, the portfolio composition differs quite considerably from the index. The similarity in returns was therefore more coincidental and can largely be attributed to the portfolio's holdings in gold and platinum stocks. AngloGold and Impala Platinum declined by 17.2% and 9% respectively, negatively impacting portfolio performance.

The portfolio has a material weighting in AngloGold and the NewGold ETF, both of which provide exposure to gold. While this allocation took away value during the quarter, we believe it provides suitable protection against the current policies of central banks across the globe. Although largely led by the US Federal Reserve, central banks continue to issue credit to lift economic growth and to override price mechanisms (particularly of interest rates) at every opportunity. These practices mean that the growing fiscal debt is burdening the global economy, which could at some point fail when debt commitments can no longer be met. In this scenario, it is becoming more likely that global markets could ultimately create some sort of gold standard. Paradoxically in this environment, gold mining companies increasingly represent better value from both an earnings point of view and a balance sheet perspective. The severe slowdown in Europe and the expected deceleration in Chinese GDP growth will undoubtedly affect some of the emerging market economies, and South Africa will by no means be an exception. The outlook for 2012 remains poor and it is highly unlikely that South Africa's growth rate will exceed 3%. A further dark cloud on the horizon was the revision by Standard & Poor's of South Africa's sovereign credit outlook from stable to negative. In summary, overall global growth appears to be at risk. The expected increase in US growth may not be sufficient to offset the declines elsewhere and in particular, the slowdown in China's growth, which is also one of the few growth engines in the global economy.

Portfolio activity
Activity within the portfolio was reasonably active. There were a number of significant reductions in larger positions and the proceeds were distributed over additional stocks. We reduced the portfolio's positions in Anglo American, BHP Billiton, Sasol and Kumba Iron Ore significantly. The proceeds were allocated to Mr. Price, Woolworths, PPC, Rand Merchant Insurance Holdings, Remgro, JD Group, Standard Bank and Imperial Holdings. We also reduced the position in AVI, sold Tiger Brands and reduced our position in MTN significantly. These sales were allocated to positions in Anglo American Platinum, AngloGold and Impala Platinum which have lagged significantly.

Portfolio positioning
The portfolio is positioned for a slowdown in global economic growth with the possibility of further dislocation within the global banking industry and the credit markets. At the end of 2011, there were a few positions that were at 10% or nearing this. Now, the largest position (SABMiller) is just under 8%. The top ten portfolio positions make up just over 50% of the portfolio, whereas at the end of the last quarter the top ten positions represented more than 65%. Sasol is currently the largest resource stock position at 7%, whereas at the end of the last quarter Sasol was the largest holding at over 10%. Apart from the precarious global macro position, market technicals appear to be exhausted in the short term. A correction would be healthy, as the market move from the lows reached during August 2011 to the high in February of this year represents a gain of 22%. This change in the market resulted in the market price-to-earnings multiple increasing from 10 to 13.5.

Market review

The FTSE/JSE All Share Index (ALSI) added 8.4% in the fourth quarter and rose 2.6% over the year. The broad industrial grouping outperformed both financial and resources over the quarter. Food and general retailers fared particularly well, closing up 20.3% and 15.5% higher respectively. Life insurers added 16.9% over the quarter while the smaller basket of technology stocks rose 12.1%. Gold and platinum miners lagged the overall index, ending flat over the quarter. General miners performed in line with the broader market while Sasol, the only company within the oil and gas sector, ended 18.6% higher.

Portfolio review

The final quarter of 2011 began displaying a bi-polar world of an improving US economy and a deteriorating European economy. World GDP growth looks set to be around 3% for 2012. This figure would ordinarily be acceptable; however, it belies the fact that growth in the euro zone will probably be zero to even slightly negative for the year. The US economy showed marginal improvements, as the third quarter GDP increased at a 1.8% annual rate. The unemployment rate fell from 9.1% in October to 8.6% in November, and the ISM Manufacturing Index rose to 52.7 in November from 50.6 in August. Inflation also improved, with the annual CPI rate falling from 3.8% in August to 3.4% in November. The federal open market committee (FOMC) retained its funds target range at 0%-0.25% throughout the fourth quarter. The FOMC released new growth projections, lowering its GDP forecast range for 2012 from 3.3%-3.7% to 2.5%-2.9%. The US economy faces some challenges. In particular, there is a risk that Congress will fail to agree on longer-term deficit reduction measures, which may in the longer term negatively affect the country's debt rating.

Europe looks set to move into recession in 2012 as its frail economy is plagued by a debt crisis, an over-dominant public sector, high levels of unemployment and an overall lack of resolve by its leaders. Unemployment increased during the fourth quarter and the forecasted rate of unemployment is set to rise further in both 2012 and 2013. Despite the European Central Bank's latest efforts to ease bank funding pressures, the constraints on the availability of credit are likely to worsen. The current slide into recession should last for a couple of quarters, but there is a possibility that something worse could happen as a result of politicians and bankers failing to respond to a rapidly deteriorating situation. The severe slowdown in Europe will undoubtedly affect some of the emerging market economies, and South Africa will by no means be an exception. The South African economy was already showing signs of deterioration in the fourth quarter of last year. Manufacturing output declined 3.6% monthon- month in October, confirming the country's vulnerability to an ailing euro-zone economy. The SA data releases thus far for the fourth quarter suggest meagre GDP growth in the range of 2.5% annualised. The outlook for 2012 remains poor and it is highly unlikely that South Africa's growth rate will exceed 3%.

We expect the Chinese economy to decelerate during 2012 due to the euro-zone crisis, falling volumes in the local real estate market and the deleveraging of the global banking sector. The slowdown is likely to be muted, provided the central bank exercises some monetary policy easing. China's GDP growth is thus expected to reach its low point for the year during the first two quarters and thereafter should begin to rise, attaining 9% on an annualised quarter-on-quarter basis in the second half of 2012. The Investec Equity Fund performed in line with the ALSI over the quarter and was well ahead of the ALSI over the year. The balanced allocation between high dividend paying stocks and global cyclical counters which offer significant value assisted us in delivering consistent performance to our investors in 2011. In the final quarter of 2011, the portfolio benefited from our holdings in Sasol, Richemont, British American Tobacco (BAT), SABMiller and BHP Billiton. Vodacom and Anglo American lagged over this period.

Portfolio activity

Activity within the portfolio was limited over the quarter. We reintroduced Aspen to the portfolio and added to our BAT and Old Mutual holdings.

Portfolio positioning

The portfolio is essentially a mix of select resource stocks (e.g. Anglo American and BHP Billiton) and high dividend yield stocks (e.g. Vodacom, BAT and MTN) 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 a general market decline as was the case during most of 2011. The sector was a poor performer during the year, returning -6.5%. The underperformance was driven by worries over global growth and particularly concerns about a loss of momentum in China. We also have exposure to emerging market growth through our holdings in SABMiller and Richemont. The portfolio is further diversified through our exposure to the gold exchange traded fund (ETF).