Local investment continued to be the smart option during October, as South African stocks outperformed their international counterparts. The local market saw a marginally negative return overall, driven by Resources counters, but Financials and Industrials were back in the black, driven largely by Banks and Telecom Services respectively. Within the fund, the fund managers reduced their exposure to Sasol in favour of the more cyclical Sappi, while increasing exposure to Nedcor at the expense of Standard Bank, now that the corporate action anticipated within Nedcor has materialised. Within the Resources counters, the fund managers continued to sell Billiton down while increasing their holding in Anglo American, based largely on valuation, and taking into account their respective exposures to different sectors of the international commodity markets. Their underweight positions in Richemont and Imperial contributed positively to performance, while Sasol and Gencor detracted. Performance has been pleasing, with strong returns over both the short and long term, and the fund has delivered returns in excess of inflation over the longer term. The fund managers continue to focus on stockpicking and, while risks remain to market performance, are confident of future prospects for the fund.

The outlook for local equities over the quarter deteriorated as our equity market succumbed to the turmoil in global markets, aided on the way down by the leaked draft mining charter. Although local demand appeared strong, even in the face of a sharp rise in the cost of borrowing, it was not enough to offset the negative sentiment towards equities. The All Share Index gave up just over 10% over the quarter, although local investors were still better off than investors in foreign markets, who saw dramatic levels of loss.

Solid stockpicks saw the fund perform satisfactorily over the past quarter, as our overweight positions in Harmony and Sasol contributed significant value, while our underweight in Richemont saw losses limited. Given the benefit of hindsight, we would have preferred to hold more Goldfields and less equities. Going forward, the risk remains that our market will yield further to the global growth downtrend, but valuations are compelling, and we maintain an overweight position. The tide will turn, and we are using the current market conditions to upweight quality counters at discounted prices.

The Managed Fund continues to perform well on the back of solid stockpicking, and astute fixed interest management. The Resources sector is a crucial area in which our long-term holdings have paid off for investors and in this regard, the Impala stable has added significant value, while in the shorter term Sasol also propelled performance upward. Liberty International disappointed over the month, and the fund manager believe that the valuation discount we bought the stock on has completely reversed. Hence, they have further decreased the weighting. Looking forward, local stocks continue to offer solid prospective returns, particularly within industrials, and the fund managers have actively sought attractively priced stock in this area and remain overweight equities.

Within fixed interest, our short duration paid off as yields responded to further macroeconomic bad news. This translated into a performance in line with the index in this asset class, and the fund managers continue to do exceptionally well in fixed interest management over both the long and short term. The fund managers remain cautious for now, although they will continue to seize buying opportunities as valuations reach reasonable levels.

Equity markets suffered losses across the globe as investor sentiment soured, with fears of accounting irregularities fed by near-daily reports of inquiries, doubts and confessions. Funds flowed out of shares and into bonds, with the MSCI index falling sharply, as the JP Morgan Global Government Bond index firmed. The local market fared a little better, although still in negative territory over the quarter. Locally, an overweight position in Financials added considerable value as the sector finally rewarded patient investors; our overweight in Banks was well timed, and our stock selection within life assurers proved correct. Although Resources lost ground over the quarter, your fund's exposure to gold increased, which performed well (and consequently was trimmed back), as did platinum, where your exposure was to Impala. Non-mining counters also did significantly better than diversified mining houses, and our overweight in Sasol continues to add value. The long-term underweight in Richemont also paid off as local consumer-linked stocks outperformed global luxury counters, as did a strongly underweight position in Dimension Data. Fixed interest exposure within the fund was conservatively managed, given our bearish outlook on inflation, resulting in marginal underperformance over three months. However, over the longer term the track record for bonds and cash is strongly ahead of the benchmark, as is total fund performance over the quarter, while long-term performance continues to improve.

April was a particularly strong month for bonds and financials. Foreign investors have been attracted back into the bond market by attractive yields and an appreciating local currency. The strengthening rand also shows that the rise in PPI is set to slow and with the inflationary risksin the longer term receding, interest rates should start to fall at the end of the year, although an increase in the short term is still likely. Resources shares buckled under the stronger rand and lost 4.8%, while the market overall gained 1%. Financials posted a good return of 15.7%.

As a result of our view in the last quarter, the Investec Managed Fund remained long of equity over this month, despite initial returns which may have led a manager of less conviction to reduce the bet on local stocks. The fund manager remains overweight local stocks, particularly Financials, while the fund manager has maintained a neutral position in resources and are underweight Industrials (although the fundmanager is neutral ex-Richemont). Within all sectors, but probably most notably in Industrials, the fund manager continues to seek companies with rand-denominated costs and dollar revenues. There appears to be more upside in these counters than would appear at first glance, given the delayed effect of rand weakness last year, and notwithstanding ongoing benefits in the light of a structurally weak currency. The fund manager predicted that financials would do better despite the aftermath of Unifer, Saambou and BOE’s woes. Within Resources, our focus on single-commodity stocks was maintained with holdings in Sasol and Sappi, both of which are doing well. The fund manager currently favours equities over bonds, particularly given the recent data releases and subsequent reaction in the fixed interest market; expectations of interest rate increases have eroded returns at the longer end of the market, although opportunities for trading gains in the market are being seized as they arise. The months ahead will be challenging, as global economies recover while stock markets appear to be in shock, companies swamped by excess capacity, and investors wary of further shocks as accounting practices come under intense scrutiny. Locally, inflation will dominate, as wage negotiations commence and the Reserve Bank keeps a watchful eye on the numbers.

The Investec Managed Fund has a 70% exposure to equities, relative to the 55% sector average. The fund has no international exposure, but are overweight resources and has a bias towards industrials with strong Dollar revenues. Financials represents 17% of the portfolio.