Despite a marginally negative performance from the JSE All Share Index (ALSI) of -0.6%, the Investec Managed Fund posted a return of 3.4% for the month. The JSE All Bond Index (ALBI) also had a good run on the back of better than expected inflation figures and a strong Rand. The ALBI returned 2.2% in October. Equities have however delivered double the return of bonds over the last twelve months, clocking in at 23% compared to 10.4% for the ALBI. We feel that monetary policy in this country is increasingly shifting towards a pro growth environment, which should further favour equities. Our asset allocation reflects this, with the portfolio being 67% exposed to the equity market, 13% in bonds and the balance in cash.
October was an exciting 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 31.6% in mid caps, 3.3% in small caps and 65% 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 index rose 5.7%. The Investec Managed Fund was well placed in this regard with heavy weightings in both sectors and an overall allocation of close to 70% in equities. Bonds returned 1.3% for the month.

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 the equity market as the retail investors become more aware of returns.

June saw a further decline of 2.7% in the JSE All Share Index, bringing the return from the equity market to -1.2% year-to-date. The bond market recorded a positive return of 1.1% on the back of a lower than expected inflation number and continuing strength in the Rand. The bond market is flat year-to-date. The Investec Managed Fund has returned 5.4% year-to-date in comparison.

During June our overweight position in retail and banking shares helped as retailers returned 4.99% for June and banks returned 2.35%. The more benign interest rate outlook necessitated by the likelihood that inflation will remain within the SA Reserve Banks target range of 3% - 6% for the foreseeable future; led to a strengthening in the outlook for domestically focussed firms. In addition, these companies still trade at a discount to their international counterparts and have solid growth prospects.

A further supporting factor is that 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 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.

We are 63% invested in equities, 19.4% in bonds and the remaining 17.6% in cash. We are starting to lean more favourably towards the bond market. In the case of both equities and bonds, our enthusiasm for the local asset class is tempered by caution for their international counterpart. We expect US 10 year bond yields to move over 5% in the medium term and still do not see any valuation support for US equities. Hence we are maintaining a cautious attitude which we hope will deliver positive real returns to investors.

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 displaying. 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. The equity weighting is currently 64.6%.

Within the equity portfolio, an interesting divergence occurred last month 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%. We feel that on PE's of 14.5 times, 10.5 times and 9.3 times respectively for the large, mid and small cap indices, the valuation levels are about right.

The bond market continues to struggle, with a flat return, despite a strong Rand as the sell off in US yields takes its toll. The portfolio has 17.5% in bonds and 18% in cash. With bond yields now in excess of 10%, real returns should be attractive once the US bond yields stabilise. We do not see the inflation rate breaching the 3 - 6% target band for a significant period of time and it seems as though the Reserve Bank will take cogniscence of this in their Monetary Policy settings.

For April, cash was king with a marginally positive gain. Equities have now underperformed bonds for the last three months. Whilst we believe that certain of our local shares are offering very attractive risk adjusted returns, we are concerned that global equity markets do not reflect the investment and political risks currently in play globally.

Our equity portfolio was reasonably well positioned with a zero weighting in mining houses which fell 28% over the month. Telecommunications fell 10%, which hurt, but we did reduce our weighting in MTN in the first quarter of this year.

We have moved more defensive in our positioning within the portfolio. We have a 4.8% weighting in Sasol on the back of geopolitical concerns and a 3% 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 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.

With medium dated bond yields approaching 10% the real return on offer is starting to look attractive. A switch from cash into bonds should be in the offering as soon as the global bonds stabilise. We are likely to keep the equity weighting under 60% and will focus in local and defensive shares for the medium term.

Fund manager Gail Daniel has trimmed the equity content back to 62% since quarter end. She says that though the SA market offers good value, there is a "quiet bear market" in the US which suggests a more conservative approach. Daniel is lengthening the duration of the bond portfolio and has recently cut back on telecom shares and accumulated Sasol, which she expects to give positive earnings in June.

The fund closed 2003 with a satisfying 21.4% return for the year. The fund ranked top quartile in its sector and displayed good relative performance. The optimistic equity market view is still reflected in the overall portfolio, with a distinct bias to shares with a certainty of growth and fundamental quality, and displaying a bias towards domestically oriented shares. We remain confident of good overall earnings growth from the retailers, with the shares still failing to fully price in the robust consumer environment. In a similar fashion, both Telkom and MTN have not fully re-rated to their cash flow valuations.

We do not anticipate another year of Rand strength with many major currencies and precious metals having normalized from extreme valuation levels. Both the gold price and the Euro are starting to look reasonably full.

We think tactically that Resources represent the next cyclical play, but caution against the high valuations. The current commodity cycle has definitely entered the final momentum stage, and we caution against Rand bearishness until the commodity cycle peaks.