Market Highlights
The main feature of September was yet again another bout of rand weakness, with the rand declining by 7.1% against the US dollar. However, unlike August this did not translate outperformance by the resource shares. Top performers were mainly non commodity rand hedge shares such as Old Mutual, Richemont and Remgro. Whilst we have good exposure to these counters we were hurt by holding Barloworld and Billiton. In the case of Barloworld we are less concerned as the share was simply, in our view, resting after a very strong August.

Our full weighting in offshore shares is providing positive impact on the performance side. We are invested in a few counters such as Air France and Toll Brothers which are beneficiaries of a lower oil price.

Whilst the All Share index returned 2.3% fro the month, the All Bond index returned 1.3%. We remain surprised that the bond market is recording positive returns in the light of weak inflation numbers and a weaker rand

Outlook
Looking forward, we expect continued rate hikes locally. The bond market which has displayed remarkable resilience in the face of some bad inflation figures and a weak rand could well sell off, placing pressure on banking and retail shares. We need to see improvement in the current account deficit, and until such time as this happens it will be hard to determine where the top of the rate cycle is.

On a more bullish note, the outlook for the US market continues to improve, in our view. Short term interest rates have peaked, and lower oil prices and a decline in long bond yields will provide some relief to the consumer who is struggling from a very weak housing market.
We are less confident on the short term outlook for commodity prices and may well continue switching into non resource rand hedges. .

Strategy
Until such time as the top of the local interest rate cycle is in view we will remain weary of the locally focussed companies. It is very hard to call when enough is enough on the rand. However, the Aussie dollar has only recently started to weaken, the copper price is still range trading, local bonds remain reasonably unconcerned about the inflation outlook and the local portfolio managers are underweight rand hedges. The rand is also not very cheap, and we think the bias is still to the downside and hence will remain overweight rand hedge shares.

We remain underweight bonds and property shares.

Market Highlights
The second quarter of 2006 saw a continuation of the positive returns in the equity market with the All Share index gaining just under 5%, whilst the shareholder weighted index gained 1.8%, however the level of volatility increased substantially. June was a month of exceptional volatility, with the market falling over 10% from 5 June to 14 June, before rebounding over 13% to the end of the month on the back of a weak rand.

International
The Federal Reserve Bank hiked to 5.25% and may finally be finished hiking rates, although this is by no means clear. If this is the case, we face the scenario of a benign interest rate environment for US shares, but local stocks will face the headwind of further rising interest rates. In addition the European and Japanese central banks look likely to raise interest rates, which will put pressure on amongst other things the carry trade funded in Yen. If interest rates have peaked in America, this is likely to see a return of some equity capital to America and a more muted outlook for emerging markets.

The saving grace for emerging markets this time round is that the valuation levels are attractive with several local shares on the J.S.E. , for instance trading on low double digit multiples to earnings. A weaker dollar environment on the back of flat interest rates is likely to support the gold price. Can gold finally start outperforming base metals? The US bond market took a hiding with yields rising from 4.85% at the start of the quarter to 5.25% late in the quarter, on the back of inflationary concerns. We believe that the US economy will slow in response to the 17 interest rises that have occurred. The US housing market is slowing and the US consumer is under pressure which will limit further rate increases. This slow down is likely to limit inflationary pressures, however there will be a lag.

SA Markets
June saw the first interest rate increase by the South African Reserve Bank since September 2002. Interest rates look likely to rise further on the back of an international environment where capital is scarcer for current account deficit countries. The price earnings multiple on the J.S.E. is likely to struggle to expand under these conditions, and whilst earnings growth remains supportive, slightly more caution is warranted towards risk assets. The rand broke R7.50= 1USD which was a level last seen in January 2004. The rand bottomed at R5.67 = 1USD in January 2004 and has resumed a bear trend, in our view.

The performance of the various sectors and shares can be traced directly to this macro economic factor. The resource 20 index returned 21% for the three months, whilst the financial 15 index returned - 5.1%. We are overweight resource shares and rand hedges in general. Consumer shares also suffered but we were fortunate to have reduced our weighting substantially through sales of Ellerines, Truworths and Edcon. The bond market struggled under the threat of higher inflation, brought on by the weaker rand, returning -3.6% for the three months and 3.9% for the year, with cash returning 7.4% for the year.

Outlook
We expect more moderate returns from the equity market. Stock selection will remain paramount and shares that have underperformed their peers due to rand hedge characteristics such as Old Mutual and Standard Bank could well start doing better. Whilst a retracement in the rand is possible we expect current account deficits will finally start to matter again in determining currency performance. The rand is not well placed in this regard. We will be looking for opportunities to further increase our rand hedge weighting

Strategy
We have over 55% of the fund in rand hedge shares with a broad spread of commodity as well as more defensive rand hedge shares. At some point the monetary tightening that has taken place in the US and the higher oil price will start to impact global demand, but what is not clear is the extent to which this can be offset by China. Even with a strong China, the US consumer is still very important in global demand terms. Consequently we have taken a balanced approach to share selection within the rand hedge space, accumulating defensive as well as more cyclical rand hedges. We are overweight gold shares, Remgro, Steinhoff and Sasol.

Investec Managed Fund (IMF) is geared heavily to a continuation of the positive SA scenario of rand and interest rate stability, strong resource prices and an overall positive equity market. Many argue that strategies like this are testing the limits of the market's ability to keep on delivering. They may be right, but IMF investors have the comfort of knowing that manager Gail Daniel has a proven ability to adjust quickly to change when needed.

Financial Mail - 21April2006

The bull market continued in the first quarter of 2006, with the JSE All Share Index delivering a 13.3% return, bringing the 12 month return to 57.4%. Equity returns have far outstripped bond returns with the All Bond Index returning 12.7% over twelve months and cash lagging at 7.4%. The obvious question is do we see this continuing.

There are problems in the SA economy and world financial markets. The supply side ability of the South African economy is constrained by underinvestment in fixed infrastructure as witnessed by the power outages in Cape Town. Supply side problems typically take longer to resolve than demand side problems. The demand side of the South African economy remains robust with motor vehicle and retail sales remaining buoyant as new consumers gain access to finance. This is probably a differentiator of the South African economy as it is an emerging market with a highly sophisticated and established financial sector. We remain invested in the consumer and banking sector although we have altered our stock picks in the retail space.

The current account deficit is always a concern although it is clearly being easily funded with the Rand at close to R6= 1USD. The budget deficit is not a problem, the ability of the local municipalities to spend the cash allocated to them is.

Globally demand also remains firm and broad based. US interest rates must be pretty close to the top now, which could see a resumption of the dollar bear market, simultaneously supporting a rerating of the US stock markets. Commodity prices moved higher again, in a seasonally weak period. Companies are slow to bring on supply. Indeed in the recent reporting period, the big 3 London miners competed to see who could announce the biggest buy back ,and not who could bring on supply. In the face of this it is not surprising that copper made yet another high at over 240 c/lb. We have a 32% weighting in resource shares. Within this we are overweight gold as we are finally seeing a rising rand gold price. The companies have enormous operating leverage to a rising revenue line and earnings growth could surprise on the upside. Platinum shares delivered superb returns, benefiting from rumours of consolidation by the gold companies. Whilst we do not see an imminent rand collapse we do think that the currency is on the expensive side, and have switched 16% of the fund offshore, principally into developed market equity. We have added or initiated positions in Old Mutual, Barloworld, Didata and Sappi. All have been consistent laggards. We expect mergers and Acquisitions to remain a strong trend this year.