Market review
During the quarter, low interest rates and further quantitative easing continued to support financial assets. Low nominal cash yields have drawn investors into riskier asset classes. Emerging market equities, along with commodity prices and emerging market currencies, were the clear winners. The MSCI Emerging Markets Index rose 18.2% over the quarter while the MSCI World Index gained 13.9%. Zinc, copper and aluminium ended more than 20% higher, outperforming a substantially weaker US dollar. Gold breached the $1300 mark, to gain 5.4% over the quarter and 19.4% year to date. Platinum and Brent crude both returned 8% in the past three months. Ten-year US Treasuries strengthened, with yields ending the quarter below 2.5%.

Local economic activity moderated, with GDP expanding by 3.2% in the second quarter, down from 4.6% in the first quarter. Concerns about the global economic recovery and subdued demand locally, coupled with the favourable inflation outlook, motivated the South African Reserve Bank to further reduce the repo rate to 6%. The August inflation number of 3.5% was the lowest since mid-2005. The rand was one of the strongest emerging market currencies over the review period, gaining more than 10% against a weak US dollar. Bond yields fell sharply, boosted by foreign investor demand and continued downward pressure on inflation. The All Bond Index ended the quarter 8% higher, behind listed property (13.7%), but well ahead of cash which returned 1.7% over the period.

The FTSE/JSE All Share Index rose 13.3% over the quarter. The non-resources sector led the market higher, with a significant increase in mergers and acquisitions globally spilling over into the local market. Old Mutual confirmed that it was in discussions with HSBC on its stake in Nedbank. Nippon Telegraph proposed a cash buyout of Dimension Data and Wal-Mart made a cash offer for Massmart. Both the gold and platinum sectors ended down over the quarter, with platinum miners losing 2.3% while gold mining gave up 1%. Consumer services, which include the general retail sector, gained just shy of 25% over the same period. Food retailers, banks, life insurance and personal goods continued to perform well ahead of the broader market.

Portfolio review
The portfolio enjoyed a successful quarter, on the back of a full weighting in equities in the final six weeks. The weakness at the end of August provided us with an opportunity to top up our equity weighting. Equities are very cheap relative to local and global bonds.

The dynamics in the global financial markets continue to be driven by near zero interest rates in America. Low interest rates, together with the US Federal Reserve stating that it would keep liquidity abundant, have driven the search for yield. This in turn, has resulted in strong inflows into our bond market, keeping the rand firm and inflation low. SA interest rates continue to surprise on the downside and equities look very good value relative to bonds. It is hard to see this changing and hence the current trend of strong inflows into emerging market bonds is likely to continue until the US raises interest rates. Equity markets will remain concerned about the debt overhang, but in our view, shares are now priced so cheaply relative to bonds that any good news could well see equities trade substantially higher.

Earnings growth is not that secure. The strong rand is making it hard for the rand hedges to grow earnings. At low interest rates, shares with solid earnings growth over the medium term are worth a premium. Growth is the scarce resource and the market is perfectly positioned for growth shares to trade at a premium. The rand is unlikely to trade at levels which allow manufacturing and some mining companies in South Africa to make a decent return. Certain commodity prices will remain strong as underinvestment post the global financial crisis will keep the supply side very tight. Copper is the best example. We prefer to buy mining companies with assets outside of South Africa, where we can. Cost growth in South Africa is outstripping increases globally, and the strong rand is holding back earnings. In addition, the legislative climate in SA is problematic. Nationalisation is likely to remain on the political agenda. We favour BHP Billiton over Anglo American, and AngloGold over Gold Fields and Harmony. Merger and acquisition activity is likely to remain a driver of share prices. Low interest rates make funding levels highly attractive and muted demand growth means that cost-cutting and identifying synergies are essential.

Portfolio activity
We continued to raise our equity weighting during the quarter and we also increased the bond weighting. The offshore portfolio has exposure to Xstrata, Rio Tinto and Freeport. Copper stocks have been falling and any restocking will drive the price higher.

We switched Absa into RMB Holdings during the quarter. FirstRand is the only local bank receiving earnings upgrades and it is the cheapest. We bought Imperial Holdings on the back of strong earnings upgrades. Our view is that interest rates are not going to be raised locally for quite some time. We disposed of SABMiller as we think it is expensive and lacks earnings upgrades. During the review period, we bought into Foschini which is one of the cheapest retail shares. The company is also enjoying earnings upgrades.

Portfolio positioning
Banking shares received severe earnings downgrades over the last quarter and the portfolio is underweight the sector. We prefer retailers in the domestic space. Diversified mining shares are cheaper with superior growth. The portfolio is long copper-related shares, with the notable exception of Anglo American. We are also holders of gold shares and the gold exchange traded fund. There are several shares in the portfolio at attractive dividend yields, including Woolworths, Mr Price, Vodacom, Vodafone, British American Tobacco, Taiwan Semi-Conductor, and potentially MTN. We are now fully weighted in equities and low on cash. Our view is that any good news should result in equities trading higher. Pessimism abounds. Our defensive holdings in gold shares and the gold exchange traded fund, which serve as insurance in weak markets, did their job this quarter. The gold exchange traded fund is one of the few assets available globally, that diversifies risk.

Market review
The second quarter of 2010 reminded investors and market commentators that excess global indebtedness, which had resulted in the global financial crises, was not likely to be resolved in a few short months or by some extraordinary policy miracle. The spotlight remained firmly focused on Europe, with certain countries in the region straining under the heavy burden of unsustainable funding requirements. Global share markets headed lower as uncertainty rose around the likelihood of a V-shaped economic recovery. The MSCI World Index dropped sharply, closing 12.5% down over the quarter, dragging this year's returns into negative territory (-9.6%). Emerging markets fared somewhat better, shedding 8.3% over the quarter and 6% year to date. The FTSE/JSE All Share Index lost 8.2%, dragging the year's returns 4.1% lower. The weaker rand detracted from US dollar returns. The local currency depreciated 4.9% over the quarter and 3.5% year to date against the dollar. The rand gained significantly against the euro, appreciating 12% over the first six months of 2010. Resources were worst hit over the quarter, with platinum and diversified miners off 11% and 18.2% respectively. The gold sector was the best performer over the quarter, rising 16.5%. Other defensive sectors also performed admirably: food and drug retailers ended 11.9% higher and fixed line telecommunications surged 10.5%. Industrials lost 7% with general retailers (4.1%) outperforming the local banking sector (-9.9%) by a wide margin. Bonds, cash and listed property provided positive returns over the quarter. Cash returned 1.7%, bonds 1.1% and listed property rose 0.6%. Year to date, listed property remains the best performing asset class (10.6%).

Portfolio review
The Investec Managed Fund returned -3.9% over the second quarter of 2010. We were defensively positioned with a large holding in the gold exchange traded fund and gold shares. Around 15% of the portfolio is invested in gold and gold companies. We took this position as we were concerned about the enormous debt burden of developed market countries. In addition, we usually run a short futures position or increase the cash weightings. Large cap share prices fell considerably faster than their mid cap counterparts. We do have exposure to mid cap shares, such as Mr Price and Woolworths. Both of these companies are on dividend yields of over 5% and are growing their dividends. However, South Africa may also feel the impact of a second global slowdown. We are running the second largest budget deficit in emerging markets and have one of the worst current account deficits and unemployment rates out of the countries measured by The Economist. Mid caps in general could be vulnerable. Resource (ex gold) and financial counters performed poorly, which is unusual. We should have had fewer resource counters, but did not have a heavy weighting in financial shares. Mobile telecoms also lost ground. MTN was weaker and we bought a few shares towards the end of the quarter. Our equity weighting fluctuated during the review period, but was at levels below 50% for most of the quarter. There are some very attractively valued shares both locally and internationally, for instance, Taiwan Semi Conductor trades on a 6% dividend yield and is growing. However, we think that equity markets are going to become very cheap whilst the debt overhang is a dominant theme in world financial markets. We are not favourably disposed to South African bonds as we are concerned about currency weakness and an imminent bottom in inflation expectations. Real wage increases (for those employed) are too high to keep inflation around the 4% mark. Developed market debt levels are excessive and fiscal drag is unprecedented. A renewed global slowdown in the developed world is likely. Leading indicators are rolling over and Chinese growth has been slowing. Our view is that the recent announcements of de-pegging the renminbi were nothing more than lip service ahead of the G20 meeting. As the US Congressional elections draw closer, China may face further pressure in this regard.

Portfolio activity
The portfolio's weighting in cyclical counters was reduced over the quarter and the defensive holdings were increased. We looked for shares with high dividend yields, and a few of these can now be found. During the quarter we were sellers of Anglo American, African Mineral Resources, Sasol, Kumba Iron Ore, Sappi and Old Mutual whilst we trimmed our Steinhoff holdings. We further increased our exposure to gold shares. Our view is that we are likely to enter a very favourable environment for gold companies with the rand weakening and the gold price strengthening. The European bailout of Greece (albeit very imperfect) illustrates how quantitative easing is still ongoing, and gold has the best supply characteristics of any currency globally. We were buyers of Vodacom, Didata and SABMiller.

Portfolio positioning
The portfolio remains defensively positioned. Strong private sector growth is essential to help counteract the over-indebted position of governments. There has not been much deleveraging, merely a transfer of debt from consumers to governments. Further quantitative easing in the medium term is very likely. The global nature of the problem makes it all the more difficult to resolve. We expect to see a further divergence between economies displaying different fundamental characteristics. The portfolio remains heavily weighted in gold and gold shares. We have reduced our overweight position in non-gold resource counters. The gold price continues to move higher with some vigorous profittaking at times. We are underweight the local banking sector, as we think that share prices do not adequately reflect banks' low growth characteristics. Recent declines in share prices have made some of these counters more attractive. The earnings growth that will be derived over the next two years will be from declining bad debts. The National Credit Act is, however, curbing loan growth and until consumers have worked off their debt, growth is going to be muted in the credit space. We prefer cash retailers to credit retailers and remain concerned that local companies are not positioned to produce the type of earnings growth that the shares require. The portfolio is underweight bonds, with most of our exposure in this space consisting of inflation-guaranteed corporate bonds. We currently have no exposure to property.

Market review
In the first quarter of 2010 asset prices continued to rise as the global economic recovery gained traction. Strong March returns took the global equity market composite back into positive territory for the year. The MSCI World Index closed 3.4% higher over the first quarter while the MSCI Emerging Markets Index returned 2.5%. US markets led their global peers, with more cyclical markets and sectors generally showing stronger returns. On the emerging market front, South Africa along with Turkey, India and Russia all recorded dollar returns above 4% (MSCI indices). Chinese equities (-1.6%) continued to languish, despite domestic growth data pointing to robust investment spending and rising consumption growth. The global market weakness in response to Chinese policy tightening early in the quarter was short-lived, with risk appetite improving and optimism about the recovery again prevailing. All returns are quoted in US dollars. The South African economy is also showing signs of recovery. Year-on-year comparisons indicate strong gains across most categories, boosted by very weak economic activity at the start of 2009 when the recession was in full swing. Large-scale job losses have abated, while manufacturing activity has recovered strongly off a low base. Durable goods spend, having previously faced the headwinds of tight lending standards and weak final demand, proved firm in the first quarter. House prices are showing signs of stabilisation. Fourth quarter GDP growth of 3.2% beat estimates (quarter on quarter, seasonally adjusted annualised rate). The current quarter's growth rate should further support the view that the local economy remains on the recovery track. With leading indicators at or near their peak, pointing to a more moderate second half, growth estimates for the year as a whole remain below 3%. The National Treasury will continue to focus on fiscal restraint. The collapse in tax receipts, coupled with the high public spending bill on existing projects, has placed substantial pressure on government's funding requirement. The budget deficit of just below 7% of GDP for this past fiscal year is estimated to fall to less than 4% by the 2012/2013 financial year. The Reserve Bank's monetary policy committee's decision to cut the repo rate to 6.5% provided a welcome boost to indebted consumers in March. Greater certainty about electricity tariff increases, slowing inflation and the negative impact of a strong rand on the economy's competitiveness were all cited as factors warranting a further cut in rates. The All Bond Index returned 4.4% over the quarter, well ahead of cash. The listed property sector added nearly 10% over this period. Greater risk appetite globally boosted the local equity market. The FTSE/JSE All Share Index (ALSI) provided solid gains in March (7.9%), pushing the quarter's return into positive territory (4.5%). Rand strength, on the back of over R14.5 billion in net equity and bond inflows over the quarter, contributed to the ALSI returning 1.5% in US dollar terms. Financials (9.9%) were well ahead of industrials (4.4%) and resources (2.1%) over the first three months of the year. However, intra-quarter sector rotation saw the All Share Resources Index adding more than 10% in March. Banks (12.2%) and general retailers (17.1%) strengthened over the quarter, on the back of a surprise cut in rates and strong interest from foreign buyers. Gold miners fared poorly during the three-month period, shedding 8.2%. The platinum sector (11.3%) and general miners (12.4%) enjoyed market-beating gains in March, but the platinum sector (2.1%) still trailed the ALSI over the quarter, while diversified miners performed in line with the general market.

Portfolio review
March was a very good month for the equity market, with emerging market flows driving returns. The portfolio benefited from this; we traded out of some of the local shares like Woolworths and Massmart which we had bought the previous month. We do not typically like to trade shares this quickly but when shares rise 25% in a month we do take profits. Unfortunately we lost more than 1.5% of performance due to our investment in ArcelorMittal. The investment logic for buying this share was sound. Iron ore prices are rising and global steel prices will have to increase. ArcelorMittal is exceptionally sensitive to global steel prices and the company was receiving iron ore at cost plus 3% from Kumba Iron Ore. Unfortunately the evergreen contract was rescinded and the share fell 25% in response. We do not expect this issue to be resolved quickly, but the bad news is already in the share price. In terms of asset allocation, we maintained a near maximum equity weighting to benefit from the inflows into the markets. Yield curves are very positively sloped indicating a pick-up in economic growth and retail investors are slowly moving back into equities. Developed markets are outperforming emerging markets. There has been monetary tightening in some countries to cool off their economies. The US, UK and Europe are not expected to increase their key lending rates in the near term. The US is recording a sharp bounce in growth and the equity market is responding positively to this. Companies have started to restock and this will benefit our commodity holdings. Long bonds have however moved to the top of their trading ranges and could start to hamper equities in the event of a large sell-off.

Portfolio activity
During the quarter we increased our weighting in Anglo American and Kumba Iron Ore. Earnings revisions are positive and these shares had lagged the locally based counters. We also own Rio Tinto in the offshore portion of the portfolio. Global miners are now attractively valued; earnings revisions are positive. We sold Woolworths, Massmart and some FirstRand shares as the valuations were becoming demanding. During the quarter we also sold SABMiller as earnings revisions are struggling and the price had moved higher.

Portfolio positioning
The portfolio is overweight resource counters and underweight locally based companies. In the event of a strong pullback we will review our position. We have maintained our overweight position in gold. Given the global debt situation, we believe it imprudent not to have exposure to gold. While South Africa enjoys favour with emerging market investors, the rand will stay strong, but the currency is likely to experience an abrupt sell-off when this trend reverses. Standard Bank is now on 16.7 times historic earnings, approaching its highest ever historic valuation of 18 times. Our view is that the risks to banks including regulatory uncertainty are not reflected in share prices. We are underweight banks, favouring FirstRand which is the only bank with decent earnings revisions.

Market review
2009 marked the end of the recession and provided asset markets with ample opportunity to retrace some of the losses sustained in the wake of the worst global financial and economic crises in decades. Along with commodities and the corporate credit markets, emerging economies were the prime beneficiaries of improving global growth prospects, the strong recovery in risk appetite, the weak US dollar and low borrowing costs across the developed markets. Emerging market equities rose 8.6% over the last quarter and 79% in 2009, well ahead of developed markets. The MSCI World Index returned 4.2% over the quarter to push the year's gains to 30.8%. All returns are quoted in US dollars. In sync with other commodity currencies, the rand regained its composure in 2009. Record capital inflows and higher commodity prices fuelled a 28.7% gain against the US dollar. 2009 was not a good year for bond markets, reversing some of their gains of the previous year. Bond prices fell in 2009 as economies recovered and the cost of massive fiscal and monetary stimulus started to hit home. The increase in bond issuance over the next few years and large fiscal deficits will keep the pressure on bond markets. Offsetting this over the near term, will be the improved domestic inflation outlook and expectations of growth below the historical average. The All Bond Index lost 1% over the year, but marginally outperformed cash over the second half of 2009, gaining 4.1%. In the fourth quarter, the All Bond Index returned 1.1%, underperforming cash. The listed property sector showed some resilience in a very difficult trading environment, gaining 4% in the last quarter to finish the year 14.1% higher. Improved growth prospects and a higher risk appetite supported domestic equities. The All Share Index (ALSI) ended December on the year's high, returning 2.9% over the month and 11.4% over the quarter. Strong foreign investor interest to the tune of over R75 billion in net equity inflows boosted the market's rating and pushed the year's returns to 32.1%, erasing all of 2008's losses. Over the quarter, the basic materials (17%) and consumer goods (18.7%) sectors recorded similar returns, beating the ALSI. There was a large divergence in the sub-sector performances in the final quarter. The gold sector struggled (-1.2%), but platinum (17.7%) and general miners (23.1%) outperformed. In the consumer goods sector, SABMiller and Steinhoff stood out as strong performers. Food producers (8%), general retailers (3.3%), banks (7.2%) and the life assurance sector (9.7%) all posted positive returns over the quarter, albeit below the overall market. The construction and telecommunications sectors, down 8.2% and 3.2% respectively, continued their underperformance during the year.

Portfolio review
The portfolio performed well in the final quarter of the year as our large holding in gold paid off and local South African shares lagged their more global counterparts. We have maintained the equity weighting in the mid 50s as we are concerned about the outlook for equities. The JSE is trading on 17 times historical earnings and the price earnings rating does not go much higher than this. Of course, earnings growth can bring the rating down to more acceptable levels. The outlook would be fine if it were not for the problem of excessively high levels of government debt, particularly in the G3 countries. As the liquidity punch bowl is taken away and some degree of fiscal tightening ensues, earnings growth is likely to be more muted than is typical at this stage of economic recovery. In addition, local companies do not have much flexibility in respect of costs, and without revenue growth, earnings growth could well disappoint. Emerging markets soared in 2009 on the back of over US$70 billion growth of inflows. This is unlikely to be repeated and valuation levels are vulnerable. The US in contrast had net outflows. We are underweight South African consumer shares. The consumer is heavily indebted and job growth is going backwards. House prices are falling and are still high, in our view. Earnings revisions are poor and valuations are not particularly attractive. The only growth seems to be from the writing back of provisions. South Africa is resuming its position as a low growth emerging market and until productivity levels improve, high debt levels will result in muted growth. We prefer banks to consumer shares; however, we are concerned that the lack of loan growth could continue. The sector could come under pressure due to banks still needing to raise high levels of capital, amid much stricter capital requirements. Gold did well over the quarter and ultimately all the major economies will have to extend quantitative easing to prevent going into a debt trap. Greece and Dubai have shown their vulnerabilities, but the UK and the US are not in a much better position. The only 'currency' where quantitative easing is not possible is gold. We think US growth will improve from here and that resource shares are best placed in terms of earnings revisions. China, India and Brazil continue to show healthy growth. A strong dollar does not necessarily mean that commodity prices have to fall. Indeed, a growing US is bullish for commodities. The rerating of global markets is complete and earnings revisions will matter. Quality shares such as SABMiller and British American Tobacco (BAT) seem particularly cheap relative to their more cyclical counterparts.

Portfolio activity
Our equity weighting remained constant over the quarter, but we reduced our holding in bonds on supply and currency concerns. We believe that during 2010 currencies will start to trade in line with economic fundamentals as opposed to liquidity. In the industrial space, we switched local shares (Mr Price and Spar) into global shares (SABMiller, Richemont and Steinhoff). The portfolio is very underweight MTN and we have taken profits on some Naspers shares. We increased the rand hedge component of the portfolio. In the financial sector, we switched some Absa shares to FirstRand as we were heavily overweight Absa. We are concerned about the ability of Absa's earnings to surprise on the upside. The portfolio made a few quick profits on Old Mutual. Within the resources sector, we used the strength in Anglo Platinum to switch back into Impala Platinum. We added Sappi on improving earnings revisions and sold some Petrobras shares, increasing our Sasol holding. We think that demand will continue to outstrip supply in commodities such as copper, where the supply response was curtailed by the Great Recession. Lead times are several years and we expect tightness in the markets over the next two years.

Portfolio positioning
The portfolio is overweight gold shares and globally competitive quality shares. We are overweight rand hedges and underweight local shares both on the consumer and fixed investment front. Operating margins are very high in consumer and fixed investment shares locally and we are concerned about earnings. We have an underweight position in bonds and are neutral to slightly underweight equities. We took profits on some of our high yield exposure. Twenty percent of the portfolio's assets are invested offshore of which less than 10% is invested in equities.