Market review
Risk assets experienced a torrid third quarter. Equities slumped, commodities retreated sharply, credit spreads widened materially and currencies depreciated against the US dollar. The traditional safe haven assets performed well: both US Treasury yields and German Bunds fell to record lows, closing the quarter at 1.9%. Gold added a further $125, up 8.2%, despite the slump in September. The US dollar gained 6% in trade-weighted terms over the quarter. With fears of a sharp growth slowdown and a high probability of an imminent recession in some regions, commodity prices could not hold on to the elevated levels reached in the first half of the year. Copper declined 23.3%, platinum fell 11.6% while Brent crude closed 5.3% lower. The MSCI World Index ended the quarter 16.5% weaker and emerging markets tumbled 22.5%. The FTSE 100 Index dropped 15.5%, the Dax 30 Index slumped 31%, while the Nikkei 225 Index outperformed meaningfully, closing 7.1% weaker. The S&P 500 Index shed 13.9%. (All returns are quoted in US dollars.)

South Africa remains subject to global pressures, the uncertainty about the crisis in Europe, the structural impediments to a more meaningful global recovery and asset market volatility. The South African Reserve Bank, concerned about global macro events, kept interest rates on hold at record lows. Citing a slightly higher inflationary trajectory and its continued willingness to consider all eventualities, the Bank heeded calls to maintain its mandated policy objective of stable inflation. The slump in the rand, along with the depreciation of other emerging market and commodity currencies, added support to the decision. Domestic growth remains sluggish, with manufacturing and mining output particularly weak. With average house prices falling, personal debt to income ratios high and job growth mostly absent, private sector investment continues to languish. SA GDP growth estimates for the year have now slipped to well below the 3% mark, with forecasts for 2012 being revised downward towards 3.5%. The All Bond Index gained 2.8% over the quarter and cash, as measured by the STeFI Index, edged 1.4% higher. The listed property sector rose 2.2%, buoyed by firmer bond yields.

The FTSE/JSE All Share Index closed the quarter down 5.8%, with significant rand weakness partially offsetting the sharp fall in commodity prices. The index lost 21.3% in US dollars. Significant dispersion marked the quarterly performances, with sectors most exposed to the SA economy generally outperforming the broader market. The food and general retail sectors fared particularly well, closing 6.4% and 1.7% higher, respectively. Banks lost 3.3%, while short-term insurers gained 6.9% over the three months. The health care sector, up 2.5%, continued its recent strong performance. Commodity-exposed rand hedge stocks fared poorly over the quarter, but even here there was significant dispersion. Diversified miners lost 17.3% and platinum miners shed 9.7%. The gold sector posted one of its strongest relative performances, gaining 19.5% over the review period.

Portfolio review
The Investec Managed Fund performed well over the third quarter, benefiting from the surge in the rand gold price, the holding in defensive shares such as British American Tobacco and SABMiller. The impact of rand weakness on the international portion of the portfolio also helped the performance. The portfolio's positive return was in stark contrast to global stock markets, which declined sharply over the quarter. Poor global growth prospects and concerns over sovereign debt dominated markets. The world is deleveraging. The last thirty years will not serve as a comparable base for the next ten years. During the last thirty years, easy access to credit drove up asset prices. Price earnings multiples expanded and ironically, interest rates fell. Valuation multiples are cheap for equities, but the situation is not likely to change in the near term. Companies that can show genuine earnings growth will be rewarded with premium multiples. There are outflows from emerging markets (EMs) into developed market equities and fixed income assets, resulting in weaker EM currencies. The carry trade has started to unwind and is likely to result in further rand depreciation. Solutions to restore investor confidence and help stabilise the financial system are not obvious. Recapitalising the banks, as a new form of quantitative easing (QE), should help, but buying bank debt could be a more effective strategy. Bank debt holders are likely to benefit at the expense of current bank equity holders. 'Normal' QE, associated with government debt purchases, is unlikely to make a material difference. Interest rates are very low in the US and Germany, and the European Central Bank's Italian bond purchases are not proving to be particularly successful. After the previous problem of too much debt, the system is now geared towards punishing banks, with a financial transactions tax and stricter capital requirements in the offing. This is highly deflationary and authorities need to be wary of over-regulating banks. Growth is struggling and fiscal stimulus is turning into fiscal austerity

Portfolio activity
We took profits on our position in the retail sector after a substantial outperformance and similarly sold our play on global volatility. During the quarter, we bought Kumba Iron Ore on a 10% dividend yield, but our resource weighting (ex gold) remains very low. We also switched a marginal platinum producer into the platinum exchange traded fund.

We believe that we are in the midst of another economic downturn. There are, however, differences to 2008. Companies' balance sheets are generally in better shape. The downside is that resource companies, for example, have the ability to keep producing a steady supply of commodities. If China slows down, we could face a five-year resource bear market. Commodity prices need to go up faster than costs, otherwise companies' business models are very vulnerable. This is not currently evident.

Portfolio positioning
We are neutral offshore and local equities. Valuations are attractive, but growth is the scarce resource. The portfolio has an underweight position in resources and financials, and is overweight industrials. Financials are ex-growth. Shares that are ex-growth need to have high dividend yields, but global financials do not offer attractive yields. South African banks are much better in this regard, but seem destined to range trade for a while.

Property counters, where we are not represented, are struggling to grow their distributions. Vacancies are high and are not yet showing signs of decline. Renewals will also involve harder negotiations than usual. Bonds are vulnerable to a rand sell-off, which should work in favour of the gold exchange traded fund (ETF). We have retained our holding in the gold ETF, as it is one of the few uncorrelated assets and is useful for its diversification benefits.

Market review
Developed market equities (0.7%) continued to outperform emerging markets equities (-1%) over the review period. The S&P 500 Index ended the quarter flat, while the German Dax, UK FTSE and Japanese Nikkei indices added 7%, 1.7% and 3.3% respectively. The emerging market BRIC members performed poorly. Russia lost 5.4%, Brazil 5.3%, and India ended the quarter 3.6% weaker. All returns are quoted in US dollars. With risk aversion and growth concerns prevalent, bonds matched a good first quarter. US treasury yields briefly dropped below the 3% mark, seemingly less focused on US credit quality and the pending debt ceiling expiry. However, lower bond yields were not evident across all countries, with those exposed to acute solvency concerns seeing their cost of borrowing shoot to record highs. Similarly, the cost of insuring against default by those governments has increased exponentially over the past few months. While global financial markets were characterised by extreme volatility, the rand seemed almost oblivious to it all. Unchanged over the quarter against the US dollar, the local currency ended only slightly weaker against the euro. Strong portfolio flows - predominantly into the local bond market - plus Competition Tribunal confirmation of Walmart's acquisition of local retailer Massmart, added to the lustre of the rand. Local bonds rallied over the quarter, with the All Bond Index gaining 3.9%. Cash, as measured by the STeFI, returned 1.4% over this period. The listed property sector enjoyed healthy gains, lifting total returns to 5%.

The South African Reserve Bank's monetary policy remains on hold for the time being. A slow jobless recovery locally, concerns about developments in Europe and the rest of the world, and moderating near-term inflation fears have pushed expectations of a rate hike deeper into the second half of the year than had previously been priced in by the market. The FTSE/JSE All Share Index closed 0.6% lower over the review period, with the market falling 2% in June. Resources were the biggest detractors, with gold miners and platinum stocks down 13% and 7.7% respectively. Diversified miners lost 3.3%. Health care (6.9%), food producers (4.5%) and telecommunication (5.4%) performed well. Banks gave up 0.9%, with flat returns year to date. Sasol, the only oil & gas sector constituent, fell 8.5% in the second quarter after a strong first three months of the year.

Portfolio review
Concerns over US and Chinese growth and European debt drove equity markets weaker in June, resulting in marginally lower returns for the quarter. We are in the 'new normal' of low growth and low interest rates, making it difficult to earn decent returns. When considering the concerns mentioned above, we feel least worried about near-term US growth as a bounce is likely, driven by lower commodity prices. However, we believe that forecasts are too optimistic about growth returning to normal and deficit reduction targets are formulated on unrealistic growth projections in the US and Europe. The Chinese economy will continue to grow, but nothing compounds at 10% p.a. forever. Bonds performed well during the quarter, but it remains to be seen if this will continue now that the second round of quantitative easing has ended. The portfolio has limited exposure to bonds, given the huge funding deficits that prevail. We have no exposure to property companies as they are struggling to grow their distributions and vacancies remain high with little indication of an imminent decline. Renewal negotiations are likely to be harder than usual.

Portfolio activity
We lowered our equity weighting during April, but bought back into weakness as selective buying opportunities presented themselves. Earnings revisions are rolling over, and earnings growth is becoming harder to find. We increased our exposure to industrial counters with positive earnings revisions by buying Naspers, Richemont, Imperial, and MTN. We believe that local consumer spending growth will be supported by real wage increases and so we have topped up on retailers Shoprite and Woolworths. We reduced our resource sector weighting to one of the lowest in the last five years, selling Anglo Platinum, BHP Billiton, Sasol, Kumba Iron Ore and Sappi. Whilst commodity supply is tight, demand is being revised down due to high prices. The upside is capped without the reintroduction of leverage through further quantitative easing. We still retain our holding in the gold exchange traded fund for diversification benefits, as it is uncorrelated with other assets. Anaemic credit growth keeps us tepid on financials, but we bought some Nedbank shares for the first time in many years as we expect the company's growth rate in the next reporting season to outshine many of its peers.

Portfolio positioning
We are neutral on offshore and local equities as valuations are attractive, but growth is slowing. The portfolio is underweight resources, overweight industrials and neutral on financials. We are overweight Gold Fields and the gold exchange traded fund. Gold Fields had a very bad quarter and detracted from returns. On the positive side, Metorex received an offer to purchase the entire share capital and Naspers performed well. We are neutral on local banking shares, which are struggling to show any credit growth and are under pressure with regard to banking charges. South African banks' growth prospects are poor relative to their emerging market peers and yet their share prices are at a premium. Money is cheap, but credit is hard to come by. This is true in South Africa and in most offshore markets, including the US and China. Further stringent capital impositions on banks by the monetary authorities will reinforce the reluctance of banks to lend, and consumers are also more cautious in terms of borrowing. This lack of credit extension will continue to dampen growth rates. We believe the market will continue to vacillate between the numerous risks present and very cheap money. Stock picking should make a comeback as opposed to the market being dominated by the 'risk-on, risk-off' trade. Risks to the portfolio include a collapse in the gold price and a surge in commodity prices. We will be flexible in our asset allocation to manage risks and take advantage of opportunities.

Market review
Equity markets performed well during the quarter considering the negative headwinds, which in preceding years would have resulted in sharp falls in risk appetite. Developed markets (4.9%) outperformed the emerging market composite (2.1%), despite a 9% drop in Japanese equities in March and a 6% weaker close over the quarter. Local equities mimicked global market volatility, recovering January's losses and ending the quarter marginally higher (1.1%). Resource counters performed best, with Sasol, the only oil & gas producer constituent in the index, rising 13.1%. Diversified miners closed 3.2% higher while paper stocks added 15.5% over the period. Platinum stocks lost 10.5%. Both the industrial and financial sectors underperformed the broader market, closing down 0.3% and up 0.7%, respectively. Again, there was substantial dispersion amongst the various sub-sectors, with construction (-25%), food producers (-4.3%) and pharmaceuticals (-11.5%) underperforming, while mobile telecommunication (3.9%), life insurance (6.4%) and industrial metals (14.5%) enjoyed strong returns. Local bonds traded weaker over the quarter, with the All Bond Index losing 1.6%. The yield curve has continued to steepen, while inflation concerns both globally and at home have been more pervasive. The firm rand has offset gains in oil prices for now, while food prices, rising at producer level, have not been passed on to consumers. Listed property, highly sensitive to the bond market, also gave up some of its 2010 gains, closing 2.2% weaker. Commercial property fundamentals remain under pressure, though highly dissimilar across regions and asset type. A recovery in growth, coupled with a lagged onset of new supply, will lend support to the market over the next year. Cash, as measured by the STeFI, provided a steady 1.4% over the quarter.

Portfolio review
The final month of the quarter was extraordinary. It is a powerful victory for the bulls that the markets closed flat to slightly higher after an earthquake, a tsunami, nuclear radiation fallout, European debt problems, and wars in a variety of countries in the Middle East and North Africa. Growth is improving, and interest rates in the developed world look likely to be mired around zero for a long time. The Investec Managed portfolio had a solid quarter. We have shifted the portfolio into more defensive equities as we expect leading indicators to peak shortly in the developed markets. Our exposure to developed market equities outside Japan (at the expense of local equities) worked well over the quarter. Our view is that the problems emanating from the disruption to the Asian supply chain are being underestimated. We still see better value in shares such as Barclays and JP Morgan compared to Standard Bank. European telecoms also look more attractive than our domestic sector. Local South African companies are missing earnings forecasts and are desperate for inflation and a weaker rand. If the rand does not weaken in the next six months, local companies will report poor earnings mid-year. Debt to disposable income is falling slowly in South Africa, but at a much slower pace than in previous cycles. We do not believe the SA consumer can handle rate increases, particularly with higher oil prices. Oil was showing strength before the outbreak of unrest in the Middle East, and we prefer it to gold. Higher oil will act as a tax on consumption, just as the beleaguered consumer was showing signs of a recovery. Real disposable incomes are being squeezed. We still like US equities, even though the debt situation in the country and other developed world markets is dire. The US has cheap oil, very cheap gas, a highly flexible labour market, a monetary regime focused on growth, and one of the less constraining banking capital regimes. Central banks, in our opinion, should not raise interest rates in response to supply side shocks. The European Central Bank seems all set to hike, and whilst this is fine for the German economy, we believe it will increase risk in the peripheral economies. In order to run economies with one monetary policy, the central bank should look at a combined European inflation rate.

Portfolio activity
Rising bond yields and firmer equity prices have given us the opportunity to lower our equity weighting to the mid 60s. Until the Middle Eastern situation resolves itself, we believe it prudent to have a lower risk weighting. We have topped up the income component in the portfolio by buying high yielding equities. Over 20% of the equity portfolio is in shares with a yield of more than 5%. These companies appear to be much less risky than bonds, and in most cases the yields are superior. Our holding in the gold exchange traded fund remains stable, as it is one of our few uncorrelated assets, and is useful for diversification.

Portfolio positioning
The portfolio is overweight offshore developed market equities (excluding Japan) and has a neutral weighting in South African equities. We have an overweight position in resource stocks, while we have a neutral weighting in industrials and financials. Our view is that the global financial crisis has pushed back the supply of commodities, and prices are set to continue rising. The market is not pricing in commodity prices remaining at these levels. The portfolio is underweight local banking shares, which are struggling to show any growth. South African banks are lacking in asset growth relative to emerging market peers and are priced at a premium to the latter. We are also overweight large capitalisation shares relative to mid and small caps in order to benefit from the higher rate of growth in markets outside South Africa. The portfolio has a material weighting in gold and oil. Our holding in financials is predominately in offshore banks. The portfolio has a significant weighting in very high yielding shares. We are underweight emerging markets, with the assumption that inflation will slow once food prices subside. There are many inefficiencies in emerging market economies which contribute to inflation. South Africa has a very expensive and under skilled labour market and sharply rising energy costs. We think the era of strong outperformance by emerging markets is over. Risks to the portfolio include an upside surprise to the South African growth rate, and downside surprises to the offshore growth rates. We will, however, have a flexible asset allocation.

Market review
After a volatile first three quarters of 2010, risky assets responded to prospects of an improved economic outlook and ended the year firmly in positive territory. During the fourth quarter, investors switched out of bonds into equities. Global equities added 8.8% over the period, while global bonds lost 1.8% in US dollars. Local bonds could not shrug off the global bond sell-off, ending up only 0.7% over the quarter. Cash, as measured by the STeFI, returned 1.6% for the three months to the end of December. The best performing asset class over the past year was the listed property sector. The sector continued to show strong returns, despite weak property fundamentals. Listed property gained 3.1% in the fourth quarter to rise by 29.6% for the year. Local equities participated in the global equity rally. The FTSE/JSE All Share Index rose 9.5% in the fourth quarter on top of the 13.3% gain over the prior three months, ending the year 19% higher. Resources (16.5%) proved to be the top performing sector, with financials flat and industrials up 7.8% for the period. Amongst the resource counters, diversified and platinum miners (both up 19.2%) did best, while short-term insurers (15.4%) and some smaller industrial sectors (media and support services) beat the overall market. Stocks predominantly focused on the South African economy fared worse. Construction ended the quarter 3% higher, banks closed flat, while food and general retailers added 2.9% and 6.2% respectively.

Portfolio review
The portfolio had a satisfactory year, improving in the second half of 2010 due to good asset allocation. The final quarter of the year saw the beginning of the great rotation from fixed income instruments into equities. Quite simply, selected equities now have the two most desired characteristics - they offer yield and growth. US equities outperformed emerging market equities, despite massive inflows into fixed income and emerging markets. Given that flows usually follow returns, we anticipate more capital to move into US equities. In our market we hold the view that equities will take flows ahead of bonds. The South African bond market has been remarkably resilient, given that US five-year yields doubled from their lows in the final quarter. Inflation appears to have bottomed locally, but we do not expect it to accelerate sharply as the strong rand is likely to support restraint in pricing. With one of the worst sell-offs ever in a quarter, US ten-year yields are around 3.5%, which still leaves valuation upside for equities. Markets should move higher, as long as corporates grow earnings. We did well out of our gold position over 2010, but we are less confident about gold in the near term. Growth is surprising to the upside in many markets, which indicates a preference for commodities other than gold. We recently increased our Sasol weighting and are looking to acquire exposure to offshore energy plays, given the lack of opportunity on this front in the South African market. The portfolio's holding in Gold Fields was trimmed. We believe it is prudent to retain some exposure to gold, given the debt situation in peripheral Europe. Earnings revisions are positive in South Africa, driven by companies with global exposure. South African banks, with the exception of FirstRand and African Bank, are struggling in this regard. We have no exposure to Standard Bank. Companies dependent on a weak rand and strong local volumes are under pressure. This applies particularly to the local manufacturing sector. The portfolio is long the local clothing retail sector where earnings have the ability to surprise on the upside, driven by real wage increases and low interest rate costs. 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 trimmed our gold positions and added exposure to the US economy through holdings in the industrial space and JP Morgan. Given the further relaxation of exchange controls, we will increase our offshore weighting as it enhances our ability to build a diversified portfolio and gives us more stock picks. An example of this is our international holding in Xstrata and Rio Tinto, which complements our domestic holding in Anglo American and BHP Billiton. We bought Barloworld and its parent company Caterpillar in the final quarter of 2010. Earnings revisions are very good and new management at Caterpillar is expanding the product offering.

Portfolio positioning
The portfolio is overweight resource and industrial shares. We believe that the global financial crisis pushed back the supply of commodities and prices should continue to rise. The portfolio is underweight banking shares, which received severe earnings downgrades over the last quarter. These shares have also performed poorly. We prefer clothing retailers in the domestic space. Our view is that the entry of Wal-Mart into the South African food retail industry is not adequately reflected in the share prices of food retailers. We have sold Woolworths. There are several shares in the portfolio at attractive dividend yields, including Mr Price, Vodafone, British American Tobacco, BHP Billiton, Santam and Kumba Iron Ore. We are now fully weighted in equities and low on cash. Risks to the portfolio include below forecast economic growth in emerging markets. China will continue to tighten monetary policy to offset the effects of quantitative easing. We do not believe that an emerging market equity bubble will develop as interest rates are being tightened in many markets. Outperformance by emerging markets requires China to stop tightening rates. We are adding US exposure to the portfolio. We believe that 2011 will be a year of searching for equities with growth. There will be a strong emphasis on stock picking.