Market review
Risk assets maintained their upward trajectory during the third quarter, thanks largely to continued support from central bankers. The MSCI World Index added 6.8% over the quarter, with the US S&P 500 Index gaining 6.4%, the German Dax 30 Index adding 14% and the UK FTSE 100 Index closing 7.2% higher over the period. (All returns are quoted in US dollars.) Local equities performed well, adding 7.3% in rands over the third quarter and returning 14.8% for the year to date. Bonds added 5% in the quarter to record gains of 13.1% for the year to date. Longer-dated bond yields fell by 50 basis points over the quarter. Cash, as measured by the STeFI Composite Index, added a marginal 1.4% over the quarter and 4.2% for the year to date.

Portfolio review
The portfolio delivered good returns in the third quarter, despite being defensively positioned for the first 2 months of the review period. Equity markets continue to grind higher in an unstable macroeconomic environment and sector returns still show large differentiation. The US market reached 4-year highs, as the US Federal Reserve engaged in open-ended quantitative easing to reduce unemployment. In South Africa, wage disparity problems were highlighted with an unprecedented level of unprotected or illegal strikes. The rand was steady, despite over 40 000 workers striking illegally and the current account widening to 6.4% of gross domestic product. We have strong views on a few key economic trends this quarter. Firstly, it is hard to adopt an overweight position in the resource sector until the Chinese economy and stock market show some strength. Costs are rising for local resource companies, now led by labour. Where suitable, we use our offshore weighting to buy overseas companies operating in similar areas with lower risks. Secondly, Europe remains the wild card. European Central Bank President Mario Draghi knows what needs to be done. Only time will tell whether the necessary policies can be implemented in a socially acceptable way. There is money to be made if Europe comes back from the abyss and we will monitor the opportunity carefully. Finally, the local labour situation is a big concern, but must, at least in the medium term, be bullish for the consumer. Although strikes normally do not pay, the maths did work out on the Lonmin settlement. Interest rates, which will remain low until the rand sells off and foreign investors are no longer prepared to fund the budget deficit, combined with rising real wages will continue to support consumer spending.

Portfolio activity
Over the quarter we added a few stocks with exposure to Europe (e.g. Steinhoff). These counters are usually the cheapest in their sector and the news out of Europe is getting better. With the US Federal Reserve, the European Central Bank and the Bank of Japan adding liquidity, we believe we have scope to invest more aggressively and have therefore reduced some of our defensive holdings like Microsoft and British American Tobacco.

Portfolio positioning
The portfolio is underweight resource counters and has an overweight exposure to growth shares. We have a 6% direct exposure to the South African consumer and very low exposure to South African mining. We don't own any South African gold or platinum counters and prefer to gain direct exposure to the metals through exchange traded funds. We will continue to invest in those counters that show good earnings revisions in an environment of scarce economic growth like Woolworths and AVI. Our exposure to equities is in the upper 60% level and we have a bond weighting in the mid-teens. Valuations are favourable, but the growth outlook is a concern. The bond portfolio's duration increased slightly and we like the hedge that US treasuries provide within the portfolio. We have a relatively large exposure to corporate debt. In our view, the valuation case for equities is better than the case for bonds and, the alternative of low-yielding cash is unappealing. We believe that stock selection based on dominating macro trends will lead to good performance. In an environment of deleveraging that is likely to prevail for the rest of the decade, companies that can benefit from the scarce growth opportunities will trade expensively. Cheap shares are likely to keep getting cheaper. It will take time to resolve the larger economic concerns and we will move forward very slowly. Growth is the scarce resource and we will continue to favour shares with positive earnings revisions supported by good dividends

Market review
After sharp declines in May, commodity prices, with the exception of Brent crude, generally edged higher in June. Brent crude fell nearly 15% over the month, declining by more than 25% during the quarter. Gold (+2%) and copper (+3.5%) closed higher in June, but weakened over the quarter. Equity markets reversed some of the previous months' losses, with the MSCI World Index closing 5.1% higher in June. Over the quarter, the index was down nearly 5%. The FTSE 100 Index gained 7% for the month and lost 4.1% over the quarter while the S&P 500 Index rose 4.1% in June and declined by 2.8% over the quarter. Emerging markets trailed their developed market peers, gaining 3.9% for the month and losing 8.8% over the quarter. Turkey led the advance, rising 17.8% in June, up nearly 29% for the year to date. (All returns are quoted in US dollars.) Local assets showed strong absolute returns, despite significant intra-month volatility. Bond yields fell to near record lows in June, with the All Bond Index gaining 3.3% over the month and 5.2% for the quarter. Listed property continued its strong run, adding 6.9% in June and 10.3% over the quarter. Cash, as measured by the STeFI Index, gained a steady 0.5% during the month and 1.4% over the quarter. The FTSE/JSE All Share Index made modest gains over the quarter (+1%) while in June, the index rose 1.9%. General miners performed well over the month, gaining 5.6% (-1.6% over the quarter). May's strong returns from gold miners were partially reversed in June, with the sector shedding more than 9% over the month. While the sector only lost 2.2% over the quarter, it has recorded the weakest performance for the year to date (-16.7%). Healthcare added 10.9% over the quarter, general retailers rallied a further 7.3% and food retailers closed 9.2% higher. Construction (-11.3%), household goods (-10.4%) and the personal goods sector (-5.7%) were weaker over the 3-month period. Telkom fell 20% in June after the South African government blocked Korea's KT Corp from acquiring a 20% stake in the fixed-line operator.

Portfolio review
After a very strong start to the year, the Investec Managed portfolio had a more muted second quarter. US and emerging market growth concerns added to Europe's woes, causing a sharp equity sell-off in May. However, low valuation levels and a better than expected policy response from Europe brought about some stability in June. Amongst all the noise, we have strong views on key economic trends. Firstly, it is hard to see a period of considerable rand strength. The rand has depreciated over the medium term, despite having a commodity cycle in its favour for much of this period. Our exports are undiversified and still dependent on mining. Unlike Australia, the local mining industry is unable to grow volumes. This lack of volume growth in exports has resulted in a widening of the current account deficit, leaving the rand vulnerable to international sentiment. We are underweight commodity shares and, in particular, gold and platinum stocks. Secondly, social grants consume a large part of the national budget and the government is also engaged in increasing employment in the public sector. It is hard to see this trend reversing. It is expensive and crowds out other areas of the economy where scarce capital could be deployed more productively. The portfolio remains overweight consumer shares relative to fixed investment stocks. We believe it will be a long time before we reach a fixed investment cycle, such as the one inspired by the 2010 Soccer World Cup. Interest rates are also more likely to decline than rise, supporting consumer shares. We have reduced our position in some of the consumer shares on valuation grounds, but remain supportive of the broader trend. We have no exposure to fixed investment. Thirdly, we find it hard to get excited about the South African bond market. The current account deficit makes the currency vulnerable and the lack of focus on productivity within the government sector does not inspire confidence. Finally, US bonds are trading below 2% on the 10-year yield, helping to lighten the US government's debt burden. Other factors such as increasing energy self-sufficiency, a cheap and bottoming housing market, a leading role in technology and excellent tertiary education facilities lead us to favour US equities in our international portfolio. Europe's focus will remain on resolving its debt situation and the BRIC nations (Brazil, Russia, India and China) are not providing much inspiration either.

Portfolio activity
Over the quarter, we increased our weighting in BHP Billiton at the expense of Anglo American as we prefer natural gas and oil to platinum. We sold out of Sappi and took the weighting to Sasol. The oil price has fallen from over $120 per barrel to under $90 per barrel. We believe a supply side response is likely at these levels and demand elasticity will help stabilise the price. We took profits on Vodacom as we are concerned that Cell C will put pressure on pricing. Lacklustre volume growth saw us take profits on our position in Tiger Brands and we sold out of Barloworld.

Portfolio positioning
We reduced the percentage equity weighting to the mid 60s level and maintain a bond weighting in the mid teens. Equity valuations are favourable, but the growth outlook is of concern. We do not believe conditions are currently bad enough to trigger a very strong stimulus response from the US. Such policy action would favour commodities and gold over growth shares. The bond portfolio remained relatively neutral, with our holding in corporate inflation-linked debt being the differentiator. We believe the valuation case for equities is superior to that of bonds. Cash returns remain unattractive. In our view, stock selection based on strong macro trends will lead to good performance. In an environment of deleveraging (paying off debt), those companies which can benefit from the scarce growth opportunities will trade expensively. Cheap shares are likely to keep getting cheaper. It will take time to resolve the global economic challenges. We believe that growth is the scarce resource and we will continue to favour shares with positive earnings revisions, supported by good dividends.

Market review
Events in Europe and the US again took centre stage during the first quarter of 2012. Asset markets remained resilient, despite continued macroeconomic uncertainty and serious doubts about the ability and willingness of failing southern European economies to meet their austerity obligations. A strong take-up of emergency funding from the European Central Bank (ECB) by hundreds of European banks boosted sentiment, driving equities higher and strengthening commodity currencies. At the margin, economic data also continued to improve in the US, where stabilising house prices and rising employment levels boosted the prospect of positive but muted growth. The FTSE/JSE All Share Index gained 6% in the first quarter, but most of the positive performance came in January. Resource shares lagged the rally and gold miners (-14.9%), Impala Platinum (-8.9%) and Sasol (-3.9%) were notable underperformers. Financials gained 12.8% and industrials added 10.5%, driven by strong performances from consumer goods and consumer services. The All Bond and Listed Property indices returned 2.4% and 8% respectively, while the rand gained more than 5% against the US dollar, reflecting the broader rotation into riskier assets. Cash, as measured by the STeFI, returned 1.4% over the review period.

Portfolio review
The Investec Managed Fund had a successful first quarter in 2012, as our overweight position in selected equities paid off. The start of the year was much more of a stock pickers' market than we have seen for some time. Growth shares outperformed, while resource-led counters recorded declines in a rising market. We believe that the market is reminiscent of the 1990s. Commodity prices have stopped rising and mining shares are ill-equipped to deliver earnings growth without this boost. The South African economy has returned to consumption-led growth. Meanwhile, falling commodity prices suit the US; its lead in technology is once again appreciated. During the quarter, the Nasdaq 100 Index outperformed emerging markets.

We are concerned about the BRIC countries (Brazil, Russia, India and China). The Chinese market is being held back by rising labour costs and natural resource deficiencies. The country's economic model focuses on employment and not returns. India has the burden of food subsidies, which is weakening their fiscal position and the Brazilians tend to micro manage problems. Russia remains dependent on the oil price. There is still too much enthusiasm for the BRIC nations, while there is a sharp focus on the economic and fiscal challenges that the US faces. In the meantime, the US has very cheap gas, growing oil production, the best technology, a highly flexible economy and low house prices.

Portfolio activity
Over the quarter, we sharply reduced our weighting in gold and gold shares. With US economic data better than expected and the possibility of additional quantitative easing diminishing, the gold price floundered. We reduced our weighting in gold shares to zero, but retained some exposure to the gold exchange traded fund. We have been gold bulls for a long time but when gold shares start paying dividends, it is usually time to sell. The portfolio has no weighting in platinum counters as we do not think the companies are cheap, despite the decline in their share prices. Expecting earnings to return to their long-term average is too generous an assumption, given declining grades and rising labour costs. We are also underweight Anglo American and BHP Billiton. We have increased our weighting in shares with positive earnings revisions. AVI and Barloworld have done well for us. Imperial Holdings' earnings growth continues to look favourable and we again invested in the share. During the quarter, we increased our local bank holdings. Earnings at FirstRand are growing in excess of 20% and there could well be a capital distribution. We are firm holders of RMB Holdings. We took profits on JD Group as the share had performed well, despite poor results. During the review period we also sold out of Shoprite as food inflation seems to be peaking and the share is unlikely to rerate upwards.

Portfolio positioning
Markets are rerating on the back of abundant liquidity and our percentage equity weighting is in the low 70s. In our view, it is crucial to maintain the growth momentum and we will continue to favour shares with positive earnings revisions supported by good dividends. The bond portfolio remained relatively neutral, with our holding in corporate inflation-linked debt being the differentiator.

Equity returns are edging up and volatility is declining. This is an environment which is usually conducive to equity inflows. Bond returns have been disappointing this year, given the strong rand. We do not expect a large sell-off, just lower returns than equities can deliver. We will continue to monitor global developments. European debt concerns are likely to resurface and China's economic problems will remain on investors' radar. It is crucial that the liquidity support from the US Federal Reserve and the European Central Bank remains in place.

Market review

Equity markets generally saw positive returns over the last quarter of the year. The MSCI World Index (developed markets) rose 7.7% in US dollars, while the MSCI Emerging Markets Index gained 4.4%. US markets ended the year in positive territory, with strong gains over the last few months. Over the quarter, the US dollar rose 0.2% against sterling, 3.4% against the euro, but fell 0.2% against the yen. The return on the Citigroup World Government Bond Index was -0.1% in US dollars.

The All Bond Index gained 3.5% over the quarter and cash, as measured by the STeFI Index, returned 1.4%. Listed property closed up 3.7%. The FTSE/JSE All Share Index added 8.4% in the fourth quarter and rose 2.6% over the year. The broad industrial grouping outperformed both financial and resources over the quarter. Food and general retailers fared particularly well, closing up 20.3% and 15.5% higher respectively. Life insurers added 16.9% over the quarter while the smaller basket of technology stocks rose 12.1%. Gold and platinum miners lagged the overall index, ending flat over the quarter. General miners performed in line with the broader market while Sasol, the only company within the oil and gas sector, ended 18.6% higher.

Portfolio review

The portfolio had another good quarter, helped by a recovery in global and local equity markets. The performance over the year was negatively impacted by poor equity market returns, but boosted by the impact of rand weakness and good stock selection. In the local equity portion of the portfolio, the quarter's returns benefited from our overweight position in general retailers and food producers as well as our underweight position in banks and real estate. Our underweight position in mobile telecommunications detracted from performance.

Portfolio activity

We took profits on our holding in Kumba Iron Ore and switched Truworths into Woolworths. We added to our positions in Absa and Rand Merchant Bank Holdings and reduced our exposure to platinum stocks.

The bond portfolio remained relatively neutral, with our holding in corporate inflation-linked debt being the differentiator. In the offshore portfolio we hold growth counters such as Apple and Google, which complement the local portfolio, where there are limited opportunities to invest in information technology.

Portfolio positioning

Our total equity exposure (local and offshore) is approximately 67% of the portfolio's assets. In addition, the portfolio has a 6.4% holding in the gold exchange traded fund (ETF), which performed very well this year, despite a poor December.

We remain negative on the rand and emerging markets, so we cannot get excited about bonds despite the yield premium to cash. There have been considerable inflows into emerging market bonds and until these reverse, emerging market currencies and bonds remain vulnerable. We continue to have no property exposure as growth prospects remain poor and yields are too low relative to bonds.

The portfolio remains underweight resource shares as the strong dollar and growth disappointments from emerging markets undermine prices in an environment of increasing supply. Rising costs will continue to constrain profits. Gold remains an important hedge against volatility, but until a strong dollar drives the US Federal Reserve (the Fed) into another round of money printing, the metal is unlikely to reach its previous highs. The rand should provide some cushion to the local counters. In our view, gold is more attractive than platinum, where very high valuations are a hindrance.

We have added to our position in local banking shares. South Africa has a unique advantage amongst emerging markets in that our banking system is financed in local currency and not dependent on external financing. Our banks are growing earnings, although the top line growth is anemic, and there is an abundance of capital.

The portfolio benefited from holding growth shares, such as Shoprite and AVI this year. Although these counters are not cheap, growth is the scarce resource, and combined with attractive dividend yields have led to decent returns. We are slightly more cautious on the retail counters, which do not have some form of rand hedge to their earnings.

The portfolio has a full weighting in offshore assets, given our rand view and preference for developed market equities over emerging market equities. We are underweight offshore bonds as yields are either unattractively low or vulnerable to high inflation or debt levels. Returns for 2011 were positive, but modest, and unfortunately we think that 2012 will bring more of the same. We expect rand weakness to support returns as it did in 2011. Dividends will remain important and capital preservation is key.

Deleveraging should continue and emerging markets are expected to still underperform developed markets. There is a risk that the weaknesses in the economies of Brazil, India and China come into the spotlight, whilst Europe and America continue to struggle. The possibility of a politically driven policy mistake in America causing a US recession is not priced into equity markets. The rand is likely to continue to weaken and although we have yet to get to the point where the rand reacts to negative political statements, the time will come. Many emerging markets such as China and Nigeria are very close to their 2009 lows, whilst the JSE is near an all-time high. We aim to lower the risk in the portfolio by diversifying away from emerging markets, into quality corporates.

We think the European Central Bank (ECB) will eventually engage in quantitative easing, but only after the Germans have bullied everyone into austerity. The Fed can be relied upon to stimulate growth, with limited but noteworthy success. The clamour for dollars as European banks struggle to fund themselves has not yet played out. Commodity prices will remain dull until the next round of quantitative easing, which may well come from the Fed before the ECB takes such a step.