The inflation rate continues to surprise on the high side, while equity markets are somewhat muted. This has negatively affected the funds performance relative to its benchmark. However, the fund's current positioning is such that the fund manager has a high level of confidence that the long-term objectives of the fund will continue to be achieved. The performance of the fund has been poor so far this year: it has under performed its benchmark by around 10% in the year to date. Importantly, however, most fund managers have lost money in this period, during which the fund has actually grown by almost 10%. Rolling three-year returns remain above benchmark. The fund is overweight in both local Financial and Industrial equities, as these stocks are, in the aggregate, priced to offer the best chance of long-term inflation beating returns. The fund continues to hold no offshore risk assets (either equities or bonds) as these assets are not well priced, and remain subject to massive price swings, based on nothing more than wild speculation. These are not conditions in which it pays to take on market risk, and the fund is actively avoiding market risk in offshore markets for this reason. All offshore exposure is in the form of short term Euro denominated deposits.

Your fund generated a return of around 1% for the month of September. For the quarter ending September 2002, your fund generated a positive return of around 0,2%. For the year to date period, your fund generated a return of 5,8%. These are not exciting numbers. But they are positive. We have not lost any of your money over the past year.

It must be said though, that we have not been able to generate inflation beating returns, either! This is important, as over the long term, our goal is to increase the value of your investment by at least 8% in excess of the inflation rate. Over the past year, we have failed in that goal. Our secondary aim, however, is not to lose money, and in this we have succeeded, despite very poor market conditions.

For the year to date, the only asset class in the above table to generate positive returns was the SA bond market. (Apart from your fund, of course!) Secondly, even hedge funds, which were supposed to be the cure-all, have generated significant negative returns, in the aggregate. (But, then again, maybe you were lucky enough to have invested in a good one!)

It is clear that we are enduring one of the most protracted and painful bear markets in the history of markets. As such, we are committed to protecting the value of your investment - as the saying goes, "in a bear market everyone loses, but the one who loses the least, is the winner." Until market conditions improve, this will be our primary objective. The problem is, we have no idea about exactly when market conditions will improve. Fortunately, our investment process does not depend on us making this call correctly. We simply invest in undervalued assets, and wait until the market recognises the value. Sometimes this happens very quickly, and sometimes it takes a bit longer. We have a feeling that we are going through a period when value recognition will take a bit longer. Bearing in mind that most of the stocks we buy pay generous dividends, we are prepared to wait.

Current market conditions allow us to do two things. We can accumulate cheap assets, and we can do so at favourable prices. We do not need to pay up to acquire these assets, as, in a bear market, sellers become desperate and are willing to accept low prices for quality goods. In fact, as fund managers, we become quite excited about prospective returns, the more despondent about current conditions the market becomes! In the meantime, our foreign holdings remain in cash - foreign markets are still not compellingly valued. In addition, we still own no SA bonds. Inflation is surprising on the upside, and bond yields are reacting negatively. The time to buy bonds will come; it is not now. Despite popular belief, the best place to invest in equities is SA (not offshore) and the best place to invest in fixed income assets is offshore (not in SA). This is an interesting point I hope to discuss in detail next month.

For fund manager Piet Viljoen the rules of the investment game are simple. "Rule number one is make sure you don't lo se money" and only then look for opportunities to make money.

One of the pillars of Viljoen's strategy has been high liquidity. Within a range of 15% and 34%, Investec Opportunity Fund's quarter-end cash holdings have averaged 25% over the eight quarters since September 2000.

But though this has protected the fund's returns for most of the period, Viljoen's strategy could, on occasion, have been criticised for being too defensive. High liquidity has meant lost opportunities such as the market's rebound between October 2001 and May 2002. During this period, the fund's 10% capital appreciation compared poorly with a 38% gain by the average general equity fund.

Low exposure to resources stocks last year also detracted from IOF's performance, says Viljoen. But right now most of the fund's investors are unlikely to be complaining. Market weakness since May has wiped off about half of the average general equity fund's gains since October, while the fund's unit price remains within a fraction of its 2002 high.

Armed with his cash pile, Viljoen is now looking for investment opportunities. "I am investing into current market weakness - there's lots of value in our market." Cash has been reduced from its June 2002 peak of 34% but only in the domestic market. A 12% offshore cash holding held in euros remains intact, says Viljoen.

One area of buying focus is banks, which look particularly cheap at present, says Viljoen. He is also buying Anglo, which looks oversold, and remains positive on the outlook for food shares, which, at 15% of equity holdings, represent the fund's largest sectoral exposure.

Viljoen does not compartmentalise himself as either a value or growth style manager. "I'm pragmatic and not married to any style." At present his focus is on companies offering value, cash flows and, a vital ingredient, dividends.

Excluding real estate holdings, the fund's average dividend income yield is close to 5%, says Viljoen. This provides the fund with defensive characteristics as well as scope for strong capital appreciation in a market recovery.

For nearly 4 years, from late 1996 through 2000 the world gaped in awe...and wondered, "What is it that the Americans have?" Now we know...the Americans had clever accountants. Your manager has been wondering for a long time now, just what negative aspect of the South African market investors agreed with so wholeheartedly. It surely wasn't that the economy was weak, as the SA economy has just entered its eighth year on the trot without a recession. It surely couldn't be poor returns from the equity market, as the JSE is just about the only market that has earned positive US$ returns over the past three years. It definitely wasn't accounting standards, as the news on this front from the US and Europe is far worse than anything our country has been able to conjure up. It cannot be valuations, as the local market remains one of the cheapest in the world (despite strong outperformance over the past few years!) So, in the end your manager has to conclude that just as the "New Economy", "Japan's superiority" and the "Nifty Fifty" were just figments of the investment world's imagination, so is the "decline and fall of the New SA". In fact, your manager would go so far as too say that investors are being presented with quite a nice buying opportunity in taking the opposite view from the consensus. Of course, were the US market to go down sharply, the SA market will not escape this - but the decline would probably be shallower, and the recovery more rapid. The key here is that investor confidence in the US is waning rapidly. This is being played out by a combination of declining equity prices, as well as a declining currency. Your fund continues to have no exposure to US (or European) equities. Furthermore, offshore assets are all in cash, 75% of which is denominated in Euro. When stock prices have been low for a long time (as in SA) investors experience is negative. However, their exposure to good returns is increasing! Do not sell your exposure to good returns by chasing after whatever happens to be fashionable at any specific point. Remember, it is the unfashionable assets that make good long -term investments! In this regard, your fund continues to be positioned in the unfashionable industrial portion of the SA market, with an increasing exposure to the very unfashionable financial sector. Over the past few years, your fund has benefited from having no exposure to the "New Economy" stocks in 2000/2001, no exposure to US stocks (ever) and no exposure to local small companies in 1998. These were difficult decisions in the short term, but highly rewarding over the long term.

Your fund's exposure to small and mid-sized SA industrial equities stood it in good stead during the second quarter of 2002. The rebound in performance from a poor first quarter was evident, and your manager is confident that the fund's long -term outlook is healthy.

Over the past month, a few noteworthy events have driven markets. But as usual, it is the less noteworthy events that have drawn your managers’ attention.

Let's first deal with the noteworthy events. First up is the continuing saga of will global growth accelerate or not?" This is a question most talking heads have been agonising over for the past few months. Firstly, their forecasts called for stronger growth and generated a rush into resource stocks. Then, as if succumbing to the laws of gravity, these very same forecasters changed their minds - and suddenly resource stocks were sold off.

In managing the Opportunity Fund, your manager has been known to trade rather less than his counterparts. This does not arise from an innate dislike of the broking community (who take so much for so little) - in fact, some of your manager's best friends are brokers! No, it is because of the conviction that in managing money (as with politics and body piercing) doing less is generally a good thing.

Your fund manager has no opinion, forecast or special insight as to the nature of global growth over the next year or so. Whatever shape it takes will not influence the long term returns on your fund. Your funds’ position remains as it has been for 18 months or so - local industrial stocks offer huge value, and it is a matter of time before the talking heads take this up as their topic du jour."

Another noteworthy event has been the renewed weakness of global equity markets. In fact, the US market is now in its third successive year of delivering negative returns.

At the same time, the US Economy is running a massive current account deficit. It is becoming well known that US equities are overvalued, and prospective returns will be low. Thus, your fund continues to hold no US$ denominated bonds or equities. Now we turn to a less noteworthy fact - and this is that few people know that the JSE’s All Share Index has outperformed most major markets in the world - in US$ terms - over the past three years! If you had put all your money in an index fund in South Africa three years ago, you would have been better off (in US$ terms!) than taking it offshore into an index fund representing either the US market, UK market, European market or Japanese market. And this is before fees and costs! Of course, most people would not have indexed their money three years ago, as tech stocks were at the height of fashion. No, they would have loaded up on goodies like Cisco, Microsoft, JDS Uniphase and Worldcom. They would also have lost about 90% of their money.

The Investec Opportunity Fund has won the S&P 2002 award for the best fund within the Domestic Asset Allocation Flexible sector over a three year period.

At the AUT/Personal Finance Raging Bull awards held in Johannesburg on the 28 January 2002, the Investec Opportunity Fund was awarded the prize for the top performing fund on a Sortino-Risk adjusted basis for the three years ending 31 December 2001 within the Domestic - Asset Allocation - Flexible sector.

The fund as also awarded the prize for the prize for the top performing fund for the three years ending 31 December 2001 within the Domestic - Asset Allocation - Flexible sector.