October was a big month for your investment. Typically speculators get excited about short term performance on their holdings, and it gives them something to talk about at dinner parties. We have all heard countless stories about the money people have made out of speculative purchases over the past two years in the SA property market.

Investors in the Investec Opportunity Fund who bought at the end of April 2003 have seen their wealth grow by over 70% including dividends, not a mean feat considering that this is not a racy fund. Unfortunately, we did not see many new investors in those days in the fund. At least this year so far, the fund return has been over 23%. We do not like rapid appreciation in our portfolio holdings, as it means we have to look to sell good quality shares when they exceed fair values. Fair value for us means we can still get a return of 14% over a year. The shares we still own are on the right side of this metric. We prefer to hold good shares forever.

Should you be worried about your holding, or could you still add more? Ironically, the bigger concern at the moment is whether your good quality shares will be bid for. Barclays will have to pay up if they want Absa and ABI is under an offer consideration. Even Afrox could see parent BOC turn its eyes to a complete take-out. This is what happens when your equity component of the portfolio is still valued at 10.5 times earnings and bears a 4.2% dividend yield on average. This means as long as the dividends from these businesses grow close to economic growth rates, good returns will accrue to investors. We believe that the returns going forward will be less than those achieved in the past 2 years, but should exceed cash by a decent margin.

Resource shares are starting to show some reasonable value, but not yet mathematically investment odds that mean we should make more money than we could lose. Bad things happen to expensive shares, so China raising rates by a miniscule 27bp in October, can cause pain. The market losers on the month were the big cap Resource complex, where you have no exposure to through this fund. The odds must be more in our favour before we buy these shares. So, we will wait.

Investors might be forgiven for thinking that there is a mini bull market going on in South African shares. The JSE All Share Index (ALSI) hit a new all-time high in September. Ordinarily, such extreme movements or new levels would give cause to pause and think about how much more upside there is likely to be.

We worry continuously about the trade-off between potential upside and possible downside capital loss risk, given that the Unit Price of your fund has been achieving new highs on a consistent basis for most of the year so far. In fact the fund has returned some 18.4% in the first 9 months of the 2004 calendar year. This return is ahead of the ALSI, although we do not expect to outperform when the market is in an up phase.

We would not be surprised to see some consolidation at the current levels, given the unlikelihood of a further rate cut and the headwind of struggling foreign equity markets. We still believe that your money is defensively positioned for such an outcome, and has optionality on a variety of potential macro-economic challenges, not least being a weaker currency.

Your fund has been heavily invested in bank shares for over a year now, and we are pleased with the performance of Absa in particular. As a rule we never invest on corporate action alone, but once again we have a situation where a corporate buyer has shown significant interest a share you own. We think that the Absa share price is still below its current fair value, even if there is no deal.

The current historic PE of the fund is 10.8x, and the dividend yield is still over 4%, making us confident in achieving meaningful long term returns.

2004 was always going to be a year for equities where dividend yield and growth in dividend was going to be the major determinant of the level of return achieved. This view has been motivated by the fact that the ratings-driven bull market of 2003 would not recur, given an outlook of unchanged short term interest rates.

The market has seen a two-tier evolution so far this year. Domestic stocks have, as a general rule, out-done the Resource shares, notwithstanding a powerful commodity cycle. The biggest issue for us has been the high valuations and near term earnings risk. Resources lost investors 14% in the first six months of the year. Our Resource exposure has been concentrated in Sasol, which fortunately has delivered a positive return this year so far.

The basis that the currency set in 2001 (>R12/$) was ridiculously low, but the same could hold of the Rand below R6.50/$.

We know that trends last longer that we think, and given the strong domestic economy and continued low inflation, the Rand could remain expensive for some time. We have the optionality on Rand weakness in the fund through the 7% held offshore, and the 9% in direct Rand hedge shares. This month we added some Transhex to the portfolio, given its favourable valuation metrics.

The fund continues to push higher, notwithstanding much market uncertainty, with a cumulate return for the first six months of 6%.

Watching share prices bob around over time sometimes gives one the suggestion that the market can be likened to a drunkard. This month saw one of the most fascinating mid-month reversals we have seen for a long time. Although shares, as represented by the JSE All Share Index, ended pretty flat, this hides a move that saw the index move down by some 9% during May.

The surprising performance for the month came from the smaller cap shares, which lost value even though the Rand stubbornly moved back to below R6.50 to the US Dollar.

The performance of your investment was close to unchanged, with some pressure on our holdings in Pick 'n Pay and Truworths and the Property Shares, that wobbled under uncertain bond yields.

To the upside, banks continue to perform well, given the strong operating performance from shares like Absa and a strong trading update from Stanbic. SAB continued to perform well due to 2004 results that were far above market expectations, and in fact, exceeded the consensus analysts' 2005 numbers. The share price, around R80, better reflects the intrinsic value in the business.

The year-to-date performance of the Investec Opportunity Fund is a respectable 4.5%, better than cash (+3.4%), bonds (-1.1%) and equities (+1.5%), which we would view as pleasing, given some of the increased uncertainty witnessed this year.

The best thing about China being a 15-year story is that it will be a 14 year story one year from now, when the markets have given up on the commodity cycle. Chinese authorities in Apri l have given the strongest suggestion that they need to slow a rampant economy. The direct interference (curbing excessive lending for capital investments) in the economy will pull back equity valuations in that area to more modest levels.

The knock-on to the SA market relates to the commodity cycle, which appears to have peaked. Resource shares (outside of Sappi (+7.6%) and Sasol (+6.5%)) have been particularly hard hit this month. Against this, your exposure to Sasol in the fund is starting to contribute strongly.

The good news is that Resource shares have priced out a large component of the irrational exhuberance towards China, and on our calculations are pricing in a combination of current commodity prices and the exchange rate. Any material underperformance from here will present levels from which good returns from these shares become likely.

In the meantime, the Fund dividend yield is over 4%, shares we own are defensive and we will ride out potentially tricky market conditions.

Few market observers, if asked to draw up a list of SA's most successful unit trusts, would fail to include Investec Opportunity Fund (IOF).

Most will recall how former fund manager Piet Viljoen bucked the market collapse in 1998 and steered IOF through a threeyear financial and industrial bear market that began in early 2000.

He and IOF's management have a great record of consistency. In the seven years since its launch, IOF has delivered a total return of 112% compared with the flexible fund average of 47%. Over that period, IOF has also steadily rather than spectacularly outpaced the general equity sector's 78% total return, while keeping its unit price volatility at under two-thirds of the price volatility of the average general equity fund.

This has been a hard act for Clyde Rossouw to follow after stepping into the management role vacated by Viljoen just over a year ago. But with IOF retaining its position among the sector leaders, it has been a case of so far so good, though it could be argued that a total return of 31,6% over one year that failed to match the general equity sector's 42% is far from optimum.

But bear in mind that underlying this performance is a strategy in keeping with IOF's long-term tradition of first making sure money is not lost, and only then looking for opportunities to make it.

Emphasising the moderate risk approach, Rossouw says in his latest review: "Shares we own are defensive." He adds that IOF's portfolio contains counters that deliver an average dividend yield of 4% that were picked to "ride out potentially tricky market conditions".

The most notable feature of the portfolio is a low 3,4% exposure to mining resource shares. He believes recent moves by China to curb economic growth mark the peak of the commodity cycle.

IOF is, as Investec stresses, aimed at investors who seek "a moderately risk-profiled fund". This is in sharp contrast to many other flexible funds, where a seemingly gung-ho approach has produced some of the industry's poorest returns.

So far, so good for fund manager Clyde Rossouw after his first year at the helm of Investec Opportunity. Performance remained as solid as ever, though arguably 2003 was plain sailing for equity and bonds. Rossouw warns that rand volatility remains a potential threat that can cut chances of short-term trading success to 50-50 at best. This applies to all fund managers in what has the makings of a testing year.

Trends persist. One of the most common mistakes an investment manager can make is to sell too soon (in a rising market) or buy too soon in a falling market. Undoubtedly, equity markets have had a very strong undertone for the past 9 months. The local market in particular has continued to forge higher, notwithstanding many fundamental risks that are apparent, not least of which are the current near term prognosis for corporate profits.

2003 proved to be a good year for your fund, even considering the early wobble in the first quarter of the year, which culminated in the start of the easing interest rate cycle for domestic assets and the end of the war driving down markets for international investors. The return for the year was a rewarding 26%, driven by the strong final quarter, with the fund up 16%.

The only portion of the portfolio that failed to deliver a positive rand return for the full year was the foreign component, hampered by the 25% appreciation of the rand. A large portion of this was stemmed, due to a clear diversification strategy away from the US dollar, which weakened against most currencies. The fruits of this strategy were evident in the fourth quarter with compelling rand returns beginning to emerge.

Equity selection paid off handsomely in 2003. The equity component of the portfolio returned 30% for the year, with many share prices moving closer to intrinsic value. We have been sellers where our estimate of intrinsic value has been reached, but continue to hold the assets where we think further upside is expected, and the downside risks are limited. Our current equity weightings are still high, indicating our expectation of continued good returns.

The equities we continue to hold are reasonably defensive and we have been reducing exposure to more economically sensitive counters, especially on the foreign economic cycle. We see no need to radically alter our portfolio structure.

We favour companies where management have a proven ability to dampen economic volatility through strong product development and market creation (Afrox), counter-cyclical businesses (Tiger Brands) or geographically diversified businesses (SAB Miller).

Looking forward, given the strong returns we have seen and the current valuations in the markets, we would expect lower total returns for the future, but are still confident of 12-14% total returns to be achieved from the portfolio, without overly exposing the fund to downside risk.