The role of the cheer leader in any team sport is to whip up a crowd into a state above what which prevails in real life, in the hope that performance of the crowd will impact on the performance of the team. So far this year, the war cry for equities has been getting progressively louder, and is no longer a faint whisper like it was two years ago. The cheer leaders are of course right, the equity market is up over 36% going into the last quarter of 2005.

The equity market has re-rated to the extent to which a realistic expectation of a forward looking return over a longer term perspective is no more than 5% in real terms.

Against this backdrop, we have continued to be net sellers of equities, reflecting relative scarcety of obvious value within equities, and continued strong performance from the companies we hold. The overall equity weightings have not increased since the beginning of the year.

Resource shares have been the strongest performers for 2005, outperforming the overall market by some 23% year to date, and also over the most recent quarter. Given the generally inferior risk/return trade-off of resource shares, we typically do not hold many of these shares on your behalf, unless the return prospects are exceptionally good. Fortunately, the holdings in Sasol, Remgro, Impala and Anglos have added a lot of value this year, especially since the contribution from banks and the domestic stocks has been minimal.

Our mandate is to continue to deliver good risk adjusted performance in excess of the inflation plus a decent hurdle rate. Most people now believe that inflation is a simple benchmark to outperform, but these people forget the spike in inflation in November 2002 to over 10.9% year over year, and the negligible real returns that most asset classes generated then.

If we have seen the lower turning point for inflation, and we have already seen the rate of inflation move up from around 3% to just under 5%, we can expect the next 2 years to be tougher as the trend in short and long term interest rates reverses in SA. We think that returns will only be low double digit from here.

Usually, by the middle of the year, the key macro drivers of the markets are in place. This usually implies that an overall portfolio strategy is clearly definable. So far this year, we have not yet seen this. We have counter-cyclical powerful drivers at play. To the surprise of many, the US Dollar has been strong this year, led by a rapidly rising Fed Funds rate, and superior growth differentials relative to Europe and Japan at least. Long forgotten are the twin deficit fears. In SA conversely, the domestic consumer still shows no sign of pause, and why should he? Interest rates are low, property prices are high, and real incomes are strongly rising.

With all this pre-amble, where am I going? We continue to favour quite a broad portfolio, with many smaller, yet clear themes. We continue to like the domestic banks, with good earnings growth and good valuations, but also like selective Resource and Industrial shares.

Banks still have a powerful tail-wind in the form of the robust credit demand, but have some cushion on an abrupt change to this favourable environment in the form of rising interest rate margins should short rates rise. We like Platinum counters. The shares are under-owned in SA, the industry is a competitive advantage of SA, and the valuations, of Impala Platinum in particular, are fairly compelling on a longer term view. We like the longer term Gas-to-Liquids growth story in Sasol, apart from the short term high Rand oil price. At times like these, we favour the better longer term growth counters with excellent brands or strong cash flows or strong domestic businesses.

We remain cautious on the cyclical shares with very high levels of earnings, where there is no net asset cushion and negative revenue drivers.

The first 6 months has yielded close to 9% as a total return, with lots of gas left in the tank. We have, however, been cautioning against expecting another 30% plus return from the fund. The fund equities still trade on 12 times historic earnings and bear a 4% historic dividend yield. The foreign allocation is around 7% of the portfolio. Good real returns still look likely without taking unnecessary risks.

As usual, Investec Opportunity Fund (IOF) remains well up among the sector leaders despite holding a quarter of its assets in cash at a time when a bigger dose of rand hedge shares would have worked wonders. But this is with the benefit of hindsight. Given the market's rush into rand hedges at seemingly any cost in May, manager Clyde Rossouw can be excused for taking the cautious stance he did and, if anything, it adds to IOF's appeal.

Financial Mail - 8 July 2005

The popular notion of "Sell in May and go away" was alive and well, ironically coming early during April this year. The conventional thinking is that a global cyclical economic slowdown will crimp the prospects for equities given the current high developed market valuations and potential for lower earnings growth and rising risk aversion. We are quite bemused by this. Corporate earnings growth of SA companies in particular have been very strong this year. Together with lower equity prices of non-resource shares so far this year, valuations of many shares have markedly improved. Anyone with a longer term outlook, and we believe in taking views that extend beyond three to five years, will continue to see good returns.

This view is enhanced by corporate buyers out there. These buyers have been active in seeking opportunities from shorter term players. This month has seen the buy-out of Grintek minorities for cash at R2 per share by Sweden's SAAB. You had exposure to the share, which we purchased on your behalf around R1.30. The offer had to be raised twice from the original R1.70 to get buy-in from ourselves. Many people would not have bothered, given the relative size of the company (c.R500m), but we believe in optimizing value.

Most people will have read about the Barclays/Absa transaction. You are a significant shareholder in Absa, and we believe the structure in which minorities are to tender only some of their shares, in order to generate a higher return on the balance of their holdings, given the value that Barclays can add, is attractive.

Another of your top ten holdings, Afrox, will see you obtain around 24% of the value returned to shareholders by way of a special dividend and share buyback.

Where does this leave us? Your exposure to good quality counters will reduce given these transactions, and we have been increasing exposure to other shares, like Anglo, Mediclinic and Remgro. Market panic is always great for long term holders of growing businesses, even though the short term performance figures for your investment do not always support this.

"Bull markets are born in pessimism, grow in skepticism, mature in optimism and die in euphoria." These words of John Templeton are as timeless as they are true.

For the bull market to end you need euphoria and highly valued share prices. Do we have this today? Lets look at the evidence.

Many of the domestic stocks have been sold aggressively in the past three months, as investors fear a change in the macro-economic environment as the Rand is expected to be about to collapse. The word "fear", the emotion driving market prices at present, hardly describes the end of a bull market. When you add that banks, as an example, are trading on 9.5 times earnings, and dividend yields of 4- 5%, they hardly are discounting blue sky. We conclude that the bull market has not yet ended and the more importantly, the opportunity for investors to make money in these companies is most decidedly there.

Let us consider two major risks out there that could impact on your 11 PE, 4% historic dividend yield portfolio, and then view whether you need to reduce your holding in the fund or increase it. Firstly, the oil price: An oil price above $50 per barrel probably reflects very strong demand globally, and ironically is not curbing global growth. You have short term protection in the form of a large exposure to Sasol, a direct beneficiary.

Negative real interest rates in the US are partly responsible for buoyancy in global house prices, commodities (including oil) and non-US Dollar assets. Positive real interest rates will slow the demand for oil and this is Greenspan's stated intention. It is important to note that rates in the US will have to rise around 1% to get to zero real. The US bond market has figured that out already.

Secondly, rising bond yields in SA: You do not have material direct exposure to the bond market, and more importantly the market has now figured out that short term interest rates are not going lower in SA.

When we do our long run valuations for shares, we consider higher bond yields than currently prevail, hence we believe that there is protection in equities, as we calculate that they are not incorrectly priced.

There are always risks around, but the current behaviour of investors is to panic when they see the slightest sign of a pull-back in share prices. These occur often and are healthy. We will continue to look for opportunities to deliver long run performance, counter to the prevailing emotions. We think that it is a far better prospect to own growing entities, with valuation protection that will make good real returns going forward.

Most people take the Christmas break to review their investments and consider any changes they need to make for the new year. It is also this time of year that many Investment companies fill your mailbox with a review of their crystal balls for the coming year and tell you what is going to happen. The truth is, they don't know. Even if you knew that a Tsunami would hit 9 countries and kill upwards of 150 000 people, would you have sold your equities? The event had surprisingly very little impact on global markets, and who could have predicted that?

2004 was a good year for your investment in the Investec Opportunity Fund. If you had invested R100 into the fund on 1 January 2004, you would have had R136.20 at the end of the year, had you reinvested the 6 monthly distributions. If you had invested the same R100 on 1 January 2003, you would have R171.16 on 31 December 2004.

Do the current levels of equity markets warrant cause for concern? We think that investors should be cognizant that many equities have reached levels from which "normal" real returns are likely going forward. The last time SA equity markets saw two consecutive positive years was 1993-1996, when markets went up for four years in a row. This period was characterized by buoyancy in the local economy, and firm US Dollar commodity prices. Similar conditions prevail at present. The first yellow light we would be looking for to slow the advance of the positions in the fund would be a possible rise in short term interest rates, which we do not know when would occur.

In the mean-time, we would expect continued meaningful real returns to be achieved from investments in the fund, but at a lower rate of return than those achieved over the past two years.