Market review
During the quarter, low interest rates and further quantitative easing continued to support financial assets. Low nominal cash yields have drawn investors into riskier asset classes. Emerging market equities, along with commodity prices and emerging market currencies, were the clear winners. The MSCI Emerging Markets Index rose 18.2% over the quarter while the MSCI World Index gained 13.9%. Zinc, copper and aluminium ended more than 20% higher, outperforming a substantially weaker US dollar. Gold breached the $1300 mark, to gain 5.4% over the quarter and 19.4% year to date. Platinum and Brent crude both returned 8% in the past three months. Ten-year US Treasuries strengthened, with yields ending the quarter below 2.5%.

Local economic activity moderated, with GDP expanding by 3.2% in the second quarter, down from 4.6% in the first quarter. Concerns about the global economic recovery and subdued demand locally, coupled with the favourable inflation outlook, motivated the South African Reserve Bank to further reduce the repo rate to 6%. The August inflation number of 3.5% was the lowest since mid-2005. The rand was one of the strongest emerging market currencies over the review period, gaining more than 10% against a weak US dollar. Bond yields fell sharply, boosted by foreign investor demand and continued downward pressure on inflation. The All Bond Index ended the quarter 8% higher, behind listed property (13.7%), but well ahead of cash which returned 1.7% over the period.

The FTSE/JSE All Share Index rose 13.3% over the quarter. The non-resources sector led the market higher, with a significant increase in mergers and acquisitions globally spilling over into the local market. Old Mutual confirmed that it was in discussions with HSBC on its stake in Nedbank. Nippon Telegraph proposed a cash buyout of Dimension Data and Wal-Mart made a cash offer for Massmart. Both the gold and platinum sectors ended down over the quarter, with platinum miners losing 2.3% while gold mining gave up 1%. Consumer services, which include the general retail sector, gained just shy of 25% over the same period. Food retailers, banks, life insurance and personal goods continued to perform well ahead of the broader market.

Portfolio review
Erratic stock price behaviour normally occurs at turning points in the stock market cycle. The past quarter has seen a fair share of this price action. Investors, who focus on quality, will continue to steer through the incessant noise and avoid the points where momentum has taken over in stock prices.

The announcement of a potential purchase of Massmart by Wal-Mart at a rich price earnings multiple of close to 20 times forward earnings illustrates three interesting points:

1. The very high price that foreigners are prepared to pay for businesses that have the perception of emerging market growth. At the same time it is very hard to see how much more value Wal-Mart can add to a well-run business. A better transaction could be for Wal-Mart to buy back its shares on 13 times earnings.
2. The very low cost of funding. Wal-Mart can raise debt at under 4%, which in part explains the high price tag.
3. Deals like this push the valuation of the rand even further into extreme territory; the rand is estimated to be over 20% stronger than fair value.

Money flow arguments are easy to understand, but can never override fundamental value. The fact that the world is nowhere near normal in terms of interest rate policy does not mean that sensible investors should sacrifice their investment principles. Bond and equity inflows of over R100 billion this year explain, but do not justify price levels. These flows can reverse very quickly, having a major impact on the rand.

Investors in the Investec Opportunity portfolio have enjoyed strong inflation-beating returns over the past 18-24 months. The portfolio continues to enjoy robust local currency returns, although returns compounded at a slower pace than a fair number of shares over the past quarter. It is hard to find new opportunities for investment in the current market, and there are several areas to avoid. Many shares are fairly valued at best and continue to exhibit limited downside protection or margin of safety. Therefore, we retain a healthy portion of cash in the portfolio, as we wait for better buying opportunities in both bond and equity markets. In particular, we are avoiding the credit and general retailers where profits are high, expectations higher and share prices unsustainable. The exception is Pick n Pay, where profits are temporarily depressed and huge scope exists to raise earnings materially from current levels over time. Future dividends should grow at a superior rate to other retailers over the next few years.

Portfolio positioning
There are still equity opportunities locally, which we continue to exploit. We are not overly negative, as we still believe that the future tailwinds of a weaker currency and better returns from developed markets will help the non-SA holding to deliver attractive returns over time. The weighting in offshore assets amounts to 20% of the total portfolio. There are a number of high quality global companies trading at below par multiples and we prefer these to the marginal local opportunities. We retain a meaningful weighting in cash to exploit interesting options that may emerge in the next few months. As always, we are patient, long-term investors.

Market review
The second quarter of 2010 reminded investors and market commentators that excess global indebtedness, which had resulted in the global financial crises, was not likely to be resolved in a few short months or by some extraordinary policy miracle. The spotlight remained firmly focused on Europe, with certain countries in the region straining under the heavy burden of unsustainable funding requirements. Global share markets headed lower as uncertainty rose around the likelihood of a V-shaped economic recovery. The MSCI World Index dropped sharply, closing 12.5% down over the quarter, dragging this year's returns into negative territory (-9.6%). Emerging markets fared somewhat better, shedding 8.3% over the quarter and 6% year to date. The FTSE/JSE All Share Index lost 8.2%, dragging the year's returns 4.1% lower. The weaker rand detracted from US dollar returns. The local currency depreciated 4.9% over the quarter and 3.5% year to date against the dollar. The rand gained significantly against the euro, appreciating 12% over the first six months of 2010. Resources were worst hit over the quarter, with platinum and diversified miners off 11% and 18.2% respectively. The gold sector was the best performer over the quarter, rising 16.5%. Other defensive sectors also performed admirably: food and drug retailers ended 11.9% higher and fixed line telecommunications surged 10.5%. Industrials lost 7% with general retailers (4.1%) outperforming the local banking sector (-9.9%) by a wide margin. Bonds, cash and listed property provided positive returns over the quarter. Cash returned 1.7%, bonds 1.1% and listed property rose 0.6%. Year to date, listed property remains the best performing asset class (10.6%).

Portfolio review
The performances of the index-leading share prices have faltered, reflecting the more realistic prospect that economic conditions might be substantially subdued. The globally sensitive shares have ceded their gains of 2009 and have begun to discount a wobble in the global economy. After a promising start to the year, local equities sold off during the second quarter, erasing the first quarter's gains. There were very few performers over the second quarter; retailers, listed property and gold provided positive returns. The divergence between the underlying commodities and the share prices of the producers of these commodities has become so stark that metal prices need to fall around 20% from end June levels to justify some resource share prices. We suspect that buying opportunities will emerge in the resources sector. The listed retail sector has seen fantastic gains. We have not held much exposure to these shares and continue to find no value, with the exception of Richemont and Pick n Pay. Richemont has started discounting the growth of the emerging luxury class in Asia and company earnings are only now moving out of the trough. Pick n Pay has finally made progress in respect of the sale of the Australian operations. Our view is that the sustainable earnings power of the group remains underappreciated, and the move to centralised distribution and the drive to eliminate loss-making activities will start to improve the sustainable earnings profile. Our biggest disappointments have been Sasol and MTN, which remain attractively valued. These shares seem to have lost favour with the global emerging market fund managers, given the strong performance of the retailers. In this regard, momentum has taken over from value. MTN suffers from a deal overhang discount. The market continues to be concerned that an acquisition is being lined up and management's apparent desperation is a widely held market concern. Our view is that an adverse outcome is unlikely and we believe that continued operational performance will ultimately be rewarded and reflected in the share price. The bond component of the portfolio performed respectably in the first six months of the year, slightly ahead of our expectations. Our global equity portfolio has outperformed the MSCI World Index, producing attractive double-digit rand returns over the past twelve months. However, performance has been subdued this year.

Portfolio positioning
Whilst the world is scrambling to generate positive real returns, the continued disciplined approach by the South African Reserve Bank ensures that local cash is not unattractive, despite offering only moderate rates of interest. We are waiting for signs that the property market in China stabilises, following the targeted measures to stem asset price inflation. The Chinese stock market has not yet signalled a bottom, as reflected in the Shanghai Composite Index. We are comfortable with the portfolio's low equity weighting for now.

Market review
In the first quarter of 2010 asset prices continued to rise as the global economic recovery gained traction. Strong March returns took the global equity market composite back into positive territory for the year. The MSCI World Index closed 3.4% higher over the first quarter while the MSCI Emerging Markets Index returned 2.5%. US markets led their global peers, with more cyclical markets and sectors generally showing stronger returns. On the emerging market front, South Africa along with Turkey, India and Russia all recorded dollar returns above 4% (MSCI indices). Chinese equities (-1.6%) continued to languish, despite domestic growth data pointing to robust investment spending and rising consumption growth. The global market weakness in response to Chinese policy tightening early in the quarter was short-lived, with risk appetite improving and optimism about the recovery again prevailing. All returns are quoted in US dollars. The South African economy is also showing signs of recovery. Year-on-year comparisons indicate strong gains across most categories, boosted by very weak economic activity at the start of 2009 when the recession was in full swing. The Reserve Bank's monetary policy committee's decision to cut the repo rate to 6.5% provided a welcome boost to indebted consumers in March. Greater certainty about electricity tariff increases, slowing inflation and the negative impact of a strong rand on the economy's competitiveness were all cited as factors warranting a further cut in rates. The All Bond Index returned 4.4% over the quarter, well ahead of cash. The listed property sector added nearly 10% over this period. Greater risk appetite globally boosted the local equity market. The FTSE/JSE All Share Index (ALSI) provided solid gains in March (7.9%), pushing the quarter's return into positive territory (4.5%). Rand strength, on the back of over R14.5 billion in net equity and bond inflows over the quarter, contributed to the ALSI returning 1.5% in US dollar terms. Financials (9.9%) were well ahead of industrials (4.4%) and resources (2.1%) over the first three months of the year. However, intra-quarter sector rotation saw the All Share Resources Index adding more than 10% in March. Banks (12.2%) and general retailers (17.1%) strengthened over the quarter, on the back of a surprise cut in rates and strong interest from foreign buyers. Gold miners fared poorly during the three-month period, shedding 8.2%. The platinum sector (11.3%) and general miners (12.4%) enjoyed market-beating gains in March, but the platinum sector (2.1%) still trailed the ALSI over the quarter, while diversified miners performed in line with the general market.

Portfolio review
Every day, the world's investment community gains a few more bulls, more believers that the global economy will continue to recover not just for one year, but over the next two to three years. As confidence in the economy becomes more widespread, the higher stock markets rise. Soon, if this has not already happened, the risks will be brushed aside. This behaviour is typical once high historic returns have been achieved and when returns over short periods are significantly ahead of inflation, as in the past year. The recent revelation that ArcelorMittal South Africa had lost its mineral rights by virtue of a technicality relating to the conversion of old-order mining rights to new-order mining rights, has raised many precedent-setting issues. These questions are very relevant for ArcelorMittal, but even more so within the broader investment environment in South Africa. Firstly, the ruling suggests that mineral rights have to be transferred on a pro-rata basis, rather than on an asset basis. What this means is that a minority holding a share of an asset must ensure that this asset has met all the requirements of the new mining legislation, despite not being privy to all the information needed. This could imply that minority shareholders of listed companies could be stripped of their rights to a profit if they had not applied for conversion. Secondly, the arbitration process must decide if contract law can be superseded by minerals legislation. If ArcelorMittal has the rights to a supply of iron ore at a predetermined price, how can this contract be cancelled by the supplier, Kumba Iron Ore, without compensation? Thirdly, can the government grant prospecting rights over an asset which has mining rights and is in production? Lastly, can the government award mineral rights to itself, or its investment arm without being seen to be acting without prejudice? One has to conclude that these issues are overlooked and that the most important considerations for the trajectory of the local equity markets remain the prospects for emerging markets in general, and the price of certain bulk and base metals in particular. The price of copper has returned to the highs of 2008, when the world was firing on all cylinders, and even the most marginal assets with the highest quartile cost of production still earn a 50% cash margin at current prices! The Chinese stimulus package announced in 2008, and implemented over 2009 to date has produced some worrying statistics. The modern city of Ordos, built in Inner Mongolia, remains largely uninhabited. The massive South China Mall has a vacancy rate of 99%, five years after opening. This mall is a stone's throw from Hong Kong. These are prime examples of inefficient infrastructure investments made within a centrally planned economy. No-one worries about misallocation of resources and bad debts in an environment where statistics aren't always reliable. At the other end of the spectrum, the rand remains stubbornly overvalued, and retail shares enjoy high valuations. For instance, Massmart, often viewed as the Walmart of Africa because of its value offering and similar business model, now trades at a sizeable premium to Walmart. Massmart's shares are pricing in substantial profit growth for three years. The world remains unbalanced with unsustainably strong growth in emerging markets, and anaemic growth in the developed world. We see better opportunities in the developed world and will continue to sow in these areas. We are extremely comfortable having large weightings of equity holdings when the businesses we own are deeply underpriced. Sadly, this is no longer the case in most parts of the South African market and we are simply watching as the 'momentum train' leaves the station with a full load of greedy passengers on board. As has happened in the past, this train will probably derail in the not too distant future.

Portfolio activity
The South African equity weightings were reduced over the quarter, which reflects our current discomfort. We have sold out of Naspers. The value attributed to Tencent has grown to 90% of the value of Naspers. Tencent is a great business with an excellent platform, but the company trades on 35 times 2010 earnings, and those are earnings that have grown rapidly for several years. We have found some room to add to Sasol, as we believe that the share is the best quality play on a weaker rand, and the oil price is the least vulnerable to a slowdown in China. The share price continues to lag the sluggish recovery in the rand oil price.

Portfolio positioning
The portfolio is likely to see further net sales of equity assets in the months ahead, with the markets possible reaching a crescendo with the World Cup by mid-year. Bonds look better than cash, but we are not entirely convinced on a risk-adjusted basis, so we continue to hold more cash than bonds.

Market review
2009 marked the end of the recession and provided asset markets with ample opportunity to retrace some of the losses sustained in the wake of the worst global financial and economic crises in decades. Along with commodities and the corporate credit markets, emerging economies were the prime beneficiaries of improving global growth prospects, the strong recovery in risk appetite, the weak US dollar and low borrowing costs across the developed markets. Emerging market equities rose 8.6% over the last quarter and 79% in 2009, well ahead of developed markets. The MSCI World Index returned 4.2% over the quarter to push the year's gains to 30.8%. All returns are quoted in US dollars. In sync with other commodity currencies, the rand regained its composure in 2009. Record capital inflows and higher commodity prices fuelled a 28.7% gain against the US dollar. 2009 was not a good year for bond markets, reversing some of their gains of the previous year. Bond prices fell in 2009 as economies recovered and the cost of massive fiscal and monetary stimulus started to hit home. The increase in bond issuance over the next few years and large fiscal deficits will keep the pressure on bond markets. Offsetting this over the near term, will be the improved domestic inflation outlook and expectations of growth below the historical average. The All Bond Index lost 1% over the year, but marginally outperformed cash over the second half of 2009, gaining 4.1%. In the fourth quarter, the All Bond Index returned 1.1%, underperforming cash. The listed property sector showed some resilience in a very difficult trading environment, gaining 4% in the last quarter to finish the year 14.1% higher. Improved growth prospects and a higher risk appetite supported domestic equities. The All Share Index (ALSI) ended December on the year's high, returning 2.9% over the month and 11.4% over the quarter. Strong foreign investor interest to the tune of over R75 billion in net equity inflows boosted the market's rating and pushed the year's returns to 32.1%, erasing all of 2008's losses. Over the quarter, the basic materials (17%) and consumer goods (18.7%) sectors recorded similar returns, beating the ALSI. There was a large divergence in the sub-sector performances in the final quarter. The gold sector struggled (-1.2%), but platinum (17.7%) and general miners (23.1%) outperformed. In the consumer goods sector, SABMiller and Steinhoff stood out as strong performers. Food producers (8%), general retailers (3.3%), banks (7.2%) and the life assurance sector (9.7%) all posted positive returns over the quarter, albeit below the overall market. The construction and telecommunications sectors, down 8.2% and 3.2% respectively, continued their underperformance during the year.

Portfolio review
2009 was a good year for investors in the Investec Opportunity portfolio. Inflation declined in line with our expectations, ending below 6% and total equity returns rose significantly. However, we don't expect inflation to fall as sharply as in 2003, and we are unlikely to enjoy several years of strong equity market returns. Earlier in March, we thought that equity markets offered good opportunities for attractive returns, but we were surprised by the strong emerging market related tailwinds that boosted the performance of South African equities. In fact, the portfolio's performance can largely be attributed to equity returns with very little assistance from the other asset classes like bonds and cash. The biggest performance headwind, though, was the foreign holdings in the portfolio which are only marginally higher in rands. We continue to believe that this part of the portfolio is where the sowing needs to be taking place, as our foreign holdings are likely to deliver the best future returns.

Portfolio activity
We have sold out of Old Mutual, Bidvest and Remgro as the shares now trade in excess of what we consider to be fair value. The only meaningful addition to the portfolio was to increase the holding in Santam. We raised our exposure given the attractive valuation, improving underwriting prospects and the ever present possibility of another offer by Sanlam for what we consider to be the prized asset in their portfolio.

Portfolio positioning
For the Chinese, 2010 is the year of the Tiger. For South Africans, we need to grapple with the sudden strengthening of the dollar. The greenback has firmed due to the unexpected recovery in the US economy, which seems to be gathering traction. If the economy is stronger than expected, then the interest rate environment is not likely to be supportive. However, earnings growth will surprise on the upside, providing a pleasing underpin for equity investors. This is likely to be good for equities, particularly global oriented equities, as non-gold commodities are set to rise further from current levels. Our conclusion for now is that reasonable equity weightings are warranted to capture further performance potential. Of course, there are always risks to our investments. Local equity valuations require stronger commodity prices, higher earnings growth rates than forecast, and sustained low interest rates. We see more risks in domestic oriented companies than foreign oriented companies listed on the local bourse. The equity strategy continues to be anchored by quality companies, whose DNA and credentials will ensure that an above average performance can be achieved going forward. Such exposures include MTN, Standard Bank and British American Tobacco.