Market review
Risk assets experienced a torrid third quarter. Equities slumped, commodities retreated sharply, credit spreads widened materially and currencies depreciated against the US dollar. The traditional safe haven assets performed well: both US Treasury yields and German Bunds fell to record lows, closing the quarter at 1.9%. Gold added a further $125, up 8.2%, despite the slump in September. The US dollar gained 6% in trade-weighted terms over the quarter. With fears of a sharp growth slowdown and a high probability of an imminent recession in some regions, commodity prices could not hold on to the elevated levels reached in the first half of the year. Copper declined 23.3%, platinum fell 11.6% while Brent crude closed 5.3% lower. The MSCI World Index ended the quarter 16.5% weaker and emerging markets tumbled 22.5%. The FTSE 100 Index dropped 15.5%, the Dax 30 Index slumped 31%, while the Nikkei 225 Index outperformed meaningfully, closing 7.1% weaker. The S&P 500 Index shed 13.9%. (All returns are quoted in US dollars.)

South Africa remains subject to global pressures, the uncertainty about the crisis in Europe, the structural impediments to a more meaningful global recovery and asset market volatility. The South African Reserve Bank, concerned about global macro events, kept interest rates on hold at record lows. Citing a slightly higher inflationary trajectory and its continued willingness to consider all eventualities, the Bank heeded calls to maintain its mandated policy objective of stable inflation. The slump in the rand, along with the depreciation of other emerging market and commodity currencies, added support to the decision. Domestic growth remains sluggish, with manufacturing and mining output particularly weak. With average house prices falling, personal debt to income ratios high and job growth mostly absent, private sector investment continues to languish. SA GDP growth estimates for the year have now slipped to well below the 3% mark, with forecasts for 2012 being revised downward towards 3.5%. The All Bond Index gained 2.8% over the quarter and cash, as measured by the STeFI Index, edged 1.4% higher. The listed property sector rose 2.2%, buoyed by firmer bond yields.

The FTSE/JSE All Share Index closed the quarter down 5.8%, with significant rand weakness partially offsetting the sharp fall in commodity prices. The index lost 21.3% in US dollars. Significant dispersion marked the quarterly performances, with sectors most exposed to the SA economy generally outperforming the broader market. The food and general retail sectors fared particularly well, closing 6.4% and 1.7% higher, respectively. Banks lost 3.3%, while short-term insurers gained 6.9% over the three months. The health care sector, up 2.5%, continued its recent strong performance. Commodity-exposed rand hedge stocks fared poorly over the quarter, but even here there was significant dispersion. Diversified miners lost 17.3% and platinum miners shed 9.7%. The gold sector posted one of its strongest relative performances, gaining 19.5% over the review period.

Portfolio review
The sovereign debt crisis can no longer be deemed to be confined to peripheral Europe, as the very core of the continent is showing signs of distress. French banks are seeing large depositors withdraw their money in search of better havens. Other lenders (reliant on wholesale funding), have experienced significant business pressures resulting from investors who are no longer willing to provide funding, due to solvency concerns. In fact, the region's financial system seems to be caught in an asset write-down, capital shortfall, funding pressure and asset decline spiral. The extremely low yields on German and US sovereign debt suggest that markets expect a combination of anaemic growth, mild deflation and a high probability of a sovereign debt default elsewhere in Europe.

The share prices of the top 161 banks in the world (collectively holding assets valued at $67 trillion and with a market capitalisation of $3.7 trillion), show the extent of the market's concerns. Prices have fallen 23% this year. It would appear as if the banking sector, which had not fully recovered from the effects of the 2008 financial crisis, is resuming a negative trend. Poor global growth prospects have resulted in emerging market currencies weakening. After two strong years where the rand was at the top of the performance tables, investors have seen this position erode rapidly. The good news is that the portfolio's foreign exposure has assisted its overall performance. Our defensive, high quality offshore equity holdings delivered a positive 12-month dollar performance, which translated into a 17% rand return. A closer examination of the rest of the past 12 months' returns has shown poor performance from the domestic general equity market, with bonds and cash delivering only marginally better returns. Our equity selections have been better than the overall market. We are encouraged that our expectations of overall portfolio returns 12 months ago have been met, despite these trying circumstances.

Portfolio positioning We continue to avoid exposure to banks offshore, preferring a defensive stance. Further recapitalisations may be required, which, if underwritten by indebted governments, could exacerbate the problems. Even in the event of an orderly default by Greece, the key problem is that many indebted developed world economies are in a difficult place, where national priorities include debt repayment, not asset accumulation. When economic growth is scarce and competitiveness is an issue, problems tend to escalate.

The last symbol of global growth, the copper price, lost more than 23% over the third quarter. This is a timely indicator that high-frequency global economic data will continue to deteriorate over the next few months. We will remain modestly exposed to South African equities until such time as we have higher conviction that we have approached the bottom of the cycle.

We rely on valuations and not forecasts, to help determine future return expectations. Fortunately, both local and global equity valuations are improving, offering opportunities to invest capital judiciously, but without the expectation of any near-term reward.

Market review
Developed market equities (0.7%) continued to outperform emerging markets equities (-1%) over the review period. The S&P 500 Index ended the quarter flat, while the German Dax, UK FTSE and Japanese Nikkei indices added 7%, 1.7% and 3.3% respectively. The emerging market BRIC members performed poorly. Russia lost 5.4%, Brazil 5.3%, and India ended the quarter 3.6% weaker. All returns are quoted in US dollars.

With risk aversion and growth concerns prevalent, bonds matched a good first quarter. US treasury yields briefly dropped below the 3% mark, seemingly less focused on US credit quality and the pending debt ceiling expiry. However, lower bond yields were not evident across all countries, with those exposed to acute solvency concerns seeing their cost of borrowing shoot to record highs. Similarly, the cost of insuring against default by those governments has increased exponentially over the past few months. While global financial markets were characterised by extreme volatility, the rand seemed almost oblivious to it all. Unchanged over the quarter against the US dollar, the local currency ended only slightly weaker against the euro. Strong portfolio flows - predominantly into the local bond market - plus Competition Tribunal confirmation of Walmart's acquisition of local retailer Massmart, added to the lustre of the rand. Local bonds rallied over the quarter, with the All Bond Index gaining 3.9%. Cash, as measured by the STeFI, returned 1.4% over this period. The listed property sector enjoyed healthy gains, lifting total returns to 5%.

The South African Reserve Bank's monetary policy remains on hold for the time being. A slow jobless recovery locally, concerns about developments in Europe and the rest of the world, and moderating near-term inflation fears have pushed expectations of a rate hike deeper into the second half of the year than had previously been priced in by the market. The FTSE/JSE All Share Index closed 0.6% lower over the review period, with the market falling 2% in June. Resources were the biggest detractors, with gold miners and platinum stocks down 13% and 7.7% respectively. Diversified miners lost 3.3%. Health care (6.9%), food producers (4.5%) and telecommunication (5.4%) performed well. Banks gave up 0.9%, with flat returns year to date. Sasol, the only oil & gas sector constituent, fell 8.5% in the second quarter after a strong first three months of the year.

Portfolio review
Investors in developed markets have had to digest a potential Greek default, risking contagion to Portugal, Ireland and Spain. Despite the latest rescue package for Greece being approved, it should be noted that there is still the possibility of a default in the peripheral countries, given the midteen interest rates these governments have to pay to service their debts. On the other end of the economic spectrum, emerging market investors have seen authorities aiming to slow inflationary pressures, most notably in China where record reserve requirement levels and higher interest rates have curbed stock market progress. By the end of the first half of 2011, China's inflation rate exceeded 6%. With these thorny issues dominating the investment landscape, only a small drawdown on capital in the first half of 2011 could be considered a good result. Investors in the Investec Opportunity portfolio have in fact done better than this, as overall returns have been in line with cash. The portfolio's offshore holdings made a solid contribution to performance. Interestingly, the performance of many developed market shares has surprised on the upside. Despite macroeconomic uncertainty creating subdued valuations, stock markets are focusing on underlying earnings dynamics. The offshore equity portfolio still trades on a lower multiple than our SA portfolio, offers better free cash flow characteristics and higher quality.

Portfolio positioning
Investors have scope for increased optimism, as the drop in the market rating over the last six months points to better value emerging in the local market. Despite this, we continue to note very elevated profit streams for many South African companies and a new-found belief that the economy is no longer cyclical. We do not believe that commodity prices are no longer cyclical, and that there won't be a down cycle in profits when interest rates start rising in due course. Local bonds added to the portfolio's performance for the six-month period and continue to offer a reasonable pick-up over cash, and sensible real yields. We do not share the market's inflation obsession, as we think the global economy is still likely to be relatively subdued overall. To raise local equity weightings from current levels, we require a further improvement in valuations and a resolution of the key macro issues. In terms of market weakness, we do not foresee share prices falling by more than 20%.

Market review
Equity markets performed well during the quarter considering the negative headwinds, which in preceding years would have resulted in sharp falls in risk appetite. Developed markets (4.9%) outperformed the emerging market composite (2.1%), despite a 9% drop in Japanese equities in March and a 6% weaker close over the quarter. Local equities mimicked global market volatility, recovering January's losses and ending the quarter marginally higher (1.1%). Resource counters performed best, with Sasol, the only oil & gas producer constituent in the index, rising 13.1%. Diversified miners closed 3.2% higher while paper stocks added 15.5% over the period. Platinum stocks lost 10.5%. Both the industrial and financial sectors underperformed the broader market, closing down 0.3% and up 0.7%, respectively. Again, there was substantial dispersion amongst the various sub-sectors, with construction (-25%), food producers (-4.3%) and pharmaceuticals (-11.5%) underperforming, while mobile telecommunication (3.9%), life insurance (6.4%) and industrial metals (14.5%) enjoyed strong returns. Local bonds traded weaker over the quarter, with the All Bond Index losing 1.6%. The yield curve has continued to steepen, while inflation concerns both globally and at home have been more pervasive. The firm rand has offset gains in oil prices for now, while food prices, rising at producer level, have not been passed on to consumers. Listed property, highly sensitive to the bond market, also gave up some of its 2010 gains, closing 2.2% weaker. Commercial property fundamentals remain under pressure, though highly dissimilar across regions and asset type. A recovery in growth, coupled with a lagged onset of new supply, will lend support to the market over the next year. Cash, as measured by the STeFI, provided a steady 1.4% over the quarter.

Portfolio review
The first quarter delivered a meaningful performance for patient South African investors who have exposure to international assets. We are encouraged by the solid returns from the Global Absolute Income and the Global Opportunity Equity portfolios, our two foreign vehicles for your portfolio. These were well ahead of local equity, bond and cash returns. Despite low domestic interest rates, SA cash was the best local asset class. The portfolio had a large cash holding, given our expectation of the market only being priced to generate a pedestrian return of some 2% ahead of inflation for the next five years. The strong advance made by the price of oil to over $120 per barrel resulted in Sasol's share price moving higher. What started as a riot against rising food prices and continued income inequality in Tunisia, rapidly spread to oil-producing countries in North Africa. A good reason for a higher oil price is rising oil demand fuelled by a stronger global economy. A bad reason is supply disruption, which is currently the dominant factor. If Saudi Arabia experiences a social revolution, the world could lose more than 10% of the global oil supply with the price spiking to well over $150 per barrel. This of course will be the tipping point that causes the global economy to stall, as consumer demand for other goods gets squashed. In the interim, the best hedge against further turmoil in the oil price is a large Sasol position, which we still hold in the portfolio. Another winner for the portfolio was Assore. The valuation is still the lowest of the commodity producers. We calculate that even with lower, normalised iron ore prices, but higher, normalised manganese ore prices, the share still offers the best value in the mining sector. The uncertain world continues to produce interesting winners. British American Tobacco performed well this year. Robust brands, strong pricing power, distribution scale and limited input cost inflation are being incrementally rewarded by the stock market. Our biggest disappointment came from Impala Platinum. The share was hard hit by the perception that Japanese demand for platinum group metals would be curbed due to the earthquake's impact on the global automakers' supply chain. Furthermore, Zimbabwe has announced that mining companies have to hand over control to indigenous Zimbabweans for no compensation, lowering the valuation of the business that has rich deposits in the country. Although no one knows the likely outcomes in Zimbabwe, the Ivory Coast, Egypt or Libya, it is clear that the valuations of assets have to attract a higher risk premium, to account for negative economic surprises.

Portfolio positioning
Bonds have been hurt by fears of inflation locally, where inflation has bottomed at 3.5%. The reality is that there is no tradable goods inflation, where price points have not yet adjusted downwards for the strong rand. Administered price inflation is a function of supply side initiatives like electricity price spikes, petrol price inflation and excessive municipal charges for rates, water and other services. We continue to seek opportunities to invest further here, given the steepness of the yield curve. We remain cautious on commodities, copper in particular, which is showing signs of peaking. Our view is that the reversal of quantitative easing (tightening reserve requirements and rising interest rates) by the Chinese will reflect in lower money supply growth and ultimately lower inflation. This process will be commodity price negative. Generally, we believe that interest rates will rise this year, in response to the inflationary pressures that abound. Stock markets, however, could be constrained by sporadic episodes of default concerns in peripheral Europe. Despite the fact that Ireland has been bailed out, the banks continue to raise more capital. Bond markets suggest that Portugal and Ireland have an over 40% chance of debt default, and Greece has a 58% chance of defaulting. Markets will be keeping a close eye on events in Europe.

Market review
After a volatile first three quarters of 2010, risky assets responded to prospects of an improved economic outlook and ended the year firmly in positive territory. During the fourth quarter, investors switched out of bonds into equities. Global equities added 8.8% over the period, while global bonds lost 1.8% in US dollars. Local bonds could not shrug off the global bond sell-off, ending up only 0.7% over the quarter. Cash, as measured by the STeFI, returned 1.6% for the three months to the end of December. The best performing asset class over the past year was the listed property sector. The sector continued to show strong returns, despite weak property fundamentals. Listed property gained 3.1% in the fourth quarter to rise by 29.6% for the year. Local equities participated in the global equity rally. The FTSE/JSE All Share Index rose 9.5% in the fourth quarter on top of the 13.3% gain over the prior three months, ending the year 19% higher. Resources (16.5%) proved to be the top performing sector, with financials flat and industrials up 7.8% for the period. Amongst the resource counters, diversified and platinum miners (both up 19.2%) did best, while short-term insurers (15.4%) and some smaller industrial sectors (media and support services) beat the overall market. Stocks predominantly focused on the South African economy fared worse. Construction ended the quarter 3% higher, banks closed flat, while food and general retailers added 2.9% and 6.2% respectively.

Portfolio review
In the end, 2010 proved to be a good year for equities. The shares we selected for the Investec Opportunity portfolio generally outperformed the market, but we sacrificed some returns due to our conservative positioning. A lower exposure to equities proved to be a little early. We are not inclined to chase momentum. Unfortunately, this investment style has been the key driving force behind the local market's performance. Our two key winning positions were the allocations to Richemont and Assore. Richemont has successfully positioned the business to sell its quality watches and jewellery to an ever-increasing Asian population, where there are many new buyers emerging. In general, though, the world's wealthy continue to raise their spending levels. Despite the fact that operating margins are at normal levels, we still see superior sales growth as the driver of investment returns going forward.

Assore continues to have the most attractive growth profile in the resource complex and has been spurred by strong prices for iron ore and manganese. The long-term commodity prices discounted by the share continue to be well below the current spot prices. The long life, low cost asset base remains attractive to us and we prefer exposure here, despite continued outperformance of both Anglo American and BHP Billiton. The rand has been one of the strongest currencies in the world, only underperforming the Australian dollar and the Japanese yen. The local currency has been buoyed by very high export prices for gold, platinum and coal. Despite solid US dollar returns from the offshore portfolio, the gains were erased in rand terms. The only part of our offshore equity portfolio which lagged, was the holding in global pharmaceuticals. Our stocks in this sector languished, despite extremely attractive share price fundamentals.

Portfolio positioning
The decision to allocate more funds to the South African bond market late in 2009 was well timed. The additional purchase during the sell-off in November 2010 has provided a useful underpin to the overall portfolio performance. Bonds serve as insurance against a strong rand. The local currency has continued its upward trajectory, ending the year on a three-year high. Unless the rand weakens by more than 20% from current levels, there is unlikely to be any upward pressure on inflation in South Africa. Domestic bonds remain a reasonable hedge with an attractive pick-up over cash.

The surplus cash weighting in the portfolio allows us swift access to attractive opportunities that might arise. At present, many local shares do not have forward-looking return projections that exceed the returns on risk-free assets. Hence, we see no reason to add risk without a reasonable probability of a commensurate reward. The ability to increase the foreign weighting to 25% for institutional funds will allow us to allocate more funds to attractive offshore assets, which we believe offer the best forward-looking returns.