Market review
Risk assets maintained their upward trajectory during the third quarter, thanks largely to continued support from central bankers. The MSCI World Index added 6.8% over the quarter, with the US S&P 500 Index gaining 6.4%, the German Dax 30 Index adding 14% and the UK FTSE 100 Index closing 7.2% higher over the period. (All returns are quoted in US dollars.) Local equities performed well, adding 7.3% in rands over the third quarter and returning 14.8% for the year to date. Bonds added 5% in the quarter to record gains of 13.1% for the year to date. Longer-dated bond yields fell by 50 basis points over the quarter. Cash, as measured by the STeFI Composite Index, added a marginal 1.4% over the quarter and 4.2% for the year to date.

Portfolio review
The quarter saw a strong rally in both equities and bonds globally. The rally was aided by accelerated policy easing from Beijing and the promise of increased infrastructure spending in China as well as a third round of quantitative easing from the US Federal Reserve. Promises of open-ended purchases of bonds by the European Central Bank and the Bank of Japan's newly expanded asset purchase programme also bolstered markets. On the local front, the South African Reserve Bank surprised the market by cutting the repo rate by 50 basis points to 5%. South African government bonds' anticipated inclusion in Citigroup's World Government Bond Index exerted massive downward pressure on bond yields. Moody's downgrade of South Africa's rating by one notch from A3 to Baa1, tempered the rally in bonds, but the bond component of the portfolio still performed strongly over the quarter. The portfolio's gold exchange traded fund holding benefited from additional monetary easing. Impala Platinum's rally made a welcome contribution to returns and Assore held on to its gains in spite of the iron ore price declining to its lowest level since 2009.

Portfolio activity
Portfolio activity over the quarter was relatively muted. We took advantage of the widening gap between the rand price of oil and Sasol, and increased our holding in the share. In addition, we purchased an initial stake in luxury goods company Coach that is held in our offshore portfolio. The share is trading cheaply, but the company remains highly cash generative with good earnings prospects. The Old Mutual preference share was finally redeemed by the company as part of its debt reduction strategy.

Portfolio activity
We do not make forecasts, instead we focus on the merits of each investment opportunity in our portfolio. More specifically, we assess the likelihood that an investment will produce returns significantly in excess of inflation while simultaneously avoiding the permanent loss of capital. In the current environment of increased interventionist policies from governments, this focus has allowed us to avoid the knee-jerk response of most market participants. In previous commentaries, we communicated our concern about the recovery in the US, the sovereign debt crisis in Europe and a slowdown in China's growth. We believe that the economic fate of South Africa is directly tied to the fortunes of the largest economies (and our largest trading partners). Over the last quarter, we have become more concerned about the specific risks within South Africa. The growing unrest among labour and the actions that they have taken pose a significant threat to our economic growth. The wildcat strikes and the demands for large wage increases are a function of the financial hardships faced by the majority of the population. However, they also show a complete lack of appreciation for the stresses faced by the mining sector as a result of a weaker global economy: falling global demand for resources amid declining productivity and rising input costs. We believe that miners with the strongest balance sheets and lowest costs will survive (one of the reasons that we continue holding Impala Platinum in our portfolio). However, weaker companies may be forced to rationalise their operations, and this is something that our country cannot afford given current levels of unemployment, the widening current account deficit and anaemic economic growth. The local equity market remains fully priced, but we are still able to find opportunities that we believe will produce returns significantly in excess of inflation. Bonds are trading more expensively following a compression in yields over the last quarter. However, given the commitment from central banks to keep short-term interest rates low for an extended period, they still represent an appropriate diversifier in the portfolio. We remain most excited about the prospects for the foreign component of our portfolio where we are able to purchase high quality multinational companies trading at multi-decade lows and with dividend yields in excess of long-bond yields.

Market review
After sharp declines in May, commodity prices, with the exception of Brent crude, generally edged higher in June. Brent crude fell nearly 15% over the month, declining by more than 25% during the quarter. Gold (+2%) and copper (+3.5%) closed higher in June, but weakened over the quarter. Equity markets reversed some of the previous months' losses, with the MSCI World Index closing 5.1% higher in June. Over the quarter, the index was down nearly 5%. The FTSE 100 Index gained 7% for the month and lost 4.1% over the quarter while the S&P 500 Index rose 4.1% in June and declined by 2.8% over the quarter. Emerging markets trailed their developed market peers, gaining 3.9% for the month and losing 8.8% over the quarter. Turkey led the advance, rising 17.8% in June, up nearly 29% for the year to date. (All returns are quoted in US dollars.) Local assets showed strong absolute returns, despite significant intra-month volatility. Bond yields fell to near record lows in June, with the All Bond Index gaining 3.3% over the month and 5.2% for the quarter. Listed property continued its strong run, adding 6.9% in June and 10.3% over the quarter. Cash, as measured by the STeFI Index, gained a steady 0.5% during the month and 1.4% over the quarter. The FTSE/JSE All Share Index made modest gains over the quarter (+1%) while in June, the index rose 1.9%. General miners performed well over the month, gaining 5.6% (-1.6% over the quarter). May's strong returns from gold miners were partially reversed in June, with the sector shedding more than 9% over the month. While the sector only lost 2.2% over the quarter, it has recorded the weakest performance for the year to date (-16.7%). Healthcare added 10.9% over the quarter, general retailers rallied a further 7.3% and food retailers closed 9.2% higher. Construction (-11.3%), household goods (-10.4%) and the personal goods sector (-5.7%) were weaker over the 3-month period. Telkom fell 20% in June after the South African government blocked Korea's KT Corp from acquiring a 20% stake in the fixed-line operator.

Portfolio review
More than 30 months have passed since rising Greek bond yields first spelt financial problems for the euro zone. Europe continues to stumble from one deadline to the next, with no clear solutions at hand that can calm the financial markets. This frustrating financial scenario has now caused broader economic challenges with the world economy hitting a rather large bump in the road. The US and BRIC economies (Brazil, Russia, India and China) have all buckled under the strain. Bond yields have declined yet again, despite being at very low levels. Economically sensitive assets have performed poorly over the past 12 months. A key question is: When will these assets enjoy a recovery in market prices? While lower commodity and equity prices suggest this might be at hand, the lesson from prior crises is to wait for signs of a bottom, before leaping in headlong. We are not yet convinced that there are sufficient signs confirming a bottom. An interesting development has been the declining trend in the rand price of oil in the past 2 months, which has taken the inflation sting out of the markets. This has lowered inflation expectations, with SA bond yields enjoying a reasonable rally. The stronger bond market has contributed to the portfolio's performance. Bonds continue to outperform equities locally. Offshore holdings remain a driver of returns. We believe it is just as important to avoid losers as it is to identify winners. We are avoiding financial shares as they continue to be risky, with a high probability of permanent loss of capital. When technology shares fell in the year 2000, the valuations were high, but the earnings were still well below the levels that could be achieved. Financial shares appear to have low valuations, but funding constraints, capital inadequacy, inflated asset valuations and margin pressure will curb profitability. In the meantime, performance consistency is important. We are pleased to report that the portfolio continues to perform satisfactorily.

Portfolio positioning
Resource shares could become a key focus area for investments, but we remain fairly selective in this area. We have continued to buy Impala Platinum at attractive levels. Platinum producer Aquarius will halt operations at its unprofitable Marikana mine. Further closures could be required from high cost producers. We believe that low cost positioning on the cost curve is essential for survival, as the industry is operating at the trough of its cycle. Market conditions remain difficult, and caution is advised. However, we believe that we will find opportunities to ensure attractive future real returns.

Market review
Events in Europe and the US again took centre stage during the first quarter of 2012. Asset markets remained resilient despite continued macroeconomic uncertainty and serious doubts about the ability and willingness of failing southern European economies to meet their austerity obligations. A strong take-up of emergency funding from the European Central Bank (ECB) by hundreds of European banks boosted sentiment, driving equities higher and strengthening commodity currencies. At the margin, economic data also continued to improve in the US, where stabilising house prices and rising employment levels boosted the prospect of positive but muted growth. The FTSE/JSE All Share Index gained 6% in the first quarter, but most of the positive performance came in January. Resource shares lagged the rally and gold miners (-14.9%), Impala Platinum (-8.9%) and Sasol (-3.9%) were notable underperformers. Financials gained 12.8% and industrials added 10.5%, driven by strong performances from consumer goods and consumer services. The All Bond and Listed Property indices returned 2.4% and 8% respectively, while the rand gained more than 5% against the US dollar, reflecting the broader rotation into riskier assets. Cash, as measured by the STeFI, returned 1.4% over the review period.

Portfolio review
High quality global franchise names have had a great 12 months. The key driver of the last year's returns for our portfolios has been the share prices of the stocks we own offshore. They have increased in value by close to 30%. Half of the gains came from dollar increases in the share prices and the balance from the weaker trend in the rand. Countering this strong performance has been the near dismal performance from local resource shares, which are continuing to underperform the broader market. Fortunately, of the three large resource shares we hold, namely Assore, Sasol and Impala Platinum, only the latter has negatively impacted portfolio performance.

Portfolio activity
We have added some weight to MTN and Vodacom. MTN's performance has been trendless, but Vodacom doesn't seem to be putting a foot wrong. The allegations of impropriety from Turkcell appear to be motivated by an attempt from their Russian owners to lay their hands on the Iranian asset. It seems extremely unlikely that a US court will rule in their favour, and the actions come amid interesting geopolitical manoeuvrings between Turkey, Russia and Iran around nuclear activities. Turkcell has been losing market share at home and is under pressure from its main competitor Vodafone. We continue to believe that although trade and political deals are hard to call from an ethical perspective, countries may have ulterior motives in their dealings. We focus on MTN's cash generation, rising dividend payout ratio and attractive growth as reasons to hold a stake in the business.

Portfolio positioning
We continue to believe that there is significant value in Impala Platinum's share price, compared to the present thinking on the company, which is summarised in the provocatively titled book by John Bannon, "Who the hell wants to be in platinum?" There can be little doubt that Impala Platinum, as well as the rest of the sector, is trading at the bottom of the earnings cycle. Our analysis shows that despite a loss of a CEO and potentially 51% of Zimplats and Mimosa in Zimbabwe, and the crippling strike, long-term investors should benefit, based on current valuations.

Sasol and Assore show great value. Both have good prospects for volume growth that are unique in their industries. However, Assore shows better potential earnings in a world where both manganese and iron ore prices are normalising from current levels. As the European economic situation ebbs and flows, so the global bank shares will act as barometers of the health of the system. After celebrating keen advances in the first two months of the year, they are now looking a little 'inebriated'. Our portfolio is priced to deliver low double-digit returns, assuming inflation recedes to 5% per annum over time. This does not take into consideration any significant opportunities that may come our way as the years advance.

Market review

Equity markets generally saw positive returns over the last quarter of the year. The MSCI World Index (developed markets) rose 7.7% in US dollars, while the MSCI Emerging Markets Index gained 4.4%. US markets ended the year in positive territory, with strong gains over the last few months. Over the quarter, the US dollar rose 0.2% against sterling, 3.4% against the euro, but fell 0.2% against the yen. The return on the Citigroup World Government Bond Index was -0.1% in US dollars.

The All Bond Index gained 3.5% over the quarter and cash, as measured by the STeFI Index, returned 1.4%. Listed property closed up 3.7%. The FTSE/JSE All Share Index added 8.4% in the fourth quarter and rose 2.6% over the year. The broad industrial grouping outperformed both financial and resources over the quarter. Food and general retailers fared particularly well, closing up 20.3% and 15.5% higher respectively. Life insurers added 16.9% over the quarter while the smaller basket of technology stocks rose 12.1%. Gold and platinum miners lagged the overall index, ending flat over the quarter. General miners performed in line with the broader market while Sasol, the only company within the oil and gas sector, ended 18.6% higher.

Portfolio review

Risk was not rewarded in 2011. Investors who take on risk do so in anticipation of earning a reasonable reward, with the assumption that higher returns provide compensation for being exposed to relatively higher levels of volatility or risk. It is important to stress that the longer the outperformance of risk assets, the poorer the valuations and the more capital that has been allocated, the greater the possibility that investors will lose money. Capital loss is typically triggered by some unforeseen event.

One could argue that the cycle described above encapsulates the emerging markets (EMs) story over the past decade. The pull factor has been superior growth on offer, arguably as a result of very loose monetary policy in several developed countries that have adopted near zero interest rates. The push factor has been muted growth prospects in developed markets. To be fair, early investors in 2001-2004 were fundamentally rewarded as the pure valuation case for both currency and market prices made sense.

Why then have EMs produced such poor returns in 2011? As these countries were the recipients of foreign capital, the financial markets created a virtuous cycle of stronger currencies, higher growth rates and lower interest rates. Inevitably, this resulted in overvalued currencies and rising inflation. These problems emerged in early 2011, which helped to trigger political turmoil, particularly in the Arab world. When capital flows reverse, the internal financial systems of many EMs are typically not robust enough to absorb the shocks and thus adverse currency adjustments are the natural outcome. The fact that the BRIC countries (Brazil, Russia, India and China) have had the worst performances in US dollar terms is mostly a function of currency weakness. In South Africa, the rand was also a poor performer over the year.

Investors in our portfolios have benefited from being correctly positioned for the two major moneymaking calls of 2011. The first was to have maximum exposure to non-rand assets, preferably those denominated in US dollars, and the second was to be defensively positioned in high quality equity assets in developed markets. The decision to maximise offshore holdings in the portfolio early in January 2011 paid off. We took the foreign weighting to 25% before the rand commenced its downward slide. The decision in early December 2011 to re-classify British American Tobacco as a local stock has allowed us to reduce the foreign exposure in the portfolio to below 25%, locking in the gains over the year, without being forced sellers of offshore assets. Even a dollar investor in the Investec GSF Global Opportunity Equity Fund (our offshore equity vehicle) made a 5.8% return during 2011. This was similar to the return on the lowest risk government bond index and was superior to the MSCI All Country World Index, which generated a loss over the year.

We hope that when investors look at their portfolios and consider alternative strategies, they will be satisfied with a close to double-digit rand return in 2011 when SA equities, SA bonds and even cash delivered mediocre returns. We are encouraged that a difficult year on the markets has not left our investors in despair.

Portfolio positioning

Looking forward, we remain cautious. We would love to be able to call for a quick resolution to the European debt problems, and have clarity on the prognosis for the Chinese economy. However, the outcome is not yet clear. In a worst-case scenario where money flows out of resources and commodities, this shock could cause a second leg down in all commodity currencies, rather than only have an impact on emerging market currencies.

The Chinese economy is slowing rapidly. Manufacturing, housing and exports are decelerating. It remains to be seen just how much flexibility the Chinese authorities have to mitigate this downturn. Sadly, credit-infused slowdowns are typically more difficult to solve. Lower commodity prices would be negative for the rand. However, a decline in rand commodity prices could be positive for bond yields and disinflation in South Africa.

Valuations are becoming more appealing across the board, and we will continue to add to current holdings where prices indicate attractive return prospects. Failing this, we will seek signs of a cycle bottom for the global economy. Overall, long-term investors, who share our views, and who have both patience and cash will be able to exploit these opportunities and should continue to see real wealth creation in the future.