October was another strong month for the Investec Value Fund, both in terms of absolute returns (+8.2%) and relative returns (second out of seven value funds). Returns over the last three months have been nothing short of startling - over 24% for the Investec Value Fund against the JSE All Share (ALSI) return of 14% - a market which can only be described as a bull market. The year-to-date return for the Investec Value Fund is 37% - well ahead of the ALSI return of 15%.

Over the month we added to existing holdings in Naspers and Remgro and added small new positions in Anglos and Investec and we reduced our weightings in Iscor, Barloworld, AVI and Business Connection.

So much for past performance - what will be more of interest for unit holders is whether we need to sell after such a run in share prices. While there is obviously considerably less value in the market than there was three months ago, we do not yet believe that we have reached fair value for stocks held in the fund. While the ALSI does not appear especially attractive on a historic PE of 15 times, this relatively high rating hides a relative wide disparity between the Financial and Industrial Index (13.5 times earnings) and Resources (18 times earnings). Given long bond yields of 8.5%, inflation at 4-5% and accelerating real economic growth in SA, we believe that a 'fair' PE for the average industrial stock in SA is around 13 times earnings. Even after the fantastic run of the last three months, the average PE and dividend yield of the fund remains at the attractive level of 10.5 times and 3.8%. We thus believe that there remains in excess of 20% to fair value for our stocks with the obvious possibility of an 'overshoot' as there was for a number of years in the mid 1990's. We thus believe investors should hold for another 20% which should be realised as long as there are no major external macro economic shocks.

The Investec Value fund, run by John Biccard, established a huge lead over its competitors through its ability to ferret out undervalued small-cap and midcap shares.

Biccard defines value shares quite broadly as those with low ratings relative to their fundamentals, historic performance, earnings potential, book value or the ratings in the same sector.

Despite the restrictions imposed by a small market, Investec has adopted a multistyle approach and, though there is some share overlap, this fund is constructed differently from the house's Equity, Growth and Opportunity funds.

Investec did not want the fund to become a victim of its own success; it had learnt a hard lesson from Emerging Companies, which ran out of investment opportunities when it reached R3bn. The Value fund was closed to new business at R2bn, but units sometimes become available when there have been outflows.

This is not a fund for fans of tight portfolios, as Biccard has kept some holdings in small caps from the days when this was a R200m fund - it has a 0,24% holding in Bridgestone and 0,20% in Bearing Man. Biccard says he will not sell these shares until they reach fair value.

But his new purchases are focused on the top 100 shares. In October he added to the holdings in Naspers and Remgro.

His employers will be pleased to see that he bought some Investec in October, after selling the entire position in September, and he introduced a 1% holding in Anglo American, which has brought his resources exposure to 3% (Implats and SA Chrome are the other holdings), though he also has a 6% holding in Ispat Iscor.

Unlike most of his competitors, Biccard prefers Liberty, arguably the most expensive life assurer, to shares such as Sanlam and Metropolitan. He says Liberty is a better business and provides a similar dividend yield. He prefers banks to life assurers and says that with a forward p:e of 9 the banks still provide the best value in the market.

This is still a great performer as a big fund.

Financial Mail - 26 November 2004

September was an excellent month for absolute returns for the Investec Value Fund (+7.7%) but only an average month for relative performance (Value Fund was 4th out of 7 seven value funds for the month and 0.2% ahead of the average value fund performance). Year-to-date we have shown a very satisfactory +26.8% return - over 10% ahead of the JSE All Share Index (ALSI) performance and sufficient to place the fund as the top performing value fund.

Over the month we added to our positions in Business Connection, Afrox, Iscor and Telkom as well as initiating new positions in Naspers and Liberty Group. Sales included profit taking in Sun International, Sasol and Edcon as well as selling out our small holding in Delta Electrical.

After such a strong quarter (+15.8% for the Investec Value Fund), the obvious question is whether it is time to bank the profits. While we remain concerned about the US equity market's long term outlook and are aware that our local market offers less value than before the strong run, we still believe the stocks that the fund holds are not yet at fair value. While the market's 14.5 PE is beginning to look full, this PE is inflated considerably by the gold and certain dual listed PE's. Despite the fund's recent strong performance, the average PE of the shares held in the fund remains around 10 times - a valuation level which we believe should conservatively be at 12 to 13 times earnings considering the current level of bond yields, interest rates and real economic growth in SA.

We thus believe we have only just entered into the re-rating of 'domestic SA' stocks which we have long argued for and that until the 12 to 13 PE's are seen for domestic SA stocks (which implies a further 25% gain in capital values), we are not sellers. Our advice would thus be to hang on and enjoy the ride and only to start climbing the 'wall of worry' once fair values are exceeded.

June was an exceptionally good month for the Investec Value Fund - in fact so good that we would say it was arguably the best relative performance that the fund has achieved over the last few years.

In June we achieved a return of +3.2% - well ahead of the market's (-2.7%) return and the average value fund's 2.2% return. A gain of nearly 6% against the JSE All Share Index (ALSI) in one month is almost too much to hope for and reflects strong performances from the banks (+2% over the month) and a very weak performance from resources (-7% over the month). Year-to-date your fund has returned +9.5% which is 10.7% ahead of the ALSI return and reflects a good performance in an indifferent market.

Over the month we added to the Bidvest, Bid BEE, Business Connection, Investec and Remgro positions as well as adding a 2% stake in Telkom at 7300c (participating in the recent bookbuild). We took some profits in Kersaf and Tiger Wheel and sold our remaining stake in Gold Reef (at a large profit) and our small stake in Seardel (at no profit).

We start the second half somewhat apprehensive in that we have more than achieved what we had hoped for in terms of outperforming the ALSI for the full year in just six months. Nevertheless, we remain optimistic in that we will continue to beat the market as the market is now actively selling the shares that we do not hold (i.e. resources) and buying the shares we hold (i .e. banks and industrials). The market is thus 'coming our way' and ironically it is once the share price momentum builds that the real out-performance starts.

Ignoring recent share price action, the most important thing to watch is the relative valuations and on that front we remain comfortable with our position - despite share price strength the banks are still only trading on 9 PE's with industrials on 8 to 11 times earnings while resources, despite share price weakness, continue to trade on 15 PE's. It is only once this valuation gap has closed that we will consider altering the shape of the portfolio.

The Investec Value Fund performed well in May, recording a return of -0.2%. This figure was slightly behind the JSE All Share Index (ALSI) return of +0.3%, it was sufficient to place the fund in the number one position in the Domestic Equity Value Sector. Year to date, your fund has returned 6.1% - well ahead of the ALSI return of +0.3%.

Over the month we traded more aggressively than usual with the major switch being out of Anglos and into Iscor and Impala Platinum. We also lightened our Goldfields, Supergroup, Murray & Roberts, Goldreef, Nampak and Tourvest holdings and added to the Bidvest, AVI, Santam, Remgro and Kersaf positions. Over the month we were net sellers and increased the fund's net cash position towards the 5% mark.

We continue to feel slightly schizophrenic with respect to the markets. On the one hand we remain convinced of the excellent value in the domestic equity market with most of the fund's holdings trading on PE's below 10 times and yielding more than 4% - valuations which look out of kilter when viewed against current domestic interest rates and the strength of the domestic economy. On the other hand, we continue to worry about US equity market valuations especially in view of rising geo-political tensions and the prospect of higher US interest rates. On balance, we remain bullish as the excellent value to be found locally must be the more important factor but we will continue to run the fund with slightly above average cash levels due to our offshore fears.

Over the month we added to our positions in Implats, Kersaf, Anglos, SA Chrome, Iscor, Bidvest, AVI and Ocfish while lightening our Northam, Frontrange and Nampak holdings.

While the fund's positioning remains broadly the same (namely overweight banks and selected industrials and underweight insurers and resources), we have used the 12% fall in the resource index over the last three months to add to our small resource holding and in so doing bringing our resource holding up to 8%. This position, together with our holdings in non-commodity Rand hedges (AVI, Ocfish, Tourvest, Bidvest, Metair, Murray & Roberts and Tiger Wheels) means that the Rand hedge element in the fund has increased over the last 12 months, although we still remain underweight Rand hedges relative to benchmark. Note that we prefer non-commodity Rand hedges at current prices as not only are they significantly cheaper but also the Rand will probably only weaken in the face of lower US Dollar commodity prices and thus any gains one might make on the weaker Rand will be offset by lower Dollar commodity prices.

Investec has announced that the Investec Value Fund will be closed to new investments once the fund has reached R2 billion in assets under management. Current assets under management are valued at R1.7billion.

INVESTMENT OUTLOOK
Being the end of 2003, it is time to reflect on what has been a very successful three-year period for unit holders in the Investec Value Fund. Over the last three years the fund has delivered a total return of 200% (or 44% p.a.) and in so doing has been the best performing equity unit trust across all equity categories ie. out of a universe of 337 unit trusts it has delivered the top return. This return should be seen against the JSE All Share Index's (ALSI) return of 11.2% p.a. ie. the Investec Value Fund has outperformed the ALSI by approximately 33% per annum over the last three years. To those investors who believe that investing in South Africa will result in it being difficult to achieve returns in 'hard' currencies, it is interesting to note the fund's performance in US dollars over the last three years (note that the starting point is prior to the rand's end 2001 rapid depreciation, and thus the exchange rate base is 'normalized'). Over this period, the fund has delivered a US dollar return of 49% p.a. - approximately 50% p.a. ahead of the MSCI World Index return. To put this into perspective, if as a SA investor you had taken R100 000 out of SA on 30 December 2000 and placed it in an index fund which invested in the MSCI World Index, you would have approximately R94 000 today, whereas if you had invested in the Investec Value Fund you would have R300 000!

So much for the past - what about the new year and how are we positioned? The SA equity market is currently moving up steadily and despite strong gains over the last six months, we continue to see value in a large number of stocks and are thus not concerned that the market has got ahead of itself. (Most stocks in the Investec Value Fund remain 25% below our valuations). We continue to believe that the only impediment to the SA market achieving its fair value is a significant correction in the US market, which we continue to believe is expensive.

Over the month of December we took profits by selling down our holdings in Tiger Brands, Iliad, Primedia, Santam and Glenrand while adding to our existing holdings in Delta, Bidvest, AVI, Goldfields, Firstrand and Standard Bank. We also added a new small position in Amap.

The fund remains materially underweight resource stocks (only 5% of the fund invested in one resource stock namely GoldFields), as although we do not expect the rand to strengthen further, we are not convinced that it will weaken enough in order to make the resource sector's current 17 PE attractive. We find the domestic banking sector (22% of the fund) especially attractive as we do not believe the historic PE of 9 (a 30% discount to the market) is discounting steady growth prospects and high share liquidity. Selected industrial stocks also appear to offer good value with the fund continuing its 14% holding in retail. While a compression in valuations across the JSE sectors will mean that it will be difficult to match 2003's 19% outperformance of the market, we remain confident of some degree of outperformance in 2004.