The Investec Value Fund performed strongly both in absolute and relative terms in September, recording a return of +7% over the month. While this return was behind the All Share return of +10%, it was ahead of the average value fund return of +6.1% and was sufficient to place the fund in the top position in the sector over the month. It should be noted that the index remains very difficult to outperform given the continued run in the ultra large cap names such as Anglos and Billiton (which together make up nearly 30% of the index but we are only allowed to invest 10% in each one).

Over the month we added to our holdings in Adcorp, Dorbyl, African Bank, ABSA and Standard Bank and introduced new holdings in Lonmin, MTN and Murray and Roberts. We sold out our holdings in Ceramic, Caxton and Sasol.

After rising 29% over the last six months, it is not surprising that the market is currently experiencing a bout of profit taking. (At the time of writing the All Share Index has fallen 5% so far in October). While a correction from an overbought level was inevitable, the timing of the correction is a little strange to us in that world equity markets are falling as the oil price is falling - certainly we would have thought $70 oil of a month ago was the catalyst for a correction rather than the current sub $60 oil price. What is probably concerning the markets more than the oil price are more hawkish statements coming out of the US central bank. It appears as if these international concerns are resulting in local investors also beginning to factor in a chance of an interest rate rise in South Africa. We believe this to be very unlikely in the next six months given that inflation is not above the inflation target and on our figures is not expected to go above the inflation target over the next three months.

Adding to our sense of comfort is the short term drop in oil prices together with the fact that even under a hawkish US interest rate scenario, the US is three quarters through its interest rate tightening process.

The fund aims to achieve capital growth through investment in the equity Given our above mentioned sanguine outlook on interest rates, we remain bullish on the local market and believe the current sell off to be a much needed correction and not the beginning of a bear market. While the overall market PE of 15 times is not especially cheap, it should be noted that as of today, the average PE of the Value Fund's top 10 holdings (which make up 60% of the fund) is only 11 times - an attractive valuation level given the quality of the stocks in the top ten and current levels of interest rates.

We retain our large holding to banks with our number two and three stocks being Standard Bank and Firstrand. On historic PE's of 10.5 times, we continue to believe both stocks offer excellent value and that current valuations (which represent a sizeable discount to both the JSE average as well as other emerging market banking stocks) are discounting substantially higher interest rates - an eventuality which, (as discussed above), we think is unlikely.

June was a reasonable month for the Investec Value Fund both in absolute and relative terms. A gain of 2.95% was recorded over the month - exactly in line with the JSE All Share Index (ALSI) return, slightly ahead of the average value fund return of 2.5% and sufficient to place the fund in position three out of seven value funds. Over the quarter the fund returned 4.6% - well behind the ALSI return of 7.2% and year to date the fund's return of 3.7% is also behind the market's return of 13.6%. The fund is five out of seven value funds year to date. If one has to use a footballing analogy, at half time in 2005, we are two nil down but have played well in the last ten minutes and are confident of our chances in the second half. The fund's underperformance so far in 2005 is due almost exclusively to the combination of the slightly weaker Rand and substantially higher commodity prices causing the marked outperformance of the resource sector (which has risen 28% year to date). It is interesting to note that the rise in commodity prices has been by far the larger contributor to this outperformance. Analysis of changes in prices in swiss francs (the world's most stable currency and thus a good indicator of 'real' price moves) is interesting in that it shows that the Rand is only 4% weaker year to date, while commodity prices are massively stronger (in swiss francs gold is up 13%, platinum 15%, sugar 17%, copper 23% and oil a massive 59%). It is strange that a commodity currency like the Rand would depreciate over a period of such strong real rises in commodity prices - this is probably a reaction to the Rand's 'overbought' position at the end of 2005.

Looking forward, it is important to note that share prices in the resource sector have adjusted upward in response to this 'perfect storm' ie the combination of rising prices in real terms and a weakening currency. In order for resource share prices to continue upwards from here, we need more of the same. However, we cannot see further Rand weakness accompanied with such high commodity prices.

In the mean time, financial and industrial stocks have been left behind and despite futher improvements in their fundamentals (lower SA bond yields, a surprise interest rate cut and earnings and dividends above expectations), most shares are roughly at the levels of six months ago. We continue to believe the best value in the market is found in these sectors and remain overweight banks, retailers and diversified industrials and underweight insurance and resources.

April was a good month for the Investec Value Fund when compared to the JSE All Share Index (ALSI) benchmark (-2.8% for the Investec Value Fund compared to -5.2% for the ALSI benchmark) but a poor month in terms of absolute and peer relative returns (the average value fund was approximately 1% ahead of us over the month). Year-to-date the -3.7% return showed by the Investec Value Fund is behind the average value fund return of -2.4%, mainly a result of the fund's large (5%) exposure to Mittal Steel which has underperformed since the beginning of 2005.

Over the month we added to our positions in Dorbyl, African Bank, Mittal Steel and AECI and used share price weakness to initiate a small holding in SAB/Miller at below 9000c a share. We reduced holdings in Implats, Apex 'B", Liberty, Sasol and Wesco.

While 2005 has been disappointing so far, both in terms of absolute and relative returns, we remain optimistic with respect to the rest of the year. We see the last few months as a healthy correction for many of the Financial and Industrial stocks that we hold and ironically take heart that four months of profit taking have only led to a 4% decline in the fund year-to-date. Now that investors who would like to lock in profits after last year's spectacular gains have effectively exited, we can look forward to the rest of the year with more confidence. We believe that the success of the Barclays/ABSA deal will be the catalyst to re-focus attention onto the FINDI stocks, most of which have still underperformed the market year-to-date despite a stronger showing over the last few weeks. We believe that most of the substantial amount of cash that will flow into portfolios following the completion of the ABSA deal (approximately R15bn directly and R15bn into Sanlam and Remgro) will be redeployed back into the FINDI space. This factor, together with the most important consideration ie valuation (the average Value Fund stock trades on 10 times earnings with more than a 4% dividend yield) leads us to remain optimistic and we urge investors to remain patient. It is, however, important to note that we do not plan to change the fund's positioning despite this period of sector rotation and that we remain overweight banks and industrials and underweight resources (with the exception of our large holdings in Implats and Iscor).

March was an average month for the Investec Value Fund with the fund's return of -2.1% placing the fund in position two out of seven value funds in the sector and much in line with the average value fund's 2.4% decline. While we are performing in line with the peer average, we continue to underperform the JSE All Share Index (ALSI) which fell 0.9% over the month. Over the first quarter of the year the Investec Value Fund has shown a return of -0.8% with the year to date situation being in line with the peer averages (-0.7%) but behind the ALSI return of 6.0%.

While we are disappointed with the first quarter's return, we need to draw unit holders attention to the fact that the fund's 60% return was 35% ahead of the ALSI's return in 2004 and that this left our stocks in a very 'overbought' position at the end of 2004 and vulnerable to profit taking. This has occurred over the first quarter of 2005 with the combination of a weaker Rand and some recent concerns over Emerging Markets (prompted by rising US long term interest rates) providing the catalyst for profit taking in the financial and industrial sector and some buying in selected resources (note that 50% of the ALSI's first quarter return was attributable to just one share, Billiton which rose 27% over the first three months of the year). Given the massive run up in most of our large holdings over the last quarter of 2004, ironically we are encouraged that in the face of substantial profit taking in these shares that they have essentially traded sideways over the last three months. This is an important factor as the sideways 'churning' of our larger holdings over the first quarter means that a lot of profit taking has now happened and that 'new' shareholders have now bought in at these higher levels - an important consideration if the shares are to go higher still.

The most important consideration however remains value and on this front we remain convinced that we hold the right stocks, with the fund's average PE and dividend yield of 10.5 and 4% respectively trading at an attractive discount to the ALSI's 14 PE and 2.7% dividend yield.

We continue to see strong real growth in both earnings and dividends in all our holdings - an outlook which seems not to be discounted in the 10 to 11 PE's accorded to our holdings. Clearly the market is discounting something 'unexpectedly' bad to de-rail the earnings growth path. The major risk must thus be a continuation of the problem that emerged in March i.e. higher than anticipated US inflation causing rising US long and short term interest rates and a corresponding sell down in what is perceived to be riskier assets namely emerging markets. With respect to the risk of this event continuing and the problem compounding, we are clear on two issues: Firstly we are not in a position to forecast the future direction of US bond yields with any certainty (as we think most people are not in a position to do). We therefore are not going to transact on your portfolio on the basis of assuming that US bond yields are going to rise sufficiently to cause an emerging market crises. Secondly, we continue to believe that the valuations of domestic financial and industrial stocks are exceptionally attractive when compared to current SA bond yields and interest rates and thus that the only way that one is going to lose money from current levels is if there is a crisis. Investors who sell out of the domestic stocks at current levels must be clear that they are discounting substantially higher risk free rates and if these rates do not materialise, the decision to sell will be wrong. The bottom line is that our conviction with respect to the value that still exists in domestic stocks more than outweighs the international concerns that exist and our overweight position in domestic financial and industrial stocks remains.

Those who believe markets are always efficient claim that share prices fully reflect all available information. Value-style investors disagree, arguing that there are always shares trading at a discount to their fair value based on factors such as earnings potential, book values, neglect by analysts and market sentiment in general.

Four years ago this was glaringly true of small and midcap industrials, an opportunity that Investec Value Fund's (IVF) John Biccard and a few others seized. IVF did not look back and in the 18 months between June 2001 and December 2002 outpaced its sector average by more than 40 percentage points.

By that stage most managers had caught on to IVF's domestic-focused theme and, though IVF's three-year return still reflects a big lead, over shorter periods returns have converged.

With the value gap between medium, small and big caps almost closed, differentiation of portfolios and returns has become difficult. The theme of high exposure to banks and consumer-orientated stocks and low exposure to rand hedges now pervades funds in the value sector and many others.

It could be argued that the market is now too efficient to be true. IVF itself is now made up of about 50% big caps, is practically devoid of small caps and has a low rand hedge element of about 15% in its portfolio.

It's likely to stay that way for a while. "Consolidation after last year's strong run is to be expected," says Biccard of the first quarter's disappointing performance. "But I see no reason to sell banks, retailers or other industrials." He believes banks, in particular, offer good value on an 11 p:e and that resources on a 15 p:e look vulnerable.

He says only an emerging-market crisis that could put pressure on the rand and send interest rates soaring would alter the situation.

IVF is closed but new investments are accepted when outflows occur. In a sector of look-alikes, however, it does not appear that IVF offers that special something that warrants queuing.

15 April 2005

While December was a good month both with respect to absolute and relative returns compared to the JSE All Share Index (ALSI) benchmark (+3.5% for the Investec Value Fund compared to +1.4% for the ALSI), it was a poor month compared to the Value Unit trust sector, with the average Value fund showing a return of +4.7%. December brought a close to what has been an excellent year for unit holders, with the Investec Value Fund's 58.1% return exceeding the ALSI's 25.4% return by more than 30%. This return should be seen against the fund's performance over the previous three years, in which the fund outperformed the ALSI in each of the three years to give a total return of +48% per annum - 33% per annum ahead of the ALSI. Over the last three years, your fund has been the best performing unit trust across all unit trust sectors.

The outlook for 2005 is not as clear as it was over the last few years with respect to prospective returns from the various equity sectors. This is mainly a result of the direction of the Rand being more of a 50:50 bet in 2005, whereas the low starting point of R12 to the US Dollar at the beginning of 2002 made the appreciation of the Rand in each of the last three years easier to forecast. Now at R6 to the US Dollar and with SA running a current account deficit, for the first time in three years we believe there is a high probability of the Rand ending the year at a weaker level to the US Dollar. (Perhaps most worryingly, most ecomomists are for the first time in three years predicting the Rand to carry on appreciating in 2005!). Unfortunately, even under the scenario of a slightly weaker Rand in 2005, it is not clear that one should switch the fund's heavy weighting in the financial and industrial sectors into resources, as the resource index remains indifferently valued on approximately 15 times 2004's earnings while most of the Investec Value Fund's major holdings remain very attractively priced on 10 to 12 times earnings.

We believe that the gap in performance between the sectors will be significantly lower than it was in 2004 and expect to upweight our small holding in resources over the course of 2005.