Market review
The domestic equity market took its cue from global markets, which benefited from the improvement in the global growth outlook and a higher risk appetite. The All Share Index added 13.9% in the third quarter and has gained 18.6% this year. Over the quarter, the All Share Resources Index (11.1%) lagged the overall market, with gold miners earning a disappointing 6%. Domestic-oriented and interest rate-sensitive sectors enjoyed good gains. Construction (19%), general retailers (19.1%) and banks (14%) stood out as strong performers, with foreigners particularly active buyers. Telecommunication (3.8%) and short-term insurers (6.1%) underperformed the market.

Portfolio review
The Investec Value Fund had a good third quarter as a result of a strong performance in July and August. The portfolio was well ahead of the All Share Index for the three months to the end of September. Performance over the quarter was assisted by good returns from our holdings in Reunert (28%), Foschini (28%), Sappi (25%), Steinhoff (23%) and Bidvest (23%) as well as the portfolio's underweight position in gold and oil shares. During this period gold stocks rose only 6% and oil stocks managed a 5% gain. The recovery in performance over the second and third quarter more than offset the first quarter's underperformance and as a result, the portfolio is now well ahead of the benchmark year to date.

Portfolio activity
Over the first half of the third quarter we continued to sell resources and global cyclical stocks; we disposed of Richemont and Old Mutual. In the second half of the quarter we sold selective industrial stocks that had reached our price targets (Bidvest and Foschini). The proceeds of these sales were used to purchase more defensive assets, namely gold shares (Gold Fields) and industrial stocks (Vodacom and AVI). The portfolio also has a higher cash holding.

Portfolio positioning
Since the market bottomed on 9 March this year, the Value portfolio has outperformed a rapidly rising market. This is an unusual outcome for a value process. The main reason for this outperformance is that we bought a moderate amount of resources and global cyclical shares into extreme price weakness over the first quarter of 2009, namely Sappi, Anglo, Richemont and Liberty International. As the market recovered and risk aversion declined, these shares rose rapidly, in some cases more than 100%, keeping our portfolio ahead of benchmark. Over the last three months, however, we have changed the portfolio markedly in response to the much higher asset prices. We have now sold our Anglo, Richemont, Old Mutual and Barloworld holdings. It is important to note that this is not as a result of any great insight into the shape of the global economic recovery. Our equity sales are a response to the fact that after most of these share prices have doubled, we are no longer being paid to take the risk that the global economy keeps improving. Consequently, we are considerably more bearish than we were at the beginning of March, as one should be after a near 60% US dollar rise in the MSCI World Equity Index in just six months. Our major short-term concern is that the Chinese economy has been overstimulated. There could be a weak patch over the next six months - a period when a slowdown in Chinese credit extension is accompanied by a disappointing economic recovery in the West. The proceeds from these equity sales have been deployed into more defensive assets, namely a higher cash holding, gold stocks (Gold Fields) and shares that have lagged over the last six months due to their defensive nature (Vodacom, AVI, Reinet and Tiger Brands). The portfolio's major overweight positions are thus in domestic banks (Standard Bank, Absa and African Bank), selective industrials (Steinhoff and Bidvest), global cyclical stocks that have lagged on the way up and are trading close to book value (Sappi and Liberty International) and reasonably priced defensive stocks (AVI, Tiger Brands and Reinet). It is important to note that our cautious positioning is not due to a belief that equities are expensive over the long term. Instead, our current positioning reflects a short-term tactical view based on the recent rapid rise in prices and our expectation of a short- to medium-term correction in prices.

Market review
While company profits remained under pressure, equity markets rerated significantly as signs of an improvement in the global economy buoyed risk assets. The local equity market had a positive quarter (8.6%), its first in 12 months, despite giving up some of its gains during the month of June (-3.1%). Year to date, the All Share Index closed 4.1% stronger. The market's foreign currency returns for the three month to the end of June, were boosted by the rand's appreciation against the US dollar (24.1%) and the euro (16.7%). Over the quarter, the financial and industrial composite (13.4%) outperformed resources (2.8%), with gold miners (-16.2%) the largest underperformers. Other sectors lagging the composite over this period included fixed line communications (-0.8%), travel and leisure (6.6%) and food producers (7.7%). General retailers (15.6%), banks (13.8%) and the construction (16.6%) sectors all ended the quarter well above their March levels. The platinum (9.5%) and general mining (8.9%) sectors performed in line with the overall market.

Portfolio review
The Investec Value portfolio had a good second quarter as a result of strong relative and absolute performances in both April and June. The portfolio was well ahead of both the average value fund and the All Share Index over the quarter. The performance was assisted by strong returns from our holdings in Old Mutual (45%), Anglo (40%), Steinhoff (33%), Sappi (25%) and Barloworld (23%) as well as the portfolio not holding positions in gold shares (-16%), BHP Billiton (-7%) and Sasol (-1%). The portfolio thus benefited from the cyclical counters, which we bought at the end of 2008. Three of the above five contributors were added to the portfolio at the end of 2008 (Old Mutual, Anglo and Sappi) and we increased our existing holdings in Steinhoff and Barloworld at the same time. The recovery in performance over the second quarter more than offset the first quarter's underperformance and as a result, we are now marginally ahead of benchmark for the year to date.

Portfolio activity
Towards the end of the quarter we reduced our exposure to the cyclical counters, which had rallied strongly in April and May. After many of the cyclical stocks had advanced between 50% and 100% in just two months, we believed that these shares had in the short term discounted the improvement in the global economy, which we had seen over the last quarter. As a result, we traded aggressively during the second quarter, with our biggest sales being Anglo, Barloworld, FirstRand, African Bank and Richemont. The proceeds of these sales were invested in more defensive counters, which were lagging the market (Absa, Tiger Brands, Standard Bank, Bidvest and a new position in Vodacom). The cash holdings of the portfolio were also slightly increased. We did not sell any of our holdings in two cyclical stocks, namely Sappi and Liberty International, as these two shares rallied considerably less than the cyclical group as a whole. In addition, both stocks are still trading below book value.

Portfolio positioning
The last eighteen months has been a period of great volatility and thus opportunity and as a result, we have traded a lot more than usual. The portfolio was very defensively positioned in the middle of last year via the large underweight position in resources. After the collapse in resources and cyclical stocks from July to November, we selectively bought some of these counters at the year end (Anglo, Sappi and Liberty International). Over the first quarter, this strategy had not worked as these stocks continued to fall. However, after the broad market turned in mid March, these stocks rallied sharply and helped us to perform strongly over the second quarter. We recently disposed of a number of these counters because many of these stocks are no longer priced for disaster, but rather are priced for a recovery in the global economy. This is best illustrated by the example of Anglo - at R135 at the end of February the share was trading at a ten year low relative to the market and was trading at tangible net asset value (NAV). At this price we were happy to be an aggressive buyer as the share appeared to be discounting a 'great depression' outcome. However, at the beginning of June with the share price at R250, we believed that the counter was not that attractive anymore. The share was trading at 1.8 times book value and in addition, much of the substantial rally in dollar commodity prices had been eroded by the stronger rand/dollar exchange rate. The key point is that as bottom-up stock pickers, we do not take views on macro-economic outcomes. At R135 for Anglo, any reasonable outcome on the macro-economic front will be sufficient, while at R250 one needs a good macro-economic outcome. The portfolio is thus more defensively positioned than three months ago and is once again very underweight resources. Our major overweight positions are in domestic banks (Standard Bank, Absa and African Bank), food producers (Tiger Brands and AVI) and diversified industrials (Steinhoff and Bidvest). We will use any pullback in the broader market as well as in cyclical stocks over the next quarter to once again increase our weighting. In the longer term we remain bullish with regard to a recovery in the global economy as well as equity returns.

Market review
Local economic news continued to deteriorate over the quarter. The release of fourth quarter GDP numbers confirmed the sharp slowdown experienced in the second half of 2008. Domestic demand remained under pressure in the first three months of 2009. Weak employment prospects and the slump in the manufacturing sector continued to bear down on retail spend and vehicle sales. Policy makers responded with two interest rate cuts of 100 basis points each during the quarter. The second meeting, held earlier than initially scheduled, indicated somewhat greater urgency on the part of the South African Reserve Bank to respond to the extremely weak global backdrop and evidence that the local economy was unlikely to escape a recession. The outlook continues to favour more rate cuts.

Equities weakened for the third consecutive quarter, with the All Share Index losing 4.2% year to date. Both financials (-7%) and industrials (-9.2%) ended the quarter in negative territory. Resource counters clawed back some of their losses sustained in the second half of 2008 to end up 1.6%. Gold mining (22.8%), platinum mining (9.6%) and pharmaceuticals (22.4%) were the only sectors to gain over the quarter. While general miners (-4.6%) performed broadly in line with the overall market, it was the domestic oriented sectors that fell most with banks (-9.8%), retailers (-7.6%) and the construction sector (-10.6%) all ending down.

Portfolio review
After the turnaround in performance over the second half of 2008, the first quarter of 2009 proved more difficult, with the Investec Value Fund's return coming in well behind the All Share Index as well as the average value fund's return. It is important to note that the underperformance experienced over the first quarter was not simply a case of holding the same portfolio and watching the share prices return to the levels of mid 2008. In fact, the recent underperformance was mainly as a result of the large changes that we made at the end of 2008. At the end of last year we became interested in a number of global cyclical and resource stocks which we had successfully avoided at their mid year highs and which had fallen by as much as 75% by year end. Many of these stocks were trading at large discounts to book value and we thus reduced our positions in a number of the domestic stocks that had served us well (Standard Bank, FirstRand, Tiger Brands, Foschini and Mr Price). We subsequently bought global cyclical stocks (Anglo American, Impala Platinum, Sappi, Barloworld, Steinhoff, Liberty International and Old Mutual). Over the last three months this did not prove to be the correct strategy. With the exception of Impala Platinum, all the remaining new acquisitions continued to fall sharply in 2009 with Sappi and Steinhoff detracting the most from the portfolio's performance over the quarter. The portfolio was also negatively affected by our zero positioning in gold. As a result of weak financial markets and a spike in the 'fear' trade, the gold sector rallied a massive 22.8% over the quarter.

Portfolio activity
Four of our top five purchases can be considered global cyclical stocks, namely Anglos, Liberty International, Sappi and Steinhoff, with the fifth (Standard Bank) also having some international exposure. All five of these shares trade at book value or lower, with the range being Standard Bank the most highly rated (trades at book value) and Sappi the most inexpensive at a 66% discount to net asset value. These purchases were funded from the sale of three of the portfolio's more defensive counters which performed strongly over the second half of 2008, namely Foschini, Mr Price and MTN. In addition, we sold out of the one global cyclical sector which did in fact perform over the first quarter i.e. platinum. In contrast to the other cyclical stocks, both Impala Platinum and Lonmin doubled off their October 2008 lows and as a result we exited entirely out of our positions in this sector. Our Impala holding was switched into Anglo, which did not perform well.

Portfolio positioning
We are not surprised that the portfolio underperformed over the first quarter, as it was extremely unlikely that our purchase of these global cyclical stocks would mark the bottom of their steep descent. Therefore, we are undeterred by the continuation of the underperformance as we are happy that on a longer-term view (i.e. 12 months and longer), our entry levels for these stocks will prove to be attractive. We have bought these shares as we believe that the valuations applied to them indicate that the market is unsure that there will ever be a recovery in a number of cyclical sectors such as paper (Sappi), materials (Anglos), luxury goods (Richemont), furniture (Steinhoff) and capital equipment (Barloworld). When the first signs of an improvement in economic activity are seen, these stocks will rerate sharply. It is impossible to estimate when this may be, but given the massive monetary and fiscal stimulus packages currently in place, we have no doubt that it will eventually occur.

Some may argue that we are too early and that it is advisable to wait for concrete signs of economic improvement. In response to this we would like to point to what happened in mid 2008 - resource stocks collapsed following unexpectedly poor economic data - data that would have been impossible to forecast. Given that the stocks that we have purchased are trading so far below what we regard as fair value, we believe that we have a sufficient margin of safety that will enable us to wait for the economic data to improve.

As a final point, it should be noted that the new global cyclical stocks in the portfolio (in order of size - Steinhoff, Anglos, Barloworld, Richemont, Sappi, Liberty International and Old Mutual) comprise approximately one third of the portfolio and therefore we do not have the whole portfolio invested in this area. We believe this to be sufficient exposure, especially when compared to these stocks' benchmark weight of about 15% of the index. We thus have an approximate 20% active positive bet - a position which will make a large difference when the world returns to some degree of normality.

Market review
The global financial crises and the ensuing slowdown in economic activity left their mark on the domestic equity market. The All Share Index lost 23.2% over the year, all of the losses sustained in the second half of 2008. The market ended 9.2% weaker over the last quarter of the year, with falling commodity prices driving down platinum (-25.8%) and general miners (-15.2%). The construction sector slumped 36.1% in the fourth quarter as companies saw their order books curtailed by weaker demand and foreign investors seemed to lose faith in the sector. Life assurers (-15.9%) continued their underperformance of the general market.

Exposure to falling interest rates and defensive earnings streams dominated the outperformers over the quarter, with banks (-6.1%), healthcare equipment and services (5.6%), food producers (6.6%) and food retailers (16.2%) high up on the performance table. However, it was the gold miners (22%) that took the top spot over the quarter as the dollar gold price held its own and rand weakness and positive production news boosted returns to the sector.

Portfolio review
The turnaround experienced over the third quarter of 2008 continued into the fourth quarter, with the Investec Value Fund's return coming in well ahead of the All Share Index (ALSI) as well as the average value fund's return. Most of the relative performance for the quarter was generated in December, with the portfolio earning a positive return, which markedly exceeded the ALSI. The year can neatly be divided into two distinct halves. The first six months of 2008 saw dollar commodity prices soaring and the rand weakening. The basic materials sector added 32%, while banks fell 24%. The second half of the year was almost the exact inverse, characterised by the collapse of commodity prices, a more stable rand and an improvement in sentiment towards South Africa. This resulted in basic materials falling 47%, while banks rose 18%. The extent of the commodity price collapse is perhaps best seen in the oil price - $147 in the first week of July with commentators calling for $200 and then $100 lower by year end. By sticking to our value discipline, the portfolio significantly outperformed the ALSI and the average value fund in 2008. It is never easy to accept a negative return, but we believe investors should see this result against the background of the worst year globally for equities since the 1930s. Most equity investments recorded significantly worse returns than the Investec Value Fund in 2008.

Portfolio activity
Over the quarter we continued to reduce our tracking error (a measure of how closely a portfolio follows its benchmark). We achieved this by purchasing substantial holdings in Richemont and MTN, taking advantage of price weakness. In addition to these purchases, we made a significant investment in Sappi at the time of the rights issue at around 3500c. Our rationale for this investment can be summarised as follows:

· Sappi has been the worst performing large cap stock on the JSE over nearly all time periods and is universally disliked.
· The share is now trading at a substantial discount to book net asset value.
· The industry continues to consolidate, with Sappi's acquisition of M-real's fine paper business adding to this trend.
· The company is in reality an "anti-resource" stock. It stands to benefit substantially from declining oil, wood and chemicals prices, which comprise the company's major input costs.

These purchases were funded by reducing the holdings in Standard Bank, FirstRand and Mr Price.

Portfolio positioning
2008 was a good example of what disciplined investing can bring and using the same principle, we are increasingly interested in resources and less bullish in respect of banks and retailers. In June 2008, the consensus view was that resources were in a super cycle and that domestic stocks were to be avoided as a result of continued poor inflation data and the spectre of higher interest rates. This was the time to have no weighting in resources and the maximum exposure to banks and retailers. At this time Foschini's share price was 2700c and Anglo American was 55000c. In January 2009, the consensus view is that the outlook for resources is very poor as a result of the global financial crises and that investors should be buying retailers and banks as further interest rate cuts are expected in 2009. Foschini's share price is now 5000c and Anglo American is 22000c. In other words, Foschini has doubled while Anglo American has more than halved and now we are reading about the merits of buying retailers.

In line with our philosophy that the future is largely uncertain, that historic valuations are all important and that you need to be buying when others are selling, and selling when others are buying, we are gradually reducing our exposure to interest rate sensitive stocks. The declining interest rate environment is increasingly reflected in the share prices of banks and retailers and we are gradually adding to our resource exposure as the outlook for commodity prices becomes more bearish. However, we are making this transition at a slow pace as most interest rate sensitive stocks are not particularly expensive in absolute terms. There is no sign of any excess valuations in this area of the market, unlike the valuations that were found in resources in mid 2008. Conditions in resource industries will probably worsen before they improve. For this reason our resource weighting at quarter end is only marginally higher than it was at the end of September 2008. We are being very selective with respect to price levels that we will transact at.