Market review
The FTSE/JSE All Share Index (ALSI) closed the third 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 third quarter of 2011 was the inverse of the second quarter, with the Investec Value Fund strongly outperforming both the average value fund and the FTSE/JSE All Share Index. Thanks to the portfolio adding to its positions into market weakness we more than regained what we lost over the second quarter and are thus ahead of benchmark year to date. Performance over the third quarter was driven primarily by our large position in gold shares, with Gold Fields (27%) and AngloGold Ashanti (19%) significantly outperforming the market over the review period. Other strong performers in the portfolio were Medi-Clinic and Vodacom, both of which rose 8% over the quarter. The fund's offshore holdings also contributed to performance. The portfolio avoided large losses in BHP Billiton (-18%), Richemont (-18%) and Naspers (-7%). The two major detractors over the quarter were our holdings in Sappi (-31%) and ArcelorMittal (-24%). Portfolio activity Over the quarter, we completed our switch from domestic 'SA Incorporated' stocks into rand hedges. We sold the remaining AVI, African Bank and Vodacom shares and added to our Anglo American Platinum (Amplats) and ArcelorMittal holdings. Other trades that deserve comment are the purchase of a small holding in Harmony at R90 as well as initiating a small position in bank shares (Absa at R133 and Standard Bank at R92).

Portfolio positioning
While the market has corrected slightly, (the JSE fell 5.8% over the quarter, bringing its losses to 5.4% for the year), the decline is not sufficient in our view to bring the market into buying territory. We hold maximum allowable cash positions as well as a large gold exposure, with the remainder of the portfolio defensively positioned. The tailwind of increasing leverage that has driven economic growth in the UK, Europe and the US over the last 25 years has turned into a headwind as the slow process of deleveraging begins. The size of this problem is best illustrated by the magnitude of US government debt. It took one hundred years for the US to rack up $1 trillion of debt, while in the last ten years this debt load has grown exponentially to $14.5 trillion. This deleveraging process, together with the fact that corporate profitability in the US is at an all time high, is expected to continue to put pressure on returns from equities.

We are even more bearish regarding prospective returns from South African equities as a result of the much higher level of the market. SA equities have risen five-fold over the last ten years while US equities are unchanged, and SA equities now trade on much the same valuations as those in the US. With earnings in South Africa at high levels, we do not believe the market's historic price earnings ratio (PE) of 13 times is attractive. We remain concerned that SA is a 'crowded trade' in that foreign investors hold a record amount of local equities and bonds. The effect of even a moderate amount of outflows from foreign investors was shown recently. In September, R26 billion of the net R350 billion of bonds and equities that have been bought over the last two and a half years was sold. The net effect was a 13.6% fall in the rand against the US dollar and a net 16.7% fall in SA equities in US dollar terms. We thus find it difficult to see how the JSE will advance meaningfully from current levels.

Valuations are high and the 'marginal' investor, i.e. the offshore holder is 'all in'. We are particularly wary of those sectors that are most heavily owned by offshore investors such as retail, because the valuations here are especially high (a PE ratio of 16 times).There is a considerable amount of money invested on a momentum basis that can exit at any time. Our positioning thus remains defensive - maximum cash, overweight gold equities and relatively inexpensive rand hedges - Sasol, Amplats, Anglo American, Sappi, ArcelorMittal and Steinhoff.

Market review
Developed market equities (0.7%) continued to outperform emerging markets equities (-1%) over the second quarter. The FTSE/JSE All Share Index (ALSI) 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
Over the second quarter of 2011, the Investec Value portfolio underperformed the ALSI as a result of stock selection. The primary source of the pain over the quarter was our large overweight position in gold shares - Gold Fields fell the most of the top 100 shares on the JSE (-16%) and AngloGold shed 12%. These two positions thus accounted for approximately half of the underperformance. Our overweight positions in Steinhoff (-9%) and Sasol (-8.5%) as well as underweight positions in Richemont (11%) and Naspers (5%) also detracted from returns. On the plus side, the portfolio benefited from its exposure to Vodacom, which rose 9% over the review period. The fund's offshore holdings detracted marginally from performance, with the rand doing little and Nintendo falling considerably.

Portfolio activity
During the quarter, we bought more Gold Fields and AngloGold shares into price weakness, thereby maintaining our bet sizes in the gold sector. We also purchased more Sappi stocks and introduced new holdings in Anglo Platinum and Investec. These acquisitions were funded by selling three strong outperformers which approached our fair values, namely Vodacom, AVI and MTN.

Portfolio positioning
We are undeterred by the second quarter's poor performance and believe that the price movements over the review period have widened the anomalies in the market. Our exposure to SA gold counters has been maintained in absolute terms and we believe that the 13% decline in the gold mining sector over the quarter is at odds with the 5% rise in the rand gold price.

Gold Fields now trades at a 40-year low relative to the rand gold price and at the current spot rand gold price, we believe that the counter trades around ten times earnings (against the long-term average of 27 times earnings). The market is thus clearly pricing in a view that this is the top of the rand gold price - an opinion that we don't share. We believe that the dollar gold price is in a long-term bull market as result of the continued loose monetary policies of many central banks as well as significant global financial uncertainty flowing from the euro debt crises and rising US debt levels. Furthermore, we hold the view that the rand is significantly overvalued - South African bonds and equities are perceived as a haven of safety in the current uncertain world. Foreigners bought R6 billion of SA equities and R42 billion of SA bonds over the last quarter and have now purchased R150 billion of SA bonds and R200 billion of SA equities over the last two and a half years. While foreign flows may come and go, the only constant is that South Africa has at least a R100 billion current account deficit to finance and our exports are no longer competitive at current exchange rates.

We believe that South Africa is not a haven of safety in an uncertain world. Thanks to a large current account deficit and a dependence on commodities, South Africa is a leveraged play on global growth - a fact that does not seem to be priced into the currency. Given our negative outlook on the rand and our cautious view of the world, outside of gold shares we like low price earnings (PE) rand hedge stocks that have lagged the market. Our large Steinhoff, Anglo American and Sasol holdings fit into this category. While our Sappi and Anglo Platinum holdings do not belong in the 'low PE' category, they are rand hedges that are cheap on a price to book basis and have both significantly underperformed.

We are struck by the large price and value divergences in the current market, with the valuations of a number of stocks appearing extremely high to us. These anomalies are best personified by one of the current darlings of the market - Massmart. It trades on an historic PE of 25 times (on elevated earnings which have risen eight times over the last ten years). Broker consensus expects 66% earnings growth over the next two years, placing the shares on a still high two-year forward PE of 15. We cannot see how such growth is possible - margins are close to all time highs and sales growth is running at 10%. A more realistic earnings per share growth of 25% over the next two years will place the shares on a two-year forward PE of 20 times. How is it possible to make a return on such a rating? Investors should take heart that our investments are the opposite of Massmart, i.e. our stocks are out of favour, are unloved by foreign investors and trade on reasonable multiples of normalised earnings.

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.

Portfolio review
The Investec Value Fund had a good first quarter, with the portfolio's 1.9% return ahead of both the benchmark FTSE/JSE All Share Index's 1.1% return, and the average value fund's -0.3% return. Performance was assisted principally by our overweight positions in Sasol (13% over the quarter), Sappi (5%), Vodacom (4%), ArcelorMittal (14%) and Mondi (22%). We did not hold grossly underperforming construction stocks, which also benefited the portfolio. However, our JD Group holding (-17%) detracted from performance. Portfolio activity Over the quarter we continued to increase the fund's rand hedge exposure and reduced the domestic company weighting into share price strength. As a result, we initiated new positions in Anglo Platinum and Investec, and added to our Anglo American and Sasol holdings. We funded this through the reduction of our Standard Bank, African Bank, Reunert and AVI holdings.

Portfolio positioning
We have been conservatively positioned for more than a year, but have managed to stay ahead of the benchmark as a result of very strong performances from some of our large stock positions (principally Vodacom, AVI, Steinhoff and more recently Sasol). The market is now 20% higher than when we started to become more cautious, and so we are even more cautious than we were at the beginning of 2010. We remain concerned that the unprecedented printing of money by the US Federal Reserve (Fed) has been the main driver in the doubling of most equity markets over the last two years. Interest rates can now only rise from current levels and asset prices could face major headwinds over the next few years. While pe earnings (PE) ratios of many markets appear relatively attractive compared to current risk-free rates, they are not as compelling once these rates are normalised. In absolute terms, they are still at high levels, especially when considering the high debt levels in most western countries, European sovereign risks and oil price risks arising from the socio-political situation in North Africa and the Middle East.

While much has been written about US monetary policy, little is said about China, where long-term interest rates of 4% remain a full 10% below nominal growth in the Chinese economy. This situation, we believe, cannot be sustained and is one which suggests that rates are too low in China. We agree with the consensus view that most of the problems in the world are concentrated in the 'old world' (i.e. the US and Europe). However, we believe that as a result of the massive outperformance of emerging markets and commodities, most of the risk is not in developed world equities, but is rather in the 'crowded ' trades which have been a beneficiary of the flood of money coming from the zero yield US and Japanese markets. Of relevance to SA is that the rand and commodities fall into this 'carry trade' basket, with the flood of money into the country leaving them both exposed when the tide eventually turns.

For all of the above reasons and the fact that the JSE trades on a PE of 16, we are defensively positioned, with your portfolio invested in three areas. Firstly, domestic high dividend stocks in defensive industries (Vodacom, AVI and Oceana Fishing); secondly, rand hedge stocks which have lagged the market and are trading on reasonable valuations (Sasol, Anglo American, ArcelorMittal and Sappi); and lastly gold shares that hedge us against an overvalued rand and a US Fed that continues to devalue the reserve currency of the world.

Given the strength of the rand and the weakness of the developed markets over the last decade, it is not unexpected that we find significant value in a number of stocks listed in the US, Europe and Japan, and we are currently fully invested in this area (i.e. 20% of the fund). In contrast to the JSE, these markets offer many stocks trading on single digit PEs, discounts to book value, and half the price they traded at ten years ago. An example of this is our largest offshore holding, Supervalu, which is the fourth largest US food retailer. The company trades on a 7 PE and a 4% dividend yield. Remarkably, this rating is on earnings which have halved over the last few years as a result of the recession and food price deflation. Supervalu has fallen from $49 four years ago to the current level of $8.

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
The Investec Value Fund had a good fourth quarter, with the portfolio's 9.7% return coming in ahead of the average value fund and the All Share Index (ALSI). Performance was assisted by our overweight position in Steinhoff and our zero weighting in both Standard Bank and Old Mutual. The fund's 12-month return was 22%, ahead of the ALSI and the average value fund. Our overweight positions in AVI and African Bank, and our underweight positions in Standard Bank and Anglo American contributed to performance. This was partially offset by a strong performance from Richemont (which we did not hold) and our overweight position in Sappi. Portfolio activity The major trade over the quarter was the deployment of 15% of the portfolio's net asset value (funded mainly from cash) into offshore equities in the US, Europe, Japan and Israel. Major holdings include Roche, Glaxo, Toyota, Nintendo, Supervalu, Kroger, Wellpoint, Nokia, Amedisys and Park 24. On the domestic front, we switched some Sasol shares into Anglo American and bought back into Standard Bank and MTN. We took profits on Impala Platinum, Investec and African Bank.

Portfolio positioning
The last ten years have been an extraordinary period for South African equity investors. Over this period the ALSI gained 18% per annum, while the Investec Value portfolio returned around 30% per annum. For the next decade, however, we expect the South African equity market to yield substantially lower returns. Over the last ten years, the ALSI's price earnings ratio (PE) expanded from 13 times to the current level of 17 times, while earnings grew at a compound rate of around 12%. The rating of the market is thus at a high level. The long-term average PE of the South African market is closer to ten times earnings. Despite a correction in response to the recent global financial crises, earnings are far from depressed. We believe it is unrealistic to expect the rating of the market to expand any further from the current PE of 17. Hence, subsequent equity returns could be the current dividend yield on the market (2%), plus future earnings per share growth. Assuming 5% inflation and 3% real GDP growth in South Africa, investors could expect a nominal return of 10% (2% + 5% + 3%) - a best case scenario. A return to a more realistic PE of 12 in ten years' time, reduces this return to just 6% per annum. We are battling to find undervalued shares to buy; therefore, this 6% per annum number seems like the more realistic expected return for the next ten years. Given that we expect low nominal rand returns, and we believe that the rand is overvalued at current levels, we hold the view that it is an opportune time to buy offshore equities. Your portfolio has appreciated approximately 14 times over the last decade, whereas the rand returns of an investment in the major US, UK and Japanese indices would have yielded an annual return of between 2% and -2% per annum. In nominal terms, this translates into zero cumulative returns for ten years! Over the fourth quarter of 2010, we thus began to accumulate offshore equities for the first time in ten years. Fifteen percent of your portfolio is now invested in US, European, Japanese and Israeli stocks. Our positioning domestically reflects our cautious outlook on local equities. We hold excess cash balances and our equity exposure is in high dividend yield domestic stocks (Vodacom, African Bank and Oceana Fishing). The portfolio has exposure to rand hedge stocks, which are trading on relatively low valuations (Steinhoff, Anglo American, Sasol, British American Tobacco/Reinet and Sappi). We also have a weighting in gold shares (Gold Fields and AngloGold), which provide both a rand hedge and protection against Chairman Bernanke's stimulatory monetary policy