Market review
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
The trend of the past 6 months prevailed in the second quarter of 2012 and as a result, the portfolio continued to underperform its benchmark. As was the case in the first quarter, the major source of the portfolio's underperformance was our holding in gold shares, with South African gold shares falling a further 2.2%, despite the rand gold price rising around 3%. Other negative contributors to performance were Anglo American Platinum (-9.1%), Sasol (-6.2%) and Steinhoff (-10.4%). There were also a number of shares that advanced strongly that we do not hold, including general retailers (+7.3%), food and drug retailers (+9.2%), SABMiller (+7.4%) and Kumba Iron Ore (+4.6%). Your portfolio's offshore holdings performed broadly in line with the local index in rands and therefore did not have much impact on performance.

Portfolio activity
Trades were limited over the quarter as our positions are mainly in place. We continued to switch Anglo American into Anglo American Platinum. We swopped a material part of our JD Group holding into Kap International, lightened our MTN holding and added to our AngloGold holding. Lastly, we introduced two new platinum holdings into the portfolio, namely Lonmin and Aquarius.

Portfolio positioning
Our positioning is very clear in terms of what we hold (gold, platinum, and rand hedges) and what we don't hold (retailers, food producers, most banks, luxury goods, and industrial metals and related resources). The sectors/stocks in which we have zero positions comprise 25% of the FTSE/JSE All Share Index, reflecting our strong conviction. These zero holdings include retailers, with historic price earnings ratios (PEs) of 20 to 25, food producers (a PE of 16), Richemont (a PE of 16), SABMiller (a PE of 20), Naspers (a PE of 25), Kumba Iron Ore (a PE of 12) and Aspen (a PE of 16). These shares have two things in common - they have recorded a number of consecutive years of strong earnings growth and they now trade on record PEs, based on inflated earnings numbers. Investors holding these shares run the risk of permanent capital loss, if there are any future earnings disappointments from these counters. The market does not take kindly to an earnings miss when a share is rated on 25 times earnings. Absa shareholders can testify to this as their shares fell 13% over 4 days, following recent earnings disappointments - and this was a share trading on a historic PE of just 11 times. We find the continued strong performance of South African retailers especially interesting and a good example of the staying power of 'momentum driven' strategies. While many investors believe these counters are currently the 'safest' shares in the local market, we hold the view that they are the riskiest of all, in fact, even riskier than gold shares at current prices. This is because the market has fallen for the oldest trap - placing a high multiple on high earnings and then justifying this by claiming a 'structural change' to the industry. The reality is that South African retailers are just a leveraged play on the commodity cycle. A decade of high commodity prices has supported the rand and driven down interest rates locally and consequently caused a debt-assisted boom in consumer spending. This boom is not fundamentally backed by rising exports, productivity and employment, but rather by rising micro loans, state compensation levels and social grants - all of which will eventually end. We have seen an increasing trend of foreign shareholders selling their South African resource stocks (on the back of cooling Chinese demand for commodities and nationalisation fears in South Africa) and then using the proceeds to buy 'safe' South African retailers. We think this is flawed thinking. If indeed commodity prices continue to fall, it will result in a rising trade deficit (already evident), a weakening exchange rate (already evident) and higher inflation and interest rates. This is not a good combination for a domestic retailer operating on record margins and valued on a PE of 25. In many cases, foreign shareholders now hold more than 60% of all the issued shares in local retail counters - a very 'crowded' trade. We therefore prefer low valuation rand hedge shares that are not exposed to the slowdown in Chinese demand for commodities (specifically iron ore, copper and coal). These shares include Steinhoff (a PE of 8), Sasol (a PE of 8), Sappi (a low price-to-book value and a forward PE of 10) and Anglo American Platinum (lowest price-to-book value in 25 years). We also hold a material position in South African gold shares (Gold Fields and AngloGold), which are inexpensive (PEs of 10). These counters should still benefit from the gold bull market that will continue as long as central banks print money, which they are obliged to do to inflate away the pile of debt accumulated over the last 30 years.

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.

Portfolio review
The Investec Value Fund had a difficult quarter, underperforming the FTSE/JSE All Share Index. The review period was characterised by 'risk on' trades and thus the major source of the portfolio's underperformance came from our material position in gold shares, which fell 14.9% over the quarter - a large divergence to the benchmark's 6% rise. Other negative contributors were our overweight position in Anglo American Platinum (Amplats), which rose only 1% and Sasol (-3.9%) as well as our underweight positions in Naspers (+22%) and Richemont (+17%). The only material positive contributor over the quarter was our large overweight position in Steinhoff, which rose 20%. Your fund's offshore portfolio enjoyed strong US dollar returns, but this was somewhat offset by the appreciation of the rand against the dollar over the quarter.

Portfolio activity
Major trades over the quarter included a large switch from Anglo American into Amplats and the sale of our entire holding in Mediclinic at 3750c. We also switched our remaining gold exchange traded fund holding into AngloGold, sold 2% of our Sasol holding at above 40000c and repurchased this holding at 38500c. Furthermore, we added to our positions in both JD Group and ABSA.

Portfolio positioning
Our positioning remains clear - we believe the 'risk on' rally that has occurred over the last 6 months is not the beginning of a bull market, but is just another rally prompted by central bank intervention. We expect this rally to peter out once the reality sets in again that meaningful economic growth is not possible against the background of ongoing deleveraging, following 30 years of excess credit. The rally this time around has been prompted by the European Central Bank (ECB) effectively printing one trillion euros via the long-term refinancing operation (LTRO) programme. While this money has reduced systemic risk by effectively underwriting European banks, it has also had a meaningful effect on risk assets.

Over the last 3 months, European banks have bought Spanish and Italian government bonds to the value of €150 billion. Unsurprisingly, bond yields in both countries fell markedly over the period that this 'free' money was deployed. The ECB has effectively followed in the footsteps of the US Federal Reserve (the Fed) to suppress the cost of borrowing. In 2011 the Fed purchased an astonishing 61% of total net Treasury issuance, against negligible amounts prior to the 2008 crises. Central banks are thus printing money and using the proceeds to artificially suppress the cost of borrowing for a number of (bankrupt) countries. The US federal debt position is equivalent to a household which earns an annual income of $22 000, spends $38 000 per annum and has a mortgage of $140 000 - a situation which cannot be resolved. It is unclear what the consequences of these extraordinary actions will be on future generations, as intervention on this scale has not been witnessed before. Whatever the outcome, it is unlikely to be good and must result in a continuing devaluation of paper money. Therefore, we still believe that gold has a role to play as a store of value in a world of continued currency debasement.

Market review

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

The Investec Value Fund had a difficult fourth quarter, which resulted in 2011 being a disappointing year for the fund. Performance over the fourth quarter was negatively affected by our international exposure (disappointing stock selection and an unchanged exchange rate) as well as flat gold mining share prices in a market which rose 8.4%. Over the year, your fund gained 0.7% - behind the benchmark All Share Index's return of 2.6% and the average value fund's return of 2.3%. Due to the rand's 18% decline against the US dollar in 2011, your fund's international exposure did not impact full year performance at all, with weak international share prices being offset by rand depreciation.

The fund's small relative underperformance in 2011 was rather due to poor performances from Sappi (-30% over the year) and Anglo American Platinum (-22%). Not holding SABMiller (23%), and food and general retailers (which rose 27% and 20% respectively), also detracted from performance over the 12-month period.

Portfolio activity

Trade was limited over the quarter as we have most of our positions in place. We increased our Sasol and Nampak holdings and added a new small position in Old Mutual. Sales were limited to Standard Bank and Oceana Fishing.

Portfolio positioning

We see a number of problems globally that will continue to present headwinds to strong equity performance. The principle concern we still have is the ending of the long period of increasing leverage that accompanied the bull market from 1981 to the early 2000s. During this period, rising government and consumer debt was the principle driver of growth in the US and Europe. Debt levels have become unsustainable and represent a major headwind for growth. While the focus has recently been on the debt crisis in Europe, we believe that more attention will be shifted towards the US debt situation, which is very serious. Rapid credit growth in China, especially in 2009 to counter the global slowdown, resulted in a housing boom and fixed investment spending growing to unprecedented levels. The subsequent tightening of policy has caused significant weakness in the Chinese housing market, which together with spare industrial capacity could see growth in Chinese demand for raw materials slow in future years. This has big implications for commodity prices and South Africa in particular.

While macroeconomic concerns are obviously very important, what is more critical is valuation. Many commentators point to a 13-price earnings ratio (PE) in the US reflecting good value. Given that US corporate profit margins are at record levels, we believe this market to be less attractive than Europe and Japan. With respect to South Africa, the equity market is at an all-time high, trading on 13 times earnings - a relatively high PE by historic standards. If the negative global macroeconomic outlook does not materialise, the fundamentally cheap shares in Europe and Japan could rally meaningfully. We don't expect this to be the case in South Africa, which has been one of the best-performing equity markets over the last 10 years. Our stock market is now trading at its highest valuation ever, relative to global equities. Consequently, we believe the upside for SA equities is very limited.

The portfolio remains defensively positioned, i.e. we have substantial cash holdings, a high gold exposure and the remainder of the portfolio is in "defensive" shares. At this juncture, we believe stocks that are traditionally viewed as "defensive" may not prove to be so, as they have led the market up over the last few years and now trade at very high valuation multiples. Examples include Shoprite (25 PE), Massmart (30 PE), SABMiller (20 PE) and Tiger Brands (15 PE). While there is no doubt that these companies' businesses are "defensive", given their very high valuations and the fact that they are heavily owned by foreign investors (who are marginal buyers in our market), we believe that these share prices may not prove to be "defensive" in a sideways to down market. Hence, we hold zero positions in all of these stocks (SA retailers are now the most highly priced retailers in the world).

In our view, "defensive" stocks in the current market environment are the low PE rand hedges that have lagged the market and are under owned by foreign investors. These include Steinhoff, Anglo American, Anglo American Platinum and Sappi - all of which form part of our top ten stocks. With respect to gold, we remain committed to our large overweight position in Gold Fields and AngloGold. While the stocks added to performance over the year as a whole, they underperformed sharply over the fourth quarter as investors took profits on both the physical metal and gold shares. We continue to believe that the dollar gold price is well supported as a result of the fact that central banks will continue to attempt to reflate asset prices to counter the massive levels of debt. With these two SA gold shares now trading on 10 PEs, we see fundamental value at current levels.

The portfolio is thus positioned for low nominal returns (i.e. flat to down markets), a weakening rand, a firm dollar gold price and more rational pricing of SA consumer shares.