Equity markets around the world sold off sharply in the third quarter. The total dollar return on the MSCI Emerging Markets Index was -22.5% compared to -16.5% for the MSCI World Index. This means that emerging markets have now given up virtually all of their gains relative to the developed markets since June 2009. Despite this recent underperformance we still see more attractive values in the developed market indices than in the emerging market indices.

The rand depreciated from R6.76 per dollar to R8.09 per dollar over the quarter, but the Fund has maintained its full foreign exposure. We remain convinced that at current market prices Orbis is presented with more attractive investment opportunities in the global markets than are available to us on the JSE. Furthermore, the Fund's foreign exposure provides diversification of country, currency and sector exposures. Orbis is able to access investment opportunities in sectors of the global economy, which are under-represented on the JSE.

For example, the biggest sector exposure in the Orbis Global Equity Fund is to the technology sector (27% of the Fund). In contrast, technology sector stocks account for less than 1% of the value of the South African shares in the Fund, and for only 0.3% of the FTSE/JSE All Share Index (ALSI). Orbis is able to invest in global technology companies such as Cisco, Qualcomm, Google, SAP and Samsung which are simply not available to us on the JSE.

The second biggest sector exposure in the Orbis Global Equity Fund is to the consumer services sector (18% of the Fund). Although this sector is well represented on the JSE, making up 9.5% of the ALSI, we find the current valuations of most of the local stocks in this sector, especially the retailers, unappealing. Consumer services stocks thus account for only 3% of the value of the Fund's South African shares. We believe that similar stocks in the developed markets (such as Safeway, CVS Caremark, Rakuten, SunDrug and Nippon TV) are much more attractive investments at current prices.

The market is presently enamoured by the perceived long-term growth potential for South African retailers. For example, Shoprite is now trading on close to double the P/E multiple on which Safeway trades. There is a risk that the markets are confusing need with economic demand backed up by buying power.

The FTSE/JSE All Share Index traded in a range between 30 000 to 33 000 points over the first half of the year, but it ended the first half at much the same level as it started the year. In light of the relatively high prices for many South African shares, the Fund's net equity exposure of 57.3% remains below its own historical average. The index is currently priced at 18 times its average annual inflation-adjusted profits over the last decade. This is expensive compared with its 41-year average of 13.5 times. Many South African shares have outperformed the MSCI World Index by multiples since 1998, but we now assess them as expensive compared to global equities. Furthermore, the strong rand is reliant on continued net investments by foreigners into South African bonds and shares and on continued high commodity prices. Neither of these factors is assured and we believe that the depreciation of the Rand over the long term is more likely than long-term appreciation from the month-end rate of R6.76 per dollar. The Fund has maintained its full foreign exposure.

The earthquake and tsunami that battered Japan on 11 March, and the subsequent damage to the nuclear reactors at Fukushima are disasters for the Japanese people. We wish them well in their recovery efforts. Despite the Fund's overweight exposure to Japan within the quarter of the Fund invested in foreign markets, the Fund has weathered the storm relatively well so far. The Fund was down 0.04% for the month of March.

Recent experiences in Japan, Egypt and Ireland (amongst others) raise the question of how the Fund would perform in the event of some unforeseen natural or man-made affliction in South Africa. The asset allocation table opposite shows that three-quarters of the Fund is exposed to South African assets, but this is based on a regulator's view of the world. Regulators tend to classify companies by the domicile of their headquarters or primary listing, but investors are more concerned with where a company makes its money than with the address of its head office. The divergence between the two views is widening as big companies grow into multi-national companies. Every company in our Top 10 holdings (bar Remgro) has significant assets or operations outside South Africa.

This means that the Fund is effectively more globally diversified than what is suggested by the asset allocation table. Nevertheless, investors with a global mindset and who are not constrained by Regulation 28 should be aware that the Fund's constraints still result in its exposure being significantly skewed to South Africa in relation to South Africa's importance in global financial markets.

A portion of the Fund's portfolio has been invested outside South Africa since June 2004. The bulk of this foreign exposure is obtained by investing in the funds managed by Orbis, with a smaller portion attributable to the Fund's current holding in British American Tobacco. For most of this period, the performance of the Fund's foreign holdings has been disappointing when compared with the outstanding returns from the South African stock market and even Rand bank deposits. This is especially true over the last two years. The strengthening of the rand has detracted significantly from the Fund's recent returns.

So in light of this disappointing past performance, why has the Fund taken advantage of the higher prudential limit on foreign investments (now 25%) to increase its foreign exposure to 24.6%?

Money flows into emerging markets, rising commodity prices and the strong rand may seem to have unstoppable momentum right now, but investors would do well to remember that they probably cannot last forever, and that the foreign portion of the Fund may play a valuable role in the event of these trends reversing just as it did in 2008. The disappointing relative performance of the Fund's foreign investments to date makes us more optimistic about their potential to add value to the Fund from this day on, because today they start from a lower relative price.

The JSE accounts for about 1.3% of the world's stock market capitalisation. In US dollar terms, the FTSE/JSE All Share Index has almost tripled since its lows in late 2008, and at the time of writing is back at its dollar highs of October 2007. One should not forget that after peaking in October 2007 this index lost two-thirds of its dollar value in just under a year. Of course, most stock markets around the world are up substantially from their lows, but not to the same extent as the JSE. At current prices, there must be a very strong probability that Orbis is now able to find better opportunities globally than we can find in the limited investment universe on the JSE.