Our thoughts are with all who lost loved ones in the tragedy which unfolded in Marikana over the last quarter. Our thoughts are also with any hardworking South Africans who may have been intimidated by threats of violence into staying away from work. Despite the illegal strikes plaguing the South African gold and platinum mines, the exchange rate barely moved from R8.14 per dollar at the start of the quarter to R8.30 per dollar at quarter-end. This is a surprising outcome until one considers the effect of the inclusion of South African government bonds into Citigroup's World Government Bond Index (WGBI) with effect from 1 October 2012. Since the announcement of South Africa's eligibility for the WGBI in April 2012, R58 billion has flowed into the domestic South African bond market. Of course, it is not possible to discern what portion of this flow is directly attributable to South Africa's inclusion in this widely tracked index. But whatever the cause, the inflows are significant when considered against the R348 billion South Africa earned from exports for the most recently reported half-year. RSA bonds are rapidly becoming one of our biggest exports. We should remember that the foreign investment into South African bonds is not intended to be charity - those investors expect a return on their investment. To the extent that their loans are used to invest in infrastructure which expands South Africa's productive capacity and tax base, they will probably rest easy. But to the extent that their loans are being used to fund current expenditure on public servants' wages and social grants, they may have some concerns as to how their loan will ultimately be repaid. In an ironic twist, Moody's downgraded SA bond's on the eve of their inclusion into the WGBI. While the momentum of flows into South Africa may seem irrepressible right now, it is surely not sustainable. We believe the Fund is relatively well positioned for a reversal in this momentum - the Fund maintains a maximum foreign exposure, a short duration bond portfolio, and a number of shares that should benefit from a weaker rand (all things being equal). Unfortunately we have no way of knowing when this momentum will indeed reverse.

After a strong bounce in 2009 from the lows in the first quarter of that year, stock markets around the world have made little net progress in the last two and a half years. The MSCI World Index has appreciated by 5.8% in US dollars since January 2010, but the path has been bumpy. Some markets, such as the American stock market, are up since January 2010. However, the Shanghai Composite Index is down substantially since then, as are the local stock market indices in the weaker European countries. The peripheral European countries are tipping one by one into a self-reinforcing spiral of austerity, deflation, banking crisis and recession/ depression. The evidence so far suggests that policymakers are powerless to stop the tide. As the rot spreads to Spain and Italy (their football teams are in better shape than their public finances), the global impact will probably become more marked. Bond investors are becoming much more discerning about who they lend their money to. They are facing up to the reality that some sovereigns may default on their obligations. So while Spain is being crippled by 10-year bond yields over 6%, Germany currently pays a yield of around 1.5% on its 10-year bonds. US 10-year bond yields recently hit an all-time low of 1.47%. We believe that the spread between the yields on 'safe' and 'risky' debt could continue to grow. But that is not to say that we see great value in 10-year US bonds either. If the US continues to overspend, as it is currently doing, it is surely just a matter of time before investors start pricing some default risk into US bonds too. We believe that this is generally not a good time to be chasing yield in global markets by taking on significant credit or duration risk. While short-term interest rates are currently very low, lending short-term money to safer counterparties and holding hedged equities may prove to be the best places to hide in the event that the European credit crisis spills over to the rest of the world.

Approximately two-thirds of the Fund was invested in shares at the quarter-end. The majority of these shares are listed in South Africa, with the remainder comprising global shares selected by Orbis. A portion of these shares, equivalent to 10.2% of the Fund, is hedged by short positions in stock index futures contracts. These hedged equities typically provide returns that are uncorrelated with those of other asset classes. Returns on hedged equities depend on prevailing short-term interest rates, and the relative performance of the shares held by the Fund versus the overall stock market as measured by the relevant indices.

The remaining or net equity exposure was 56.3% at end-March. This is somewhat below what we would regard as a neutral equity weighting of 60%. Whenever considering what equity weight constitutes neutral for a balanced fund, one should bear in mind that the widely accepted view of what is neutral changes over time. Almost by necessity, we would expect the prevailing 'wisdom' to argue for higher equity market weights close to secular market tops and for lower equity market weights close to secular market bottoms.

Some will argue that the Fund's net equity weight of 56% is too low, because 'money-printing' central banks will dilute the value of the currencies they are supposed to uphold, or because holding money on deposit with a bank currently yields very low or even negative returns after adjusting for inflation. Others will argue that a net equity weight of 56% is too high, because the excessive leverage built up over the last 30 - 80 years has only just started to unravel and that a deflationary depression will drag down most asset prices. Interestingly, both these two schools of thought would probably agree that many governments will be severely challenged to fulfil their debt obligations and other promises. Where they differ is on how this conundrum will be resolved.

A further complication for a South African balanced fund is that deflation or depression in the Western world may result in a considerably weaker rand, which would soften the impact on the rand returns of globally diversified companies and exporters. It is very hard to know whether either, neither or both (and then in which order) of the inflationary or deflationary scenarios will unfold. We try to position the portfolio for superior returns in a range of probable scenarios. What we do know is that the FTSE/JSE All Share Index is currently trading on 18.7 times its long-term trend-line earnings, and that this multiple is considerably above the long-term average of 11.8 times trend-line earnings, which suggests that the overall South African stock market is on the expensive side (although this one measure by itself is, of course, not conclusive).

Despite the shaky performance of most global equity markets in 2011(the MSCI World Index returned a negative 5% in dollars for the year), the Fund's foreign holdings contributed substantially to its returns as the rand weakened from R6.62 per dollar at the beginning of January to R8.07 per dollar by year-end.

The Fund's holding in British American Tobacco (BAT) is now classified as domestic, and it is included with the Fund's other South African shares in the asset allocation table alongside this commentary. This reclassification, which was enacted by the authorities in December, had the effect of reducing the Fund's measured foreign exposure. We increased the Fund's foreign exposure back towards the 25% limit opportunistically over December, as we continue to see more attractive value in global stocks than those listed on the JSE, and we continue to see more long-term downside risk than upside potential for the rand.

An important feature of 2011 was the underperformance of the emerging markets - the MSCI Emerging Market Index returned a negative 18.2% indollars, and the FTSE/JSE All Share Index (ALSI) returned a negative 16%in dollars. This was only the third calendar year this millennium in which emerging markets underperformed developed markets (the other two years were 2000 and 2008).

The publishers of stock market indices tend to focus on a company's country of incorporation or market of primary listing when determining its eligibility for an index. But this can be a poor approximation of the underlying exposures which drive a company's performance. For example, we estimate that more than half of BAT's profits originate from emerging market countries, but there is no place for it in the MSCI Emerging Markets Index because it is listed in London.

Similarly, many of the US technology stocks currently held in the Orbis funds such as Cisco, Google, Qualcomm and Apple, are classified as developd market stocks, but they undoubtedly benefit from the rapid adoption of technology in the developing world. Investors who slavishly track the 'official' emerging markets stocks may be missing out on some relatively attractively priced companies, which stand to benefit at least as much from long-term progress in the developing world, but with arguably less downside in the event of macroeconomic disturbances