Banks have been beaten down recently, so they would seem a prime hunting ground for contrarians. But Orbis views most of the banks as too risky to compensate for the high risk of loss. An exception is the Orbis Global Equity Fund's position in Banco do Brasil, which Orbis believes is sounder than many of its Western peers.

The Fund remains invested in Japan, which has added to performance for the year to date. The Japanese economy is moribund, but this does not spell doom for stock pickers. It is a stock's starting valuation - not its economic environment - that is the biggest driver of long-term returns. Stocks in growing economies are often expensive, but the opposite is true in Japan, where TOPIX valuations are at historic lows. But importantly, Orbis does not simply invest in the index - the Japan Equity Fund remains focused on a handful of promising shares.

The Fund is also invested in shares in Asia, including a position in Hon Hai Precision Industry. Hon Hai - under its trade name, Foxconn - manufactures every iPad and the overwhelming majority of iPhones on the market. Many investors look at Hon Hai and see a saturated market with declining margins, but Orbis sees strong advantages in Hon Hai's scale and smooth execution. With macro risks dominating headlines, the combination of pessimism, risk aversion, and short-term thinking has made markets very volatile. Orbis cannot control market swings, but it can take advantage of the opportunities these swings present. For investors who want access to this stock picking expertise, without full exposure to stock markets, the Optimal SA Strategy is a natural complement to the Orbis Equity funds.

At 30 September, the Fund was overweight North American and Asia ex- Japan currencies, underweight the yen, and underweight the euro.

In many sectors in the US, corporate profit margins are now at multi-decade highs. Unsurprisingly, Orbis has found few opportunities in sectors where margins and valuations are especially high, such as US basic materials and industrials. Instead, the Orbis Global Equity Fund has invested in companies with strong pricing power and the ability to maintain or increase profitability regardless of the economic environment.

Sentiment in Japan remains extremely depressed, as the 11 March earthquake has weighed on short-term prospects. Still, many of the Orbis Japan Equity Fund's holdings have been largely unaffected by the earthquake, and some may even benefit from policies prompted by the disaster. One example is INPEX, Japan's largest oil and natural gas company. INPEX is currently developing a massive liquid natural gas (LNG) project off northwest Australia, which should ultimately be a beneficiary as Japan tries to transition away from nuclear power.

Many investors are concerned about a global internet bubble, yet 20% of the Orbis Asia ex-Japan Fund is invested in Chinese internet stocks. Though some unproven companies are trading at very high valuations, Orbis has identified several Chinese internet companies with proven profitability and attractive valuations.

At 30 June, the Fund was significantly overweight North American and Asia ex-Japan currencies, slightly underweight the yen, and heavily underweight the euro.

In response to the Japanese earthquake, Orbis added to many of the Global Equity Fund's Japanese holdings. In Orbis' view, many of these companies were undervalued before the earthquake and the sudden sell-off made them even more attractive.

The Fund's holdings in the Orbis Japan Equity Fund were adversely affected by the massive 11 March earthquake, but the investment outlook may not be as gloomy as headlines suggest. Based on discussions with companies in the Japan portfolio, Orbis believes that operations can return to normal in a matter of months, not years. Even property and casualty insurers may bear surprisingly little risk from this type of event. Although shares of the insurers plunged after the earthquake, Orbis believed the drop far exceeded any drop in intrinsic value and added to the Japan Fund's positions in two major property and casualty insurance companies.

The portion of the Fund invested in the Orbis Asia ex-Japan Equity Fund outperformed the benchmark by 4.9% in the first quarter. Much of this outperformance came from Chinese shares that were detractors in 2010. Mindray Medical International, a medical device maker, is an exception. Mindray was punished for failing to meet high sales expectations but Orbis believes the company is attractively valued and poised to produce solid growth and pleasing performance in the long term.

The Orbis Optimal SA funds do not typically hedge away all stock market risk. They retain some equity exposure to selected markets, based on Orbis' bottom-up assessment of the most compelling risk-adjusted opportunities. It is generally a small component of returns and its composition changes slowly over time. On rare occasions, Orbis may adjust the equity exposure more proactively in response to extreme market events. That was the case recently following Japan's sharp post-earthquake plunge when Japanese shares fell as much as 20% on an intraday basis. Orbis increased the Optimal SA Fund's net equity exposure to Japan to 10% from about 2.5%. This was achieved by buying back stock index futures at low prices. As the market rebounded, Orbis reduced the Japanese net equity position back to levels where it began in the year, by selling those same futures at higher prices.

At 31 March, the Fund's currency exposure was overweight in North America and Asia ex-Japan. The Fund's currency exposure was significantly underweight in Europe and slightly underweight in Japan.

In 2010, the portion of the Fund invested in the Orbis Global Equity Fund meaningfully underperformed its benchmark, owing to poor stock picking and market timing. Orbis had fewer winners than losers, and few big winners. In some cases, one might produce better returns by letting winners run, but in the long term, we think it is more important to maintain a disciplined, value-oriented approach. Often, this makes Orbis early to buy - and to sell.

Japan faces a number of entrenched structural challenges: an ageing population, bloated government debt, persistent deflation, and indecisive political leadership. Performance for the portion of the Fund invested in the Orbis Japan Equity Fund has been underwhelming, but Orbis continue to find attractive long-term investment opportunities in Japan.

The Fund invested in the Orbis Asia ex-Japan Fund in the latter part of the year. Over this period, the Asia ex-Japan fund has performed well in absolute terms but performance relative to its benchmark has been poor. In Orbis' view, this speaks to the volatility of investing in emerging markets such as Asia. This volatility will continue to be a feature of investing in such markets.

The Orbis Optimal SA Funds underperformed US dollar bank deposits and had negative returns in 2010. Though returns over the past five years were modest, the Optimal SA strategy is designed for the long term, and we remain confident in its ability to produce absolute returns going forward.

At 31 December 2010, the Fund of Funds was overweight the US dollar and substantially overweight Asia ex-Japan currencies. The Fund was underweight the euro and slightly underweight the Japanese yen.