As a contrarian investor, Orbis is always trying to find companies whose likely future will be much better than their perceived future. Orbis does this by comparing its assessment of the company's long-term, fundamental value with its share price. The greatest opportunities tend to arise when there is a wide discrepancy between the two. The US healthcare sector provides an illustration. The Allan Gray Global Fund of Funds has very little exposure to the pharmaceutical sector, but favours health insurers, mainly WellPoint, Aetna, and Humana. To put this in perspective, pharmaceutical stocks account for 6% of the S&P 500, while health insurers have a mere 1% weighting. These health insurers have several appealing characteristics. They offer attractive long-term earnings and cash flow growth, are deeply out of favour with investors, and trade at depressed valuations due to fears which Orbis regards as short-term. Orbis' view is that the future for these companies will likely be much better than the stock market's current perception. Valuations on health insurance shares are not far from where they were during the darkest days of the US healthcare reform debate, despite considerably greater clarity on what the new legislation will mean for the industry. On average, these companies generate free cash flow per share equivalent to 13% of their current share prices. Put differently, it would take less than eight years for them to generate enough cash to cover the cost of buying these companies today - and shareholders would still own the businesses outright. In contrast, the pharmaceutical sector is now trading close to its highest valuation level in about five years and is currently in favour with investors seeking stable, mid-single digit dividend yields. For many large pharmaceutical companies, patents on key drugs have or will soon expire, while those in the pipeline appear to offer little growth potential. While pharmaceuticals may seem to be a 'safer' place to hide at the moment, Orbis' view is that clients will be more richly rewarded in the long run by investing in high quality health insurers, which are currently trading at attractive valuations relative to their peers and their history. Another such example is Japanese insurer NKSJ Holdings. One way to value NKSJ is to break it down into three parts: its life insurance business, its property and casualty (P&C) insurance business, and its excess capital. Of late, the value in NKSJ's profitable life insurance franchise has been overshadowed by the P&C business. There, a poor pricing environment has dragged down earnings, but Orbis research suggests that P&C profits should improve over the medium term. Taken together, Orbis believes these businesses are worth meaningfully more than NKSJ's current market value. Both NKSJ and the health insurers are currently valued at attractive metrics, but not all cheap shares are compelling investment opportunities. Through in-depth fundamental research, Orbis has been able to gain conviction in both of these attractive stocks.

Investors are often classified as having either a growth or value style, a distinction Orbis has found difficult to apply to itself. Sometimes the stocks Orbis buys fit neatly into either classification. At other times, the distinction can be quite blurred. Japan, for instance, is often considered a paradise for value investors, characterised by an unusually large number of stocks that trade for less than the value of their tangible assets. Of course, many Japanese companies trade below tangible book value for a reason - they fail to deliver a sufficient return to compensate shareholders for their risk. Because of this, the Japanese market is perpetually scorned by many global investors. Yet among shares that trade below tangible book value, some also offer strong growth potential, and these are particularly attractive. OBIC, a large holding in the Orbis Japan Equity Fund, is one such growth/ value hybrid. The company is one of Japan's leading providers of enterprise resource planning software, where it has carved out a very profitable niche among small and medium-sized companies. OBIC has increased its operating profits every year since 1997 for a compound annual growth rate of 15%. Currently trading at just 11 times Orbis' estimate of March 2013 fiscal year earnings, OBIC's shares appear significantly undervalued. But that is just half the story. OBIC also trades for just 1.1 times its tangible book value, providing investors with a significant margin of safety. The company has no debt, while holding cash, land and marketable investments that Orbis believes are worth 78% of its market capitalisation. That means that for every share priced at JPY15,270, investors are backed by at least JPY11,969 of cash, securities and land. It also means that they are effectively paying only JPY3,301 for JPY1,251 of after-tax operating earnings per share (Orbis estimate) - an adjusted price earnings ratio of just three times. On the other side of the Pacific, semiconductor manufacturer Micron Technology also offers a blend of growth and value. Micron operates in the highly cyclical dynamic random access memory market, which has recently seen unsustainably low prices. These low prices have driven out weaker competitors, including Elpida, which Micron was able to buy for a very attractive price. After the purchase, Micron's market share will be 24%, joining Hynix and Samsung in dominating a consolidated market. This should improve pricing behaviour and lead to greater profits for the whole industry. At the same time, Micron trades for less than the value of its tangible assets, offering a significant margin of safety for investors. While ideas like OBIC and Micron can be difficult to characterise, they are exactly the kind of investments that Orbis seeks to uncover. By staying true to our disciplined, contrarian philosophy, Orbis believes the holdings in your Fund are poised to deliver pleasing long-term returns.

Current sentiment on inflation seems radically split between two schools of thought. The first argues that credit levels now dwarf those before the Great Depression, and as this is unwound, the developed world risks a classic debt deflation scenario: debt looks high relative to GDP, so people reduce debt; this lowers prices and activity, which makes debt look high again next to a now smaller GDP figure. The second school argues that central banks have printed an unprecedented amount of money, and as this hits the real economy, inflation or hyperinflation, will surely result. Traditional investment theory suggests diametrically opposed strategies for each scenario. So what should investors buy - deflation-friendly bonds or inflation-friendly equities?

In extreme periods of inflation, stocks trounce bonds; in extreme periods of deflation, bonds rout stocks. With modest inflation or deflation, stocks moderately beat bonds. Still, there is reason for caution: since Japan entered a deflationary period in 1999, its stock market has produced a negative return in yen terms and a scant 1.2% annualised return in US dollar terms. But a value-oriented approach yielded far different results: over the same period, the Orbis Japan Equity Yen Fund produced a 9.3% annualised return in US dollar terms. Valuation always matters, and in the current turbulent period, Orbis has found several shares that look like great values.

One example is Park24, the Japan's leading operator of parking lots. Japan's GDP has been flat since 1998, but over the same period, Park24 has grown its sales by over 500%. Orbis was first drawn to Park24 in 2007, when concerns about slowing growth weighed on the company's share price. But Orbis' research suggested that the slowdown would be temporary - the company had built new lots faster than it could market them, but this was correctable. Over the long term, Orbis believes that demand for parking will outstrip supply, making Park24 far more valuable than its current price suggests.

Another example is Walgreen, the largest pharmacy network in the US and a holding in the Orbis Global Equity and Orbis Optimal SA Funds. Nearly two-thirds of the US population lives within three miles of a Walgreen branch, and this population is ageing. As an older population fills more subscriptions, they will spend more time in Walgreen locations and buy more high-margin 'convenience' items. At a 25% discount to its nearest competitor, Walgreen's share price has the potential to nearly double over the next four years. We are neither brave nor foolhardy enough to make inflation forecasts, but we are confident that our shared investment approach can succeed in either environment.

Globally, the big picture has been tough to ignore of late. Whether it is Europe's sovereign debt crisis, political gridlock in Japan, or government intervention in the US, there is plenty to worry about. This has made markets volatile and highly correlated - but does it make stock picking harder?

The consensus view is 'yes', and it has even become fashionable to argue that stock picking is dead. Unsurprisingly, Orbis has a different view. When correlations are unusually high, investors are effectively tarring all companies with the same brush. This creates significant mispricings and can present attractive opportunities to patient investors.

Attractive opportunities frequently come in groups. These concentrations tend to cluster around specific industries or countries. Currently, one of the largest clusters in both the Orbis Global Equity Fund and the Orbis Optimal SA Fund is in technology shares.

In the 'lost decade' since the technology, media, and telecom bust, there has been a prolonged consolidation in which undisciplined and money-losing companies were eliminated. What has emerged is a roster of companies that have built world-class franchises with unmatched scale and distribution, particularly in emerging markets. Excellent examples in the Global Fund include Apple, Cisco, and Qualcomm. Like most significant clusters in theOrbis funds, this technology exposure has been building for some time. In doing so, Orbis will often take advantage of short-term underperformance to add to positions, lowering the average purchase price of high-conviction ideas.

In other areas, Orbis analysts have found several compelling 'deep value' opportunities that offer strong potential returns with limited downside risk. One example in the Orbis Japan Equity Fund is Japan Tobacco, which has failed to deliver the strong, stable returns of its peers. Many investors have avoided the stock because of an unfavourable regulatory climate in Japan and the company's perceived indifference to shareholders. Here, Orbis believes the company's future will be different. It is priced very cheaply, but the reasons for this discount are starting to erode. Cigarette pricing in Japan is being deregulated, giving the company an opportunity to raise prices. At the same time, the Japanese government - currently the majority shareholder - is reducing its stake, giving the company a chance to return capital to shareholders through a stock buyback.

Though relative performance never comes in a straight line, Allan Gray and Orbis remain confident in and committed to our shared investing philosophy. We believe that doing so is the best way for us to create value on your behalf