At Orbis and Allan Gray, our core skill is bottom-up stock picking and it is this bottom up process which drives our asset allocation positioning. We look to provide clients with continuous access to the skill-based component of returns and balance the exposure to the stock market by allocating between Orbis Optimal SA, which is largely market-neutral, and the Orbis long-only equity funds. There are other 'low beta' alternatives to Optimal SA which can be utilised to lower risk in the portfolio. Bonds are the traditional and most liquid alternative to stock market exposure. In this regard, although yields have risen from the lows seen in 2012, in our view global government bonds remain far from being the type of cheap and unloved asset from which one would expect to generate satisfactory real returns over the long term. At the end of September, the Fund's investments in this mix of Orbis funds results in an exposure of approximately 50% to net equities, which is at the low end of its historical range. The global equity universe is naturally deeper and more diverse than in South Africa, and Orbis is able to find a number of attractive opportunities to invest clients' capital as described below. However, this does not mean that foreign equities are currently without risk. The FTSE World Index has returned just under 16% since the start of 2013 and is near an all-time high. The Orbis Global Equity Fund, currently 37% of the portfolio, has had an even better year, delivering more than double the benchmark's return. As encouraging as this may be, it is natural for clients to wonder what it means for Orbis' ability to continue finding attractive stocks after such a strong period of absolute and relative returns. One technique that Orbis uses to advance its reasoning and assess the broader opportunity set is a proprietary quantitative measure termed 'rerated total rate of return' or 'RTRR'. If the future ends up being similar to the past, this number can be thought of as the future annualised return that Orbis analysts can expect from a given stock. The higher the RTRR percentage, the better. Likewise, the difference between the RTRR of a particular portfolio and the stock market benchmark can be a crude way to gauge the opportunities for stock picking that are available to Orbis. Notably, the median RTRR of stocks in the benchmark has hovered near just 5% in recent months, while the median RTRR of the stocks in Orbis Global is currently about 18%. It is a noisy estimate, but it implies that there is still scope for Orbis' global stock selections to deliver satisfying returns, provided of course that Orbis' fundamental assessment of the stocks and the broader opportunity set proves to be correct. The key message from this data is that one can probably expect lower absolute returns from the FTSE World Index relative to the past few years, but that Orbis is still finding compelling opportunities to add value through stock picking skill. This is reflected in the underlying positioning of the Fund at the end of the quarter.

While the task of balancing risk and reward in a portfolio is nothing new, it has become challenging for many investors in the current environment. As always, equities are volatile and in many markets now trade close to all-time highs. But after a decades-long bull market, bonds look even more extended and generally offer negative yields after accounting for inflation.

In this environment, we believe the Optimal Strategy provides compelling portfolio diversification benefits. Since its inception, the Optimal Strategy has added value relative to both equities and bonds, across a range of market environments. That said, Optimal has not done quite as well over the last five years, particularly relative to bonds.

The Fund's returns are driven chiefly by the performance of our stock selections relative to their local indices. The other major driver of performance is a cash-like return generated from the pricing of stock market futures.

The cash-like portion of Optimal's return is beyond our control. With most central banks keeping interest rates low, this part of Optimal's return is now close to zero: over the last five years this cash-like return contributed just 0.5 percentage points per annum toward the Orbis Optimal SA Fund's absolute return, far lower than we would expect over the long term.

One thing we can control is our stock picking, which ultimately determines your Funds' long-term returns. The principles behind our investment philosophy and process have not changed since the firm's inception, but the stock market's view of the shares in your Funds changes all the time. Many of the Fund's best-performing stocks in recent months were precisely those that had detracted from performance before the rebound this year.

It is not uncommon to see a stock go from being a major laggard to amongst the Fund's biggest winners in a short span, often without much change in the company's fundamentals. Some examples in the current portfolio include US semi-conductor manufacturer Micron Technology, Chinese internet company NetEase and US health insurer WellPoint. The circumstances are different in each case, but the common thread is that we were able to build the Fund's holdings at attractive valuations when these stocks were deeply out of favour - and we bought more shares when they continued to lag.

More recently, the stock market has come to recognise, to varying degrees, the value that we have long seen in these shares. Of course, we can never predict or control these shifts in sentiment. In the case of global oil and gas company INPEX, the gap between our view of the company's value and the stock market's view has widened of late. In time we will know which view is correct, but we continue to believe that INPEX shares are attractively priced and have therefore added to your Fund's position. These stocks are just a few examples, but they underscore the importance of taking a long-term perspective. To that end, it is encouraging to see the performance of the Fund responding as strongly as ever to a more favourable environment for stock selection.

American International Group (AIG) is a name that needs little introduction. During the Global Financial Crisis, AIG imploded in spectacular fashion and ended up being the target of a US$180 billion capital injection by the US government. While the name remains the same, the company your Fund owns today is quite different from its previous incarnation. AIG has repaid the US government's bailout loan, has gone back to basics, and with two main divisions - a multinational property and casualty insurer and a US life insurer - AIG has at long last become a 'boring' insurance company. However, AIG's reputation remains tarnished by the events of nearly five years ago, and this is reflected in the share price. The company's tangible net asset value (TNAV) now stands at US$65 per share, compared with its share price of US$39. Orbis considers this a rare bargain. Historically stock market investors have been willing to pay a multiple of about 1.5 to 2.5 times TNAV, on average, for US insurers, and they have typically paid more than TNAV for all but the bottom 20%. By applying a 40% discount to AIG's TNAV, the stock market is currently pricing AIG as if either its net assets are vulnerable to another shock, or the company will fail to generate adequate returns on those assets in future. Orbis' research concludes that there is no good reason for the stock to be priced so far outside the normal range and, for the patient investor, Orbis believes that the outlook for this 'boring' insurer is actually rather exciting. The Orbis Optimal SA Funds started the year on an encouraging note. The recent performance has been driven primarily by Orbis' core skill of bottomup stock selection, just as it has since inception. However, over the past three years the Funds' performance has been disappointing as the contribution from stock selection decisions has not met Orbis' expectations. Firstly, there has been a lack of big winners but a normal number of big losers, both in the stock market and in Orbis' portfolios. Secondly, stocks that fit within the traditional 'value' category have performed poorly relative to those typically described as 'growth'. While Orbis doesn't describe itself as a 'value' investor, history shows that this approach has worked much better when 'value' stocks have beaten 'growth', rather than the reverse. Thirdly, stocks with bond-like characteristics, so-called 'bond proxies', have performed very well and Orbis has had little exposure to these stocks. Finally, the valuation gap between Orbis' selected equities and the broader stock market, while positive, has been lower than normal over this period. While these market conditions have been challenging for stock pickers, it is important to remember that they are often mean-reverting. Orbis, like Allan Gray, maintains a consistent strategy and is never tempted to try to time the market. Orbis' quantitative models indicate that the valuation gap between its selected equities and the stock market has returned to more attractive levels, consistent with what Orbis analysts are seeing on a bottom-up basis.

To realise long-term investment opportunities, Orbis and Allan Gray often lean against prevailing sentiment. This can result in short-term pain, and of late, this has been the case for the Orbis Equity Funds which your Fund holds. But our shared contrarian approach is readily apparent by taking a closer look at some of the key holdings in those portfolios. In the technology sector, shares of networking equipment and semiconductor manufacturers have performed poorly, but Orbis has high conviction in its selections in these areas. In semiconductors, Orbis believes that the memory industry is seeing a wave of consolidation that will benefit the surviving players. Micron Technology, the largest holding in Orbis Global, is playing a large role in that consolidation through its planned acquisition of bankrupt competitor Elpida. Orbis expects the Elpida deal to boost Micron's tangible net asset value (TNAV) by 15-30% - no small matter for a stock that trades at 0.9 times TNAV. Micron should also benefit from a cyclical recovery driven by rational capital spending throughout the industry. In networking equipment, Ericsson - also a major position in Orbis Global - has been the biggest winner to date in contracts for the next generation of mobile technology (so-called LTE), though at the expense of margins. But having secured a dominant market share, Ericsson is now in a position to reap higher margins. In the meantime, the company offers a near 4% dividend yield. Far from their mid-2000s highs, financials may now seem a prime hunting ground for contrarian investors. Orbis Global has major positions in Barclays and in three insurers. Prior to the global financial crisis, Barclays was trading at three to four times TNAV, had thin capital and liquidity, and a less solid loan book. Today, the bank is much stronger, yet one can buy Barclays at a 30% discount to TNAV. Like Barclays, all three of Orbis Global's insurance holdings have strong capital positions, yet all can be bought at significant discounts to estimated TNAV. While it took a housing crisis for sentiment to sour on financials, sentiment on Japan seems perennially pessimistic. Still, some companies offer both attractive fundamentals and an appealing valuation. Two examples in the Orbis Japan Equity Fund are Toyota Motor and Toyota Industries (TI). Toyota Motor is set to reclaim its position as the world's top automaker by sales, but it trades at just 13 times Orbis' estimate of this fiscal year's earnings. The cash held by Toyota's core auto unit plus the company's investment holdings account for over half of its market capitalisation. TI, Toyota's forefather, holds a 6% stake in the automaker that at current market prices is worth TI's entire market capitalisation. In addition, TI is a global leader in its own right in forklift trucks and car air-conditioning compressors. The holdings discussed above are an eclectic collection, reflecting the opportunities the market presents. Though some of these holdings have yet to deliver pleasing returns, Orbis remains excited and optimistic about your Fund's underlying equity portfolios.