Our fact sheets over the last twelve months have consistently expressed our concern about the level of global markets. This has been further expressed in our low risk portfolio (lots of cash), very little exposure to risk assets (emerging markets), no precious metals and hardly any exposure to high yielding assets. In short, it's a boring portfolio. Until last week, we were underperforming the market and our peers by almost all measures and yet in the last week, (markets have seen a small correction) it's been quite surprising to see how fast this has changed. An informed investor phoned to tell me that our conservatism has paid off. My response was that it is too early to tell. Now might be a good time to revisit some of our concerns. A word of warning: our concerns are not to be interpreted as forecasts. In this department we have failed dismally and have often proven to be too early.

By now it seems safe to say that the markets, the USA in particular, have been driven by the expansion of the Fed balance sheet. This balance sheet expansion is coming to an end. I think that the market may decide that once the Fed has finished tapering, it will not be quick to raise rates. This could be a mistake. The economy could do just fine but the stock market may not. The strong dollar may have serious disadvantages for economies that have benefited from a weaker dollar - suddenly their products become more expensive for their customers. Think of a European retailer paying for a garment from Hong Kong. The low interest rates are allowing disruptive technology companies to fund their expansion while not charging for their services. How many of us have had free rides from UBER for referring friends and family to their service? Another disadvantage of these disruptive technologies is the havoc they have unleashed on existing "old world" businesses.

Again, think of UBER versus the London taxi industry where it can be 30% cheaper to use UBER than a black cab. In the USA the purchase of a small device called Magic Jack, plugged into your computer, allows you to speak unlimited to a USA / Canadian number for 3 dollars a month! Take that Telkom. My point, by referring to these examples, is that we are entering a world where comparisons to the past will lead to outcomes that may not turn out as expected. Capital loss may become permanent and risk will be defined as it should, by the loss of your purchasing power (after allowing for inflation) and not after some Greek symbol.

Finally, we'd like to reiterate an important ingredient for wealth creation - patience. Be patient, disregard the short term noise and volatility and think about the long term. This has often rewarded investors.

Over the past year, our high cash holdings have penalised the fund on a relative basis. One might ask why, when it is known from numerous studies that equities over the long term outperform other asset classes, would you not hold 100 % of the fund in equities instead of cash?

One of the consequences of the policies of financial repression followed by the central bank governors has been the increased correlation of all risk assets. In other words, they go up and down together providing the patient investor with no diversification benefits. Furthermore, equity returns looking out ten years appear to be lower than their historical norms of about 6% real growth.

Robert Jeffery defined risk "as the likelihood of not having cash to buy something important". Besides our belief that risk is overpaying for assets we cannot help feeling the above definition comfortably explains our rationale for holding significant cash. On too many occasions I have witnessed fund managers not having enough cash to purchase bargains when the market obliged. What was worse was buying from colleague fund managers who had to sell quality and scarce stocks and for these forced trades to be booked at bargain basement prices to my fund. Sometimes the selling was due to panic (outflows) only to buy back (later inflows) these investments at higher prices.

In the past we have always been too early to build up cash in the fund and so we may again be too early but to do otherwise would not fit with our philosophy of investing.

We do not suffer from quarteritis (the continuing short term focus on many markets participants) nor do we envy the performance of others. We only care about preserving purchasing power in real terms.

The Aylett Equity Prescient Fund had a reasonable quarter, outperforming the market by 0.2%. Unusually, we were quite active and the portfolio has gone through some change. Our high exposure to Reinet was maintained and we introduced a new counter to the portfolio, Transaction Capital.

Transaction Capital has two main operating subsidiaries, the bigger being SA Taxi Finance which is an asset backed lending business that finances minibus taxis. It also owns a debt collection business that collects distressed debt on behalf of lenders and buys distressed loan books for fractions of the original loaned amount with the goal being to collect debts greater than the cost of the book and the associated costs of collection. Transaction Capital also has in excess of R900 million cash on the balance sheet and a management team who is young, sharp and has significant skin in the game (they own in excess of 50% of the business).

The fund continues to shed industrial exposure in favour of financial shares, predominantly the banks and cyclical stocks. Selected small caps are also being purchased which should hold up quite well when the inevitable market correction occurs. While keeping liquidity of these investments at top of mind, it is expected that over time this group of shares could make up about 15 % of the fund.

The volatility in listed South African banking shares such as African Bank and Barclays Africa (what used to be called ABSA) have also provided some fertile ideas. At a share price of R9.30 for African Bank we were able to write put options at volatility levels in excess of 40%, which if exercised would allow us to buy African Bank shares at R8.40; a price at which we would comfortably own the business. The options we have written expire in the middle of June and if the African Bank share price is above R9.00 at expiry, we shall not buy African Bank shares, but shall instead have received a 60 cents premium per option written. These are terms we like.

The fund is taking a new shape which we expect will do well in time to come. Our offshore investments are conservative and we are sensitive to valuations, with the view of rather holding onto cash until opportunity arises. Cash is the ultimate contrarian bet.