Mark Landecker - co-portfolio manager - profiled our investment in the Jardine positions at our FPA Investor Day. These Hong Kong-based holding companies can trace their roots back to 1832 and the founding family remains in control and continues to manage and shepherd the growth of these sister entities.

About 80% of the value of our estimate of the net asset value (NAV) of the Jardines is comprised of the following listed companies: HK Land, Mandarin Oriental Hotels, Dairy Farm, Jardine Lloyd Thompson and Astra.

As is typically the case, one often needs a little bit of market distress or company-specific hair to buy a high-quality business at an attractive price. In the case of the Jardines, we got a bit of both earlier this year. The hair is the convoluted cross-shareholding structure that is confusing and requires some mental gymnastics to figure out what you are actually buying. Although he walks around our office barefoot at times, we don’t know if contrarian analyst Chris Lozano will ever be mistaken for an Olympic gymnast, but he did gold-medal work in disaggregating the financial statements of the various holdings so we could figure out what we were paying for this fine collection of businesses.

Throw in a small emerging-market selloff earlier this year and we had the ingredients to purchase what we viewed as a compounder with high-quality assets, an unlevered balance sheet and a long-term, owner-operator management team at the helm for a reasonable multiple of 12x earnings. On an NAV basis, this equated to discounts of 37% for Jardine Strategic and 28% for Jardine Matheson, with Jardine Strategic being our larger holding due in large part to the greater discount. Thanks to its management’s excellent stewardship, Jardine Strategic has grown its equity/share at a 22% rate over the past decade, more than twice the 10% rate of the far better-known Berkshire Hathaway.

Russia

Early in the year, we began to focus on Russian companies as many global businesses seemed reasonably priced. We ultimately settled on a commodity basket that we could buy if, and/or when, its stock market sold off. We chose commodity companies because their dollarized revenue stream limited exposure to the ruble, which is expensive to hedge. Furthermore, these businesses account for 25% of Russia’s GDP and 50% of the country’s governmental revenue so it’s clear they are of critical importance to the state. We also believed that there was some ability to mitigate U.S. sanctions as the underlying asset is globally traded.

When Russia ‘annexed’ Crimea, we had our opportunity. The companies in our basket traded at huge discounts to their global peers and, despite low-pay-out ratios, had dividend yields that were much higher than their P/Es. The average P/E of the basket at purchase was less than four times current year consensus estimates while the average current dividend yield was greater than 5%. We appreciate the risk of investing in a country with a complex, authoritarian political system and that our upside could potentially be taken by the government, but we also believe that the prices at which we purchased these securities were sufficiently discounted to offer an asymmetric risk/reward that was skewed in our favour.

We cannot eliminate risk, but we seek to identify it, understand it, minimise it, and be adequately compensated for it.

The word risk has no precise meaning in an investing context. In order to avoid confusion, we must clearly explain what type of risk we mean. There is a plethora of risks to consider when investing. The list of potential pitfalls include: credit, currency, obsolescence, fraud, sovereign, interest rate, inflation, litigation, expropriation, customer concentration, vendor disruption, competition, economic, balance sheet, political, permanent impairment, mark-to-market losses, and more, many more.

Risk goes hand-in-hand with investing. If you do not like the stock market and choose to remain in cash, then you will have assumed inflation risk. If inflation subsequently moves higher, the value of your cash erodes. Every choice (and doing nothing is still a choice) trades one risk for another. If we tried to avoid all risk, then we would have little chance of accomplishing our goal. So in a world where risk is unavoidable, our mission, on a portfolio basis, is to minimise the risk of permanent capital impairment.

We reject volatility as a measure of risk. However, we know a highly volatile investment may not serve our clients well, since large fluctuations in price may create stress, causing our clients to invest in or cash-out at precisely the wrong times. Lower volatility is not the aim of our investment process, but it has proven to be a natural by-product.

More importantly, regardless of the environment, we aim to distinguish ourselves by using volatility to our advantage, rather than our detriment. Instead of composing a portfolio designed to mimic the performance of some benchmark or index, we utilise a deeply held contrarian philosophy oriented toward pushing back on a rising market by reducing exposure (thus allowing cash to increase), and conversely, leaning into a falling market and spending that cash to opportunistically buy inexpensive securities.

We spend a disproportionate amount of our time evaluating and managing investment, company-specific, and economic risk. We believe that if we look to limit the downside of your portfolio, the upside will take care of itself.

Surveying the economic landscape this year, we're inclined to consider the power of myth to explain the inexplicable. The American author Joseph Campbell considered myths to be public dreams, and we see both public officials and private investors engaged in some serious flights of fancy. Perhaps believing in myths is the only means to cope with the actions of the few being taken for the many.

Zeus punished Sisyphus for his hubris by having him push a huge boulder up a hill, but before he could reach the top, it would always roll back down, forcing him to begin again. The US Federal Reserve seems engaged in a similarly unproductive task. The printing of money, the expansion of its balance sheet and the management of interest rates lower has only served to elevate risk assets rather than grow the economy. We cannot think of a single example in history, where centralised planning dictated successful economies. New York Fed President William Dudley adds little comfort with his admission at a recent economics conference that, "We don't understand fully how large-scale asset purchase programs work to ease financial market conditions. There's still a lot of debate ..." We sincerely hope the Fed and the rest of us avoid Sisyphus's consignment to an eternity of useless effort and perpetual frustration.

But our optimism erodes when considering the following: GDP has increased by just $2.2 trillion since 2008, despite a $7.3 trillion increase in US government debt since 2008, part of which funded a more than $3 trillion increase in the Fed's balance sheet. This poor return on investment isn't new; it's just getting worse. This begs the obvious question: Where would the stock market be without the Fed fuel? The strong relationship between the level of the market and the size of the Fed's balance sheet makes for interesting contemplation.

Many investors have been seduced by the alluring but dangerous - if not deadly - call of the Sirens that has manifested itself in the form of low interest rates and aggressive government spending. This potent combination has led not only to a soaring stock market but inefficient and excessive spending as well. This has resulted in continued budget deficits that are only manageable because of the Fed's success in driving rates lower on both the short and long-end of the curve.

We question what's sustainable. One successful real estate investor pointed out that as much as he'd like to liquidate his entire portfolio today at huge gains, he'd have a lot of money after paying taxes but no income. So he won't sell and others, who want or need more return than a conservative investment might yield, are liquidating those investments for even more risky propositions. It's an unusual environment we find ourselves in, much of it thanks to extraordinary Fed policy. We should fear the repression of a government that redirects capital to itself, with one example being interest rates so far below the real inflation rate. Savers are punished and seekers of return are pushed out the risk curve.

For the most part, the market has recently been focused on comments from the U.S. Federal Open Market Committee. Since the May 22nd remarks by Chairman Ben Bernanke regarding the eventual phase-out of the $85 billion-per-month bond-buying program, the various Presidents of the Fed Banks have been attempting to back away from those statements especially with regards to the timing of the phase-out.

We are not sure that they have an exit strategy or any certain timeframe as to when it should end. Thus we continue to focus on companies that we believe will be more defensive in nature and hopefully will perform better in such uncertain times.

As we transitioned the Nedgroup Investments Global Flexible Feeder Fund from the previous advisor we focused our new allocations to high quality, global business, trading at respectable valuations given our sense of their business prospects. We are still frustrated by the lack of volatility in the marketplace and keep anticipating higher levels in the future. Not sure when it will come, but we do not see the current injection of capital by the government into the markets as sustainable.

Thus we proceed with caution and are looking for opportunities, in industries or asset classes that might fall out of favor, that align with our value discipline.

Three technology companies that we own serve as an example of our process. Microsoft, Oracle and Cisco have seen their share of media bashing and not without good reason. However, we believe that the negative sentiment created an opportunity for us to arbitrage the difference between perception and reality. These three companies all face real challenges, including poor management and/or competition from new technologies. But we feel, in each case, the prices adequately discount those fears.

While it can be dangerous looking in the rear view mirror when investing in technology, we believe it is important to point out that while the growth of the three companies in question has slowed from their respective peaks, the group as a whole continues to grow faster than most companies in the S&P 500.

Consistent with our portfolio approach to seek out companies that offer non-US exposure, the three tech companies in question all have global businesses in the truest sense of the world, generating almost half their sales from outside of the US. This is not unique to the portfolio, as we have made a concerted effort to gain exposure to markets outside of the United States.

Given our purchase price and conservative target multiples, we are optimistic about the return potential for each of these companies. We reemphasize that our earnings (and revenue) estimates are less than that of Wall Street. We consider "owner earnings" when establishing our base case, rather than GAAP (General Accepted Accounting Principles) earnings. We, therefore, reduce net income by cash used for stock options and further ding earnings for "required" M&A (Mergers & Acquisitions) that we view as imperative to remain relevant and to sustain earnings on a going forward basis.

We believe that our Contrarian Team's bottoms-up process of analyzing Microsoft, Oracle and Cisco is replicable. Returns may be transient, but process is not. This is the only way that we know how to manage money. We've done it this way for more than two decades and commit to you that this will not change. We can't tell you what the world will look like tomorrow or when Bernanke will raise rates, but we will borrow a line from the investment strategist, Dylan Grice, who said it best when he quipped, "I'm interested in the possibility of building a profitable portfolio which is robust to my ignorance."

Whether good environment or bad, our focus is to consistently balance the natural tension that accompanies both protecting your capital and preserving your purchasing power. We can't promise to do either over the short-term, but if you are willing to commit to us over a full business cycle, we think our team has a fighting chance to accomplish these goals.