The final quarter of our reporting year was a prime example of the volatility that we have been dealing with throughout this year. Concerns over Chinese growth and the floatation of the renminbi, as well as the failure of the US Federal Reserve to finally grasp the nettle and start hiking interest rates all contributed to huge volatility in asset prices during the quarter. Global equity markets (both developed and emerging) sold off, while currencies and bonds whipsawed depending on the market's views on their respective economies' fiscal outlook and exposure to China and commodities. SA being a major trading partner with China, and mainly in commodities, was hard hit by these volatile moves with most asset classes under pressure. For the quarter the fund returned -2.59% against its benchmark of -0.20%, bringing the full year return to 2.29%.

The fund took advantage of the declining equity markets to increase its weighting towards the local equity market as valuations started to become more realistic. Within our domestic equity holdings, we remain overweight resources, which continued to detract from our performance in the short term. Sentiment towards the resource sector approached an all-time low this quarter and we were witness to some extreme movements in the prices of these assets; the most extreme being the collapse of the Glencore share price by over 50% during the month of September. Other large fund holdings such as Anglo American, Exxaro and Impala Platinum were also impacted severely, if not as bad as Glencore. While it is never pleasant during periods of volatility and apparent irrational behaviour, it does offer opportunities. Where we believe we have a solid grip on the true value of the underlying investments, sharp sell-offs have allowed us to buy more of these underpriced assets at exceptionally good levels. Overall risk in the portfolio is controlled through ensuring appropriate allocation to sectors and overall exposure to equity to ensure that the portfolio can continue to deliver acceptable returns during such volatility. Our big holdings in defensive global businesses and allocation to developed market equities serve as a counter balance to the more volatile and highly cyclical resources.

Other emerging markets experienced similar levels of volatility and selling pressure as we did in SA. On any long-term measure these markets look extremely attractive and we have continued to hold a reasonable weighting at these levels. Most other emerging markets have experienced devaluation of their currencies and significant de-ratings of their equities, which leaves them in an almost asymmetric payoff profile, offering good upside.

Our position in property has remained fairly stable, but with some refocusing on a few key holdings where yields and rental growth remain attractive, but we have sold down some of the smaller positions. The large position in Intu, the UK shopping centre owner, has continued to perform well and recent operating metrics show that the turnaround is in place and gaining traction in an economy that is showing robust growth.

The fixed interest position remains focused mainly on floating rate notes and good quality credit in particular. While SA government bond yields did rise during the quarter, we do not believe they are yet at the appropriate level to be attractive investments. Similarly global bond yields remain extremely low and offer the investor no prospect of any real return on a held-tomaturity basis.

Looking forward, the prospect for markets to remain volatile persists. The speed and pace of interest rate rises in the developed world will continue to be a point of debate amongst global managers and likely to influence portfolio positioning and market direction. The sooner the US and the UK start a process of normalising their monetary policy, the sooner financial markets are likely to settle down into a more normal distribution of returns and exhibit less volatility than what we have seen year to date. We believe the portfolio is appropriately constructed to take advantage of attractive opportunities in the market, but still robust enough to deliver sustainable long-term returns despite the increased volatility.

Portfolio managers
Neville Chester and Pallavi Ambekar

The fund had a reasonable quarter despite the market volatility, producing a positive 0.6% return against the benchmark return of -0.15% and the JSE return of -0.2%. The quarter was characterised by some aggressive price moves across most asset categories as macro events, ranging from the Chinese economy to the US recovery to the Greek debt crisis, caused havoc in global markets.

The fund managed to eke out positive returns under these circumstances due to some specific asset allocation strategies. Firstly, our exposure to preference shares helped the fund as they delivered a strong positive return for the period, predominantly through capital gains as the market re-rated the instruments. Secondly, our higher exposure to emerging markets also helped as these delivered a positive return (in rands) for the quarter. Our exposure to the lower-rated property stocks, which have higher earnings yields, also buffered us from the worst of the sell-off in the property sector which impacted the very highly-rated stocks far more. Our low exposure to fixed-rate bonds, both local and globally, also protected us from the sell-off here as the market started pricing for rising rates in the US and domestically.

We have retained a fairly full weighting to offshore assets as the outlook for local assets remains poor given a combination of high ratings on quality local investments and a poor outlook for the rand given the impact of load shedding on the local export sectors and continued labour instability. We still find better opportunities in the offshore markets in terms of valuation relative to growth potential, in particular other emerging markets where the ratings are significantly lower than those locally. Our domestic equity exposure remains skewed to global businesses that are able to access earnings growth outside of the SA economy, except for our exposure to resources. It has been a trying time for resources as we have continued to see spot commodity prices fall and the price of resource companies decline in tandem. We remain steadfast in our view that ultimately commodity prices will return to our estimates of long-term normal prices as the supply-demand equation rebalances. In that case, there is enormous upside potential as a number of mining companies are trading at some of the lowest levels seen in over a decade - lower even than where they traded at in the financial crisis. One never gets an opportunity buy good assets cheaply when the news is good; it can only be done when the news flow is poor and one has to be prepared to stomach the short-term volatility to benefit from the long-term upside available.

As mentioned earlier, we have invested in a number of property stocks, specifically those with yields well in excess of 8%. While the large cap property names have seen their yields compress to as low as 5%, some of the mid cap names have not benefited from the flows of foreign funds and as a result we think they offer much better opportunity for the patient investor. The benefit in the property sector is the companies pay decent dividends, so even if there is no capital gains, you are still rewarded by an 8% or more payout every year.

The credit markets have also given us some good investment opportunities the past few months as lack of buyers has meant that credit spreads have opened up, giving us the chance to pick up some good quality exposure in return for generous yields. These have been locked in for periods of five to seven years and will give us a good constant source of cash flows over that period.

Markets remain very volatile and political outcomes are always uncertain. Whether it's Russia, Greece or back in SA, one has to remain focused on identifying long-term valuation opportunities and ignore the froth being generated in the short term via the headlines of news services around the world. We remain committed to generating sustainable inflation-beating returns over the long term for our unitholders.

Portfolio managers
Neville Chester and Pallavi Ambekar

After a shaky start equity and bond markets around the world continued to deliver positive returns, with the exception being certain emerging markets where short-term concerns weighed heavily on their returns. The roll-out of European quantitative easing provided a huge boost to yielding assets in the euro area, which saw double-digit returns coming from many property stocks and some bond markets. Domestic equities continue to surprise with strong returns, which has detracted from our relative performance given our underweight position. In addition, being underweight government bonds detracted from our returns, but this was offset by a big position in local and global property, which delivered a good return for the fund. For the quarter, we lagged the benchmark return of 5.9% by 2.8%, but still delivered a respectable 3.1%.

In a world driven by relentless printing of money by the major central banks it is getting increasingly difficult to find assets that offer absolute value. It is all too easy in the race to deliver short-term relative outperformance to lose sight of the fact that asset prices are being inflated by the search for yield in the strange world we live in; a world where governments, and recently even homeowners in certain European countries, can borrow money at negative rates. While one might look smart in the short term taking on additional risk to eke out basis points over one's peers, the risks to permanent loss of capital are growing as bubbles in asset prices become evident across more and more asset classes. All too often the argument we hear for investing in assets is a relative one, where the relative benchmark being used, whether it is ten-year US bonds or ten-year German bonds, is at the completely wrong level. In this environment we are still working very hard to find those pockets of opportunity. The first area we think is very compelling now are certain emerging markets. The emerging market love affair has ended and we have seen significant underperformance from many emerging markets as money has fled from the riskier of these markets in search of a safe-haven back in developed markets or the 'lower risk' emerging markets. This has resulted in major mispricing of some very attractive companies and, as a result, we have increased the weighting in our offshore equity component to emerging markets.

The second area that looks attractive to us is South African credit. Following the African Bank crisis in 2014, a number of the big players in the corporate credit market have pulled back, resulting in a surplus of supply of corporate bonds over the demand for them. This has allowed us to price for the relevant credit risk and ensure that we get the appropriate return, which is in stark contrast to credit markets globally, where the search for yield mentioned above has driven spreads down to unrealistic levels.

Within local equities we remain overweight in the resource sector. Resource companies are currently very much out of favour with the market as the majority of commodity prices have fallen the last few years. Commodities are cyclical and this is something we have become accustomed to in South Africa. The prospects for short-term earnings remain poor, but importantly valuations are incredibly compelling. While interest by foreigners in many South African retail and industrial shares are at an all-time high, the opposite is true of the resource shares where there is no interest at all, resulting in an enormous divergence in valuations. Anglo American is now trading below the level, in British pounds, that it troughed during the global financial crisis. The inflection point for an improving outlook for commodities is never easily forecast. We have experienced a similar environment on the other side of this trade in 2008 when we were very underweight resources and they relentlessly moved to higher and higher valuations. All we can do is remain true to our valuation-driven philosophy and ensure we are invested appropriately to deliver long-term returns.

As the rand has weakened significantly, we reduced the extent of our currency exposure back to around 29% of the fund. While the outlook for SA remains fairly bleak, the currency has moved significantly the last few years and it is certainly closer to an equilibrium level to its main trading partners and no longer justifies a full overweight position. We will continue to actively allocate here depending on the market levels. The beauty of the flexible mandate is that it does allow carte blanche in how we construct a portfolio that can deliver returns on a sustainable long-term basis. This is becoming very important in the world we described above. Having complete discretion on where we can invest will be important for us to continue delivering real growth going forward.

Portfolio managers
Neville Chester and Pallavi Ambekar

Capital markets were extremely volatile in the final quarter of 2014, with large and violent moves being driven by changes in growth expectations for various regions and then later on by the precipitous drop in the oil price and what it means for oil importers and exporters. Subtle wording changes made by heads of the major central banks were (over) analysed by market punters and often drove big shifts in asset allocation. Without a doubt, 2014 has been a year marked by the revival of the US economy and severe pain for most emerging markets. While SA was not immune from most of this volatility, the equity markets managed to end on a positive note in local currency terms, if not in USD. The local bond market, and particularly the listed property market, delivered strong double-digit returns as the threat of inflation faded thanks to lower oil prices. For the quarter, the fund delivered a return of 1.2%, underperforming the benchmark return of 3.4%. Our underweight position in bonds and heavier weighting in emerging markets in the global portion of the fund weighed on the returns. For the calendar year, the fund returned 8.9% against the benchmark return of 12.4% with this underperformance being driven by similar reasons.

Our local equity performance has continued to lag the index return this year, driven by our reduction in the highly rated industrial shares and increased weighting in resource shares. While the short- to medium-term outlook for commodity prices remains tough, we believe the valuations of most resource companies now more than take this into account and that as earnings normalise and certain commodities move back towards normal levels this value will be recognised. We remain invested mainly in platinum shares and the general miners and underweight the oil and gold producers. We have reduced our exposure to a number of industrial counters which have delivered strong returns over the past few years. While newsflow remains positive around these counters, their elevated ratings no longer justify such significant holdings.

Our offshore exposure has been predominantly exposed to equity, which has done well as an asset class. What has detracted from our returns has been our exposure to emerging markets within this. These markets have suffered from the flow of money back to the developed world markets and one has seen ratings reduce as well as domestic currencies under pressure. We remain firm of the view that a lot of these markets have very good fundamentals and that valuations are now very attractive on a medium-term view, and represent a great entry point. Unlike previous emerging market crises, the balance sheets of most emerging market economies remain in good shape; in fact, most are far better than the developed world and we do not expect there to be a major emerging market crisis. Exporting nations should benefit from the resurgent US and weaker local currencies which will boost domestic growth.

We managed to hedge a lot of our low bond position by a heavy weighting to property. This has assisted us as the property index once again delivered a superb return for the year. A number of the large cap property stocks now have yields well below the SAGB and as such are no longer attractive. We are instead invested in a number of mid cap names with yields in excess of 8% and reasonable growth potential, which should deliver decent returns for the foreseeable future. It is unlikely that 2015 will be any easier than 2014, with the first rate hikes from developed markets expected to arrive in the second half of the year. This will play a role in maintaining volatility amongst asset classes at high levels. The fund remains positioned with sufficient growth assets to deliver on its long-term return goals but still conservative enough to preserve capital over the medium term.

Portfolio managers
Neville Chester and Pallavi Ambekar Client