Please note that the commentary is for the US dollar retail class of the fund. The feeder fund is 100% invested in the underlying US dollar fund. However, given small valuation, trading and translation differences for the two funds, investors should expect differences in returns in the short term. Over the long term, we aim to achieve the same outcome in US dollar terms for both funds.

The fund advanced 7.0% in the third quarter of 2016, against the benchmark return of 5.3%. Over a rolling 12-month period, the fund’s return of 10.2% is behind the benchmark return of 12.0%.

Equity markets enjoyed a strong third quarter with the MSCI All Country World Index advancing 5.3% over the period. Investors shrugged off the shock Brexit referendum result late in the previous quarter, as the key central banks continued with their stimulative monetary policies. As widely anticipated after the Brexit vote, the US Federal Reserve postponed a further increase in interest rates and the Bank of England cut rates by 0.25%. In addition, the Bank of Japan announced changes to its monetary policy to further boost the Japanese economy. The European Central Bank was the only such institution that did not announce any further changes, but as at the time of writing there is talk about ending the negative interest rate strategy it is currently following. This buoyed the markets, and especially those in emerging countries.

Over the past quarter Japan was the best-performing region within the fund, returning 8.8% (in US dollar terms). It was closely followed by Asia ex-Japan, which returned 8.2% (in US dollar terms). North America was the laggard, returning only 4.1%, while Europe managed to deliver positive growth of 5.5% (in US dollar terms). Emerging markets rebounded by 8.3% (in US dollar terms).

Amongst the global sectors, IT (+12.7%) and materials (+9.2%) generated the highest quarterly returns. There were also good returns from financials (+6.3%) and consumer discretionary (+5.8%). The worst-performing sectors were utilities (-4.1%), telecommunications (-3.2%) and healthcare (-0.2%). On a look-through basis, the fund was positively impacted by overweight positions in IT and consumer discretionary, and an underweight position in utilities. Low exposure to financials had a negative impact.

The fund’s strong performance over the quarter was primarily due to two managers - Contrarius and Egerton Capital.

The Contrarius Global Equity Fund returned 15.2%, a significant outperformance driven by a number of the fund’s top holdings. Its exposure to resources via Teck Resources (+36.9%), Fortescue Metals Group (+45.0%) and Stillwater Mining Company (+12.6%) was a key contributor. Exposure to Twitter (+36.3%), JD.com (+22.9%) and Apple (+18.9%) also contributed. Marginal detractors were the fund’s exposures to gold mining companies.
Large-cap tech names such as Facebook (12.2%), Alphabet (+12.3%), Tencent (+21.0%) and Priceline (+17.9%) made a solid contribution to the outperformance of the Egerton Capital Equity Fund over the quarter. In addition, the fund benefited from exposure to Charter Communications (+18.1%), S&P Global (+18.3%), Visa (+11.7%) and the London Stock Exchange Group (+11.1%).

The Cantillon Global Value Fund, Magellan Global Fund and Coronation Global Emerging Markets Fund all contributed marginally to overall alpha for the quarter. The Adelphi Europe Fund underperformed over the period. Exposures to Novo Nordisk (-22.3%), Pandora (-11.7%) and Scout24 (-10.1%) would have contributed to this.

Outlook
The final quarter of 2016 brings with it a number of key events that could provide some market volatility. These include the US presidential election, a constitutional reform referendum in Italy and a widely anticipated second interest rate rise by the US Federal Reserve. There will also be further clarity on the Brexit process, which so far has had a far smaller impact than originally feared. However, that may still change as the way forward emerges. Also of concern is the fact that Deutsche Bank is under severe pressure and is at risk of needing a bailout, something the German government has so far ruled out. Equity and bond markets are in the later stages of a multi-year bull market, and investors are rightfully cautious on the near-term future. However, if the US economy proves resilient - and we believe it may - then, combined with modest cyclical growth improvement in Europe and Japan and investment-led momentum in China, the global growth outlook may be more favourable than anticipated.

Portfolio manager Tony Gibson as at 30 September 2016

Please note that the commentary is for the US dollar retail class of the fund. The feeder fund is 100% invested in the underlying US dollar fund. However, given small valuation, trading and translation differences for the two funds, investors should expect differences in returns in the short term. Over the long term, we aim to achieve the same outcome in US dollar terms for both funds.

The fund declined by 1.0% for the quarter, against the benchmark advance of 0.2% over the same period. For the rolling 12-month period, the fund’s return of -5.3% is lagging that of the benchmark return of -3.0%. Equity markets were very volatile over the quarter. Sharp declines in January and February were followed by a quick recovery in March to end the quarter marginally positive. At the start of the year, investors were nervous about global economic signals and looking for safe havens, thus causing a shift from riskier assets (commodities, emerging markets and cyclical stocks) into sovereign bonds and safe-haven equities. Japan’s move into negative interest rate territory came as a surprise and demonstrated that although the US had started its tightening cycle, the rest of the world was not yet ready to follow suit. The US Federal Reserve (Fed) had to adopt a more dovish tone given the turmoil in markets, but the ‘risk on’ trade returned when the Fed indicated a slower-than-expected rate rise for the rest of 2016.

Emerging markets had a good rebound over the quarter, rising 5.4% compared to 0.2% from developed markets. Within developed markets, Asia ex-Japan was the best performing region, rising 1.8% (in US dollar terms), while Japan performed the worst, declining 6.4% (in US dollar terms). North America advanced 1.5% and Europe declined 2.4% (both in US dollar terms). The fund’s regional positioning had a small negative impact on performance during the quarter.

Amongst the global sectors, utilities (+8.0%) and telecoms (+6.3%) generated the highest returns. Strong returns also came from energy (+4.2%), materials (+3.8%) and consumer staples (+4.1%) over the quarter. The worst performing sectors were healthcare (-7.4%) and financials (-6.9%). On a look-through basis, the fund was negatively impacted by underweight positions in energy, consumer staples and utilities and an overweight position in consumer discretionary. In turn, the fund benefited from underweight positions in healthcare and financials.

The underlying managers delivered mixed returns for the quarter. Vulcan Value Partners, Contrarius, and Coronation Global Emerging Markets generated good alpha, but this was offset by Sands Capital Growth, Egerton, Cantillon and Adelphi which lagged their benchmarks.

Sands Capital had a tough quarter, declining by 4.6%. This was mainly driven by its exposure to healthcare/pharmaceuticals which comprised stocks such as Biogen (-15.0%), Regeneron Pharmaceuticals (-33.6%) and BioMarin Pharmaceuticals (-21.3%). Other big declines came from Amazon (-12.2%), LinkedIn (-49.2%) and Suzuki India (-19.6%). On the positive side, Sands Capital did well owning Facebook (+9.0%), Rolls Royce (+18.6%) and Las Vegas Sands (+19.5%).

Adelphi returned negative alpha of 1.7% for the quarter. Detractors included Just Eat (-23.6%), AstraZeneca (-12.8%) and GrandVision (-9.4%), which outweighed positive contributions from Admiral Group (+19.5%) and Geberit (+5.6%).

Egerton declined by 1.8% over the period with diverse performances amongst their holdings. Big losers include Amazon (-12.2%), Activision Blizzard (-11.9%), Ryanair (-5.6%) and Gilead Sciences (-8.8%), while the winners were Stryker Corp (+15.9%), Aena (+7.6%) and Comcast (+8.7%).

Contrarius had a very good quarter (delivering alpha of some 16%), rebounding strongly after a period of poor performance. This was driven mainly by their exposure to gold (Barrick Gold +84.5%, Kinross Gold +85.8%, IAM Gold +53%), platinum (Anglo American Platinum +99%, Impala +84%) and other miners (Fortescue Metals +38%, Newcrest Mining +30.3). Not all of their stocks were as strong, in particular some of their consumer and technology stocks such as Blackberry (-13%), Western Digital (-21%), Twitter (-25%) and Sohu (-12%) delivered negative returns.

Vulcan Value Partners had a good quarter, generating 3% alpha through positions in Oracle (+12.5%), Fossil Group (+21.5%), Time Warner (+12.9%) and Parker Hannifin (+15.3%). Detractors, mainly in smaller positions, included Swiss Re (-9.4%), State Street (-11.3%) and Boeing (-11.4%).

Outlook
There is reason to believe that the investment outlook for 2016 will be difficult, as the international economy and world of finance remain laden with severe distortions and anomalies. The political and fiscal tensions in the US, China and Europe mean that significant uncertainty prevails. Coupled with the US seeking to raise interest rates and creating a divergence amongst monetary policies worldwide, we expect volatility to continue in the short term. China’s currency regime requires adjustment, and Europe’s political instability will perpetuate capital flight, and hence further undermine its domestic banking systems. There are parts of the equity markets, such as the large cap/defensive stocks, where valuations are demanding, but there are also many attractively priced stocks in the midcap space where growth prospects or business models are strong. The monetary unwinding cycle has begun - this will present both opportunities and risk.

Portfolio manager
Tony Gibson

The fund advanced 6.2% for the quarter, compared with the benchmark MSCI All Country World Index (dividends reinvested) return of 5.0%. For a rolling 12-month period, the fund’s return of -2.0% is ahead of the benchmark’s -0.88%.

The quarter started on a positive note, with a strong rebound in global markets during October. However, continued falls in commodity prices, the slowdown in China and the US Federal Reserve’s first interest rate increase in many years meant that the markets tapered off towards the end of the year, but still delivered a good positive performance for the quarter. Japan was the best performing region, rising a strong 9.4% (in US dollar terms), while emerging markets performed the worst, rising only 0.3% (in US dollar terms). Asia ex-Japan rose 8.3%, North America added 6.2% and Europe increased 2.5% (all in US dollar terms). The fund’s regional positioning had a negative impact on performance during the quarter. Amongst the global sectors, energy was the only negative sector, falling 1.4%, while utilities were marginally positive at 0.7% (both in US dollar terms). The best performing sectors were IT (+8.6%) and healthcare (+6.7%). On a look-through basis, the fund was negatively impacted by an underweight position in healthcare and consumer staples, but benefited from an overweight position in IT and underweight position in materials.

Sands Capital contributed strongly to performance over the quarter, with good gains in stocks such as Alibaba (+37.8%), Baidu (+37.6%), Alphabet (+24.7%) and other IT names. Smaller positions in Rolls Royce (-15.1%) and Under-Armour (-16.7%) were detractors over the quarter. Coronation Global Emerging Markets also had a good rebound during the quarter, with holdings in Baidu (+37.6%), JD.com (+23.8%), Tata Motors (+31.0%) and Naspers (+22.5%) all delivering good returns. Cantillon Global Equity had another quarter of positive alpha, benefiting from positions in technology names such as Alphabet (+21.9%) and Baidu (+37.6%), but also from holdings in Hargreaves Lansdowne (+24.8%), Kerry Group (+13.6%) and Aalberts Industries (+20.1%). On the downside Harley- Davidson (-17.3%) and CME Group (-2.3%) detracted from performance. Our key Europe manager, Adelphi European Fund, also delivered indexbeating performance with gains in companies such as Just-Eat (+20.3%), AstraZeneca (+10.4%), Ryanair (+12.2%) and Admiral Group (+10.5%).
Unfortunately, not all the managers had a good quarter. Vulcan Value Partners lagged the index by a large margin with positions in Fossil (-34.6%), National Oilwell Varco (-11.0%), State Street (-1.3%) and F5 Networks (-16.3%), which outweighed the positive returns from Microsoft (+25.4%), Boeing (10.4%) and Visa (+11.3%). Iridium US Equity also underperformed as one of their top positions, Valeant (-43.0%), was negatively affected by accusations of poor business practise. This position was the key detractor from performance over the quarter, while many of their other key positions did relatively well, including Delta (+13.0%), Lowe’s Co (+10.3%) and Valspar Corp (+15.4%).

Outlook
The US Federal Reserve has finally started its long-awaited rate rising cycle and to some extent, the markets’ preoccupation with the timing and pace of this has shifted to focus on the economy and lack of growth prevalent around the world. China, the growth engine of the recent past, is slowing and other emerging markets are feeling the effects of the commodity price weakness and currency weakening. Developed markets are in a better position, but still struggling, with growth remaining slow and low inflation remaining a concern. Within equity markets there are pockets of growth, or companies that are benefiting from some of the volatility within commodity markets, which should provide a good opportunity for stock picking. Portfolio manager Tony Gibson