The fund appreciated marginally over the quarter (+0.72%), which takes its year-to-date return to 7.0%. Over longer and more meaningful periods, the fund has delivered a very strong performance with a three-year return of 28.8% p.a. (17.9% p.a. ahead of its benchmark of CPI plus 5%) and a fiveyear return of 19.2% p.a. (8.9% p.a. ahead of the same benchmark). In US dollars, the fund's return has been 15.3% p.a. over the past three years and 9.9% p.a. over the past five years.

Our view remains broadly unchanged: global equities continue to be the most attractive asset class. The fund's global equity exposure of approximately 75% reflects this position. After being in the high 70%-level for most of the year, the equity exposure actually recently reached the high 60%-level as we reduced mainly developed market equities as they appreciated. However with the sharp sell-off in emerging markets in September (the 'taper tantrum' is back), we added to a number of the fund's emerging market positions which resulted in the equity exposure moving up again to the mid/high 70's. South African assets still offer very little value in our view, and this is reflected in the fact that less than 10% of the fund's assets are in SA (of which only 4% are in equities). We also continue to hold the view that government bonds worldwide are overvalued and as such have no exposure in this area. The fund does however have a few small listed property positions (in Brazilian shopping malls and the German residential sector).

Over the past few months we have added to the fund's Russian exposure as share prices fell due to the crisis in Ukraine. Whilst the developments in Ukraine are undoubtedly worrying, there are a number of very good and attractively valued businesses in Russia whose long-term prospects remain sound. We value businesses based on their long-term earnings streams and make investment decisions on this basis, as opposed to being steered by the current newsflow. As such, we are finding good value in selected Russian equities.

The fund's largest Russian position is in the country's biggest food retailer, Magnit, which has actually been a beneficiary of the Ukraine crisis by taking market share from weaker operators. In fact, Magnit's revenue growth has accelerated as the Ukraine situation worsened: in the early part of the year Magnit was growing its revenue by around 25% year-onyear, but in more recent months this has accelerated to close to 35%. The fund has owned Magnit for a number of years but we recently upped the position to the point where it is now a top-10 holding. Magnit is one of the best managed businesses that we have come across in emerging markets. This is in large part due to the drive, focus and entrepreneurial ability of the founder and CEO, Sergey Galitskiy. He still owns 40% of the company, which aligns his interests with those of minority shareholders, and he is also young (47), with many years left to drive the business. Over the past 15 years Magnit has grown from one store to operating 8 899 stores in Russia today. As is shown below, over the past 10-year period to December 2013, the store base has grown at a 32% p.a. compounded annual growth rate. Magnit typically opens between 1 000 and 1 500 new stores a year. Despite this, its share of the Russian food retail market remains only 6%. The informal sector continues to make up 50% of the Russian food market, which is very high compared to all developed markets as well as a number of emerging markets. In addition, the market is very fragmented. Magnit is the largest retailer, followed by X5, and by the time one gets to the third or fourth largest operator, their market share is only around 2%. As a result, in our view, Magnit can continue to take market share for many years to come. Magnit trades on around 19x forward earnings, which we think is very attractive given the quality of the business and its long-term prospects.

Portfolio manager team
Gavin Joubert, Neville Chester, Karl Leinberger, Louis Stassen and Mark le Roux Client

Driven by reasonably strong equity markets the fund appreciated by 6.9% over the quarter, which takes its year-todate return to 6.2%. Over longer and more meaningful periods, the fund has delivered very strong performance with a three-year return of 29.0% p.a. (18.1% p.a. ahead of its benchmark of CPI+5%) and a five-year return of 22.1% p.a. (11.7% p.a. ahead of the same benchmark). In USD, the fund's return has been 11.0% p.a. over the past three years and 14.5% p.a. over the past five years.

Our views continue to be broadly unchanged: global equities remain the most attractive asset class, and the fund's global equity exposure of approximately 74% reflects this view. Within our equity holdings, this year we have generally been adding emerging market exposure and reducing developed market exposure due to the poor performance of the former and strong performance of the latter. Overall equity exposure has come down over the past few months, from the high 80% level to a high 70% level. South African assets still offer very little value in our view, and this is reflected in the fact that only 6.5% of the fund's assets are in SA (of which only 4.2% is in equity). We also continue to hold the view that government bonds worldwide are overvalued and as such have no exposure in this area.

The largest buy in the fund over the past few months has been a new position in Tata Motors (3.1% of fund). While being an Indian company (with a domestic Indian car business), the value of Tata Motors sits in its ownership of Jaguar Land Rover (JLR), which it acquired from Ford in 2008. In fact, 95% of our fair value comes from JLR and it is this asset that attracts us. While the fund currently also has large holdings in Porsche/VW and Brilliance China Automotive (BMW JV in China), an important point to make is that our attraction is more towards the premium car companies specifically and not merely to car companies in general. We believe that the growth of the premium car market is structural for the history of the premium segment's market share in Western Europe over the past 15 years), driven by a number of factors. These include the wealth effect, the introduction of more entry level models by the premium car companies, and the growth of the SUV market where the likes of Audi, BMW, Land Rover and Mercedes have been particularly successful. In addition to this, we believe that the good premium car companies are better businesses than mainstream car companies because of stronger and more desirable brands, greater pricing power, higher margins and higher return on capital. The other point we have made before is that even in poor, cyclical, capital intensive industries like the car industry there are long-term winners. In our view Porsche/VW, BMW and JLR all fall into this camp.

On JLR specifically, while the company is of British origin, today it is a truly global business. Of its revenue, 33% is generated in China, 16% in the UK and Europe, 14% in the US and 21% in the rest of the world (a large part of which would be emerging markets). JLR have seen a significant reversal of fortunes over the past five years and today produce some of the most desirable premium cars in the SUV segment in particular. Their pipeline of new product launches over the next few years is also attractive and includes new versions of already very successful models (like the new LR Discovery) as well as continued moves into the fast-growing premium compact crossover market (where they already have a presence in the form of the highly successful RR Evoque and will be introducing a Jaguar model as well). The management team at JLR is almost entirely German, and of high pedigree with most being heavyweight ex-BMW and Porsche executives. We believe that Tata Motors will generate earnings growth of over 15% p.a. over the next five years, driven by JLR. Yet Tata Motors trades on just 8.5x the next year of earnings, which we believe is very attractive given the quality of the company's earnings profile and its main asset (JLR).

Portfolio manager team
Gavin Joubert, Neville Chester, Karl Leinberger, Louis Stassen and Mark le Roux

The fund appreciated by 10.7% (in ZAR) during the quarter, taking its year-to-date return to +51.1%. In USD, the fund is up 22.7% year to date, with the balance of the return coming from ZAR depreciation. Over the past 5 years, the fund has generated a return of +20.6% p.a. in ZAR (+18.6% p.a. in USD) and in doing so has outperformed its benchmark (CPI +5%) by 10.2% p.a. and the MSCI World by 2.9% p.a.

Our views remain broadly unchanged: we believe that global equities remain the most attractive asset class and the fund's global equity exposure of approximately 72% reflects this view. The global equity exposure has, however, marginally decreased over the past few months (from 75% to 72%) as we sold or reduced a number of individual stocks due to sharp share price appreciation. South African assets still offer very little value in our view, and this is reflected in the fact that only 13% of the fund's assets are now in SA (only 7% of this is in equity). Overall equity exposure is now 79%, compared to the mid-high 80% level earlier this year. As equity exposure reduces, we will look at adding listed property, where there are still a number of attractive opportunities. We also continue to hold the view that government bonds worldwide are overvalued and as such have no exposure.

Whilst global equity markets have appreciated considerably over the past few years, we are still able to find good selected value and the fund's largest holding, Porsche (7.1% of fund), is one such example. Even though Porsche has appreciated by around 30% since our initial purchase, we continue to believe that the share is materially undervalued.

Porsche today is not actually Porsche as one would conclude from the name: in fact, its only asset (besides a net cash position) is a 32% stake in Volkswagen (VW) due to the fact that in 2011 VW acquired the Porsche assets. Our investment case is therefore first and foremost about VW. In our view, Porsche is merely a cheaper way to buy VW.

There are a number of key points we like about VW as a business:

- Owner of some of the best car brands in the world, notably the VW brand itself, Audi and Porsche (these three brands contribute 70% of group profits).
- A focus on higher-end brands (Audi and Porsche) that are better businesses than mainstream car brands, in our view, and generate higher margins and return on capital.
- Leaders in engineering and customer satisfaction, the results of which are reflected in the fact that VW's global market share has increased from around 9.5% in 2007 to almost 13% today (see adjacent graph). The fact is VW makes attractive, reliable cars that people want to own.
- Scale (enabling more to be spent on R&D and marketing) and platform sharing (resulting in efficiencies between the various brands).
- High emerging markets exposure (est. 45% of profits) where car penetration is still low.

There is no debating that the car industry is a poor industry (very cyclical, capital intensive, intensely competitive, etc.), but within this industry there are inevitably winners - in our view, VW is one of them. Despite its strong earnings track record and operating metrics (5-year ave. ROE of 12%), the share trades on just 8.5x 2014 earnings. In our opinion, the entire industry is being painted with the same brush (partly because of the poor history of US car companies and more recently a number of European car companies), whereas in reality not all car companies are equal.

Whilst VW is very cheap in our view, Porsche in turn trades at a large discount to the value of its stake in VW (in effect on around 6.5x 2014 earnings). This is partly due to concerns about litigation from hedge funds arising from the short squeeze in VW shares in 2008. Even providing for the total litigation claim amounts (which is very unlikely to be realised in our view), Porsche would still be marginally more attractive than VW. If anything less than the full claim is realised, Porsche is far more attractive from a valuation point of view than VW. As such, we have taken all of the fund's exposure through Porsche.