The fund returned -5.8% (in ZAR) in the third quarter of 2015, underperforming the benchmark (CPI +5%) by 8.3%. The one-year return of 0.1% is 9.7% behind that of the benchmark over the same period. Over the longer-term periods of between 3 and 15 years, the fund has generated consistent outperformance over the benchmark, which has been as high as 10.4% p.a. over the past 4 years. Since inception more than 16 years ago, the fund's outperformance amounts to 3.3% per annum. While we are disappointed with the short-term performance, we believe the drivers of recent underperformance are shorter term in nature and that the portfolio is capable of generating long-term returns that are in keeping with the long-run track record of the fund.

During the quarter the US internet stocks Google (now Alphabet Inc.), Priceline and Amazon were up strongly (between 24% and 35% each). With an average weight of close to 10% in the three stocks combined, these holdings made a significant contribution to offsetting share price declines elsewhere in the portfolio. Also helping to protect capital were the fund's large cash holdings and other derivative positions to reduce effective equity exposure, which shielded the fund from equity market declines experienced during the period.

The biggest driver of recent underperformance has been the fund's exposure to emerging market assets. Among the fund's direct emerging market holdings a significant number of Brazilian stocks have experienced heavy declines over the last 12 months. Chief among these are the education stocks Kroton and Estacio, which are down as much as 60% in rands over the period. As the no.1 and no.2 players in a very fragmented market, with market shares of 13% and 6% respectively, we believe the long-term earnings growth potential of these companies is among the most attractive in our investment universe. The private education businesses are benefiting from the rising propensity of recent high school graduates to complete tertiary education in an attempt to raise their longterm earnings potential. This in a country where the returns to education are among the highest in the OECD thanks to a severe skills shortage. Yet the companies have sold off significantly as the government has scaled back student loans that helped increase enrolments for the private universities in recent years. We believe that although near-term growth will be impacted, over the longer term the main drivers of earnings remain intact: organic expansion in the form of new campuses, acquisition of good smaller operators and market share gains from weaker players. The potential also exists that the change in government's payment terms to the sector for these student loans will hurt smaller players with weaker balance sheets much more. This could see some of these players close or merge with larger businesses on terms more favourable than what seemed possible a year ago (when the asking prices for smaller players looking to sell to larger players were much higher). Kroton and Estacio are performing very well operationally despite significant economic headwinds affecting the rest of the economy. They now trade on 7-8x forward earnings, well below their fair multiples and both stocks are capable of delivering 15-20% earnings growth for several years.

More recently, the car companies Tata Motors and Porsche have declined significantly. The former due to issues relating to Jaguar Land Rover (the main driver of Tata's value) and its exposure to China, where the local joint venture with Chery has experienced teething problems relating to customer acceptance of locally produced vehicles. Volumes in that country have declined 34% this year, offsetting reasonable volume growth elsewhere. With significant concern over the state of the Chinese economy, the share has sold off beyond the impact of these nearer term issues on the fundamental value of the firm and it now trades on less than 7x forward earnings, which is why we continue to hold it in the fund.

Porsche sold off by almost 40% in September when Volkswagen, Porsche's primary asset, admitted to cheating on emissions tests in the United States. The potential fines that VW faces for these actions, together with costs of recalling and repairing vehicles, are significant. Yet the market has punished VW (and hence Porsche) by a quantum we believe to be far in excess of what is reasonable in these circumstances. Our view is derived from historical precedents involving other car companies that have sinned and failed to come clean as well as our estimates of all material costs VW will incur and how this impacts their earnings and balance sheet. Valuing stocks based on long-term earnings is, in our view, the right way to invest. This does, however, often come with the cost of significant shortterm underperformance. Times of significant share price declines, when not justified by fundamentals, can present great buying opportunities. We believe that the examples above, among others we have taken advantage of, will be a source of long-term outperformance in the years to come.

Portfolio managers
Neville Chester, Gavin Joubert, Karl Leinberger, Mark Le Roux and Louis Stassen

The fund returned 4.60% in the first half of the year, slightly behind its benchmark of CPI +5%, which returned 6.3% YTD. Over longer and more meaningful time periods, the fund has delivered very strong performance - a five-year return of 20.6% per annum and a three-year return of 24.5% per annum, both significantly ahead of the benchmark.

The fund has benefited from its high global equity exposure, which has now been reduced to the mid-70% level from over 80% for a large part of the past few years. Developed markets have now outperformed emerging markets significantly over the last four years, with the US market in particular having done exceptionally well. Although the fund still holds a number of selected US names, we have increased exposure to emerging markets gradually as the average upside to fair value of the emerging market stocks we own has risen to levels of around 70% (compared with a long-term average of 50% upside). Approximately 50% of the fund's equity exposure is now invested in emerging markets, with the balance being invested in developed markets, mainly the US. The fund's South African equity exposure has fallen to less than 2% as we have reduced the Naspers position due to share price appreciation. Global bonds remain very unattractive, in our view, with little on offer in terms of yield and some countries heading into negative interest rate territory. Property stocks globally are now far less attractive than what they have been over the past few years, but we can still find selected value and 2.5% of the fund is invested in property (all of which is in two areas: German residential and Brazilian shopping centres).

We added to the fund's positions in the online travel companies (Priceline and TripAdvisor). These two stocks now make up 5% of the fund in total and are good examples of the attractive opportunities one can still find in global markets today. Priceline (the owner of Booking.com) and TripAdvisor are disruptors of the travel or booking agent's share of the travel industry's value chain. Historically they operated in two separate parts of the value chain, with TripAdvisor acting as a marketing and traffic acquisition channel (where one would go to research hotels, etc.) and Priceline performing the role of a booking agent (where one would actually make an online booking). As time has passed, their roles/activities are increasingly converging into one another's turf and they have begun to fulfil each other's functions. The investment case for each business is simple; they will be beneficiaries of:
-Global growth in travel, especially leisure travel.
-Online travel booking taking share from traditional booking channels, and online advertising/marketing taking share from traditional marketing channels (TV, magazines, trade fairs, travel agent 'show me' trips, etc.)
-Priceline and TripAdvisor consolidating the online market i.e. taking share from other online travel agents (OTAs) and online marketing/traffic acquisition companies (Google, Yahoo, etc.). They are both best of breed in terms of their core competencies, and are both investing heavily into their mobile offerings. In the shifting landscape, where mobile is taking share from desktop, online travel research resources such as TripAdvisor and OTAs such as Booking.com are becoming increasingly important in travellers' lives as they become used in all parts of the travel process; and not just the planning and booking stages. Travellers now also use online resources for checking and changing itineraries, reading reviews, sharing experiences, booking car rentals and choosing restaurants, tours and activities. The app-based interaction of mobile means that dominant companies will increase their lead and possibly take share from traditional search channels (such as Google, Yahoo and Baidu). With localised sites in 45 countries and offered in 28 languages; 315 million monthly active users; and over 200 million independent reviews and opinions covering more than 4.5 million places to eat, things to do, and places to stay, TripAdvisor stands as the 'go to' destination for travel research on the internet. As such it is an extremely important channel for traffic acquisition for companies wishing to gain customers for their travelrelated businesses.

Priceline, primarily through Booking.com, facilitates bookings of over 900 000 hotels and vacation properties in 200 countries and 42 languages. As of June 2014, the Priceline group had 140 million active users according to Comscore. Their core strength is aggregating supply and then driving transactions. They offer value to their hotel partners by effectively providing their booking platform for smaller/less sophisticated properties and providing them with useful tools to measure their business and enhance their revenue. Priceline trades on around 19x forward earnings, which may not immediately jump out at one as being cheap. However, this is a high-quality, high return on capital, dominant business in our view, with great shareholder-friendly management, that has several years of growth ahead due to the structural drivers mentioned earlier. Priceline are also one of those rare businesses that convert all earnings into free cash flow. TripAdvisor's short-term multiple is higher than that of Priceline (35x forward earnings), but earnings are well below normal in our view due to the fact that TripAdvisor are in the early stages of monetisation, making short-term valuation metrics less relevant in our view.

While we are cognisant of the risks in global markets today (end to quantitative easing, financial crisis in Greece, etc.) we believe the bottomup valuations of the stocks held by the fund indicate they are very attractively valued and we remain positive on the long-term prospects for the fund.

Portfolio managers Neville Chester, Gavin Joubert, Karl Leinberger, Mark Le Roux and Louis Stassen

The fund returned 3.78% for the quarter and 13.54% for the 12 months to 31 March 2015. Over longer and more meaningful time periods, the fund has delivered very strong performance with a three-year return of 24.9% per annum and a five-year return of 18.8% per annum, both ahead of its benchmark of CPI plus 5%. In US dollars the fund's return has been 7.7% per annum over the past three years and 7.6% per annum over the past five years.

The fund has benefited greatly from its high global equity exposure, which was reduced gradually during the quarter to a low 70% level from close to 80% at the end of December, primarily through the use of hedging. Developed markets have now outperformed emerging markets significantly over the last 4 years, with the US market in particular having done exceptionally well. Although the fund holds many US names, we are struggling to find new ideas that offer compelling upside. Instead, we have increased exposure to emerging markets gradually as the average upside of the emerging market stocks we cover and hold in our dedicated emerging markets portfolio has risen to levels above 60% (compared to a long-term average of 50% upside). Our South African exposure fell to less than 3% as we reduced the Naspers position due to share price appreciation. Global bonds remain very unattractive, in our view, with little on offer in terms of yield and some countries heading into negative interest rate territory. While some equity valuations have undoubtedly been elevated by a search for yield in a world of low interest rates, we believe our valuation-driven approach, which eschews paying over the odds for expensive assets, will provide us with decent returns going forward. In the previous quarter we highlighted having increased the fund's exposure to Russia during December last year as share prices sold off significantly in response to the falling currency and oil price - in effect, the defensive food retailers and internet stocks in Russia behaved as though they were commodity stocks. This stance was somewhat vindicated as the stocks have rebounded sharply this year already. The food producers (Magnit, X5) are performing well operationally and are benefiting from food inflation, which helps their turnover, while their costs are not increasing at the same pace due to lack of wage pressure as the economy enters recession. Almost 8.5% of the fund is invested in Russia, mostly in food retail and internet stocks and we believe that these are very attractive in the context of a below-normal oil price and undervalued currency, in our view.

We have also previously discussed the fund's exposure to Brazil, which rose from 10% to 15.4% over the period. The biggest driver of this increase has been greater exposure to the Brazilian education sector. Kroton, the largest private education provider in the country, is now the largest fund holding at 4.6% (up from 3.1% at the beginning of the year). The increased position size is in response to a sell-off in its share price, and sector as a whole, as the government announced measures to tighten student loan criteria and cap the number of new loans granted. These loans have helped boost student numbers in recent years, so the share prices of the listed education stocks were badly affected. In our view, while there is a reduction in the fair value of these businesses, the share prices have fallen by significantly more than the economic impact of these changes. In addition to Kroton, we have also built a 2% position in Estacio, the second largest player in the sector with 437 000 students enrolled at the end of 2014 across its campus and distance learning operations (compared to Kroton's 980 000). We like Estacio because, in addition to the attractiveness of the sector as a whole, it is growing its distance learning operation from a smaller base. The company also has more opportunities to improve overall profitability as its margins are significantly below those of Kroton and what we think is achievable in a mature state. Profit growth will therefore exceed revenue growth. There is a large private equity shareholding, together with close to 20% shareholding by the board and management, giving strong alignment of incentives with outside shareholders. Estacio is incredibly cheap at 10x forward earnings, especially when one considers that earnings can grow at 15% to 20% per year for several years, in our view. This is a good example of the market being fixating on short-term uncertainty at the expense of long-term opportunity. Kroton can also be bought for 10x forward earnings - the larger position size of Kroton reflects our belief that its management team is the best in the industry and that it will entrench its number one position in the market after integrating the Anhanguera operations and realising cost synergies.

While we are cognisant of the risks in global markets today, particularly in the event of an end to quantitative easing, we believe the bottom-up valuations of the stocks held by the fund indicate they are very attractively valued and are positive about the long-term prospects of the fund.

Portfolio managers
Neville Chester, Gavin Joubert, Karl Leinberger, Mark Le Roux and Louis Stassen

The fund appreciated marginally over the quarter (+1.63%), taking its 2014 return to 8.72%. Over longer and more meaningful periods, the fund has delivered a very strong performance with a three-year return of 26.27% p.a. (15.74% p.a. ahead of its benchmark of CPI plus 5%) and a five-year return of 18.66% p.a. (8.44% p.a. ahead of the same benchmark). In US dollars, the fund's return has been 12.91% p.a. over the past three years and 9.06% p.a. over the past five years.

Our view remains broadly unchanged: global equities continue to be the most attractive asset class, although certainly less attractive than three or four years ago. Whilst the fund's global equity exposure ended the year at 79%, this has been reduced in early January to the low 70%-level, predominantly through hedging (specifically, the shorting of US and European equity index futures). Following the very strong performance of US equities over the past five years, we are struggling to find compelling new investment ideas in that market. In contrast, we are finding lots of value in emerging markets, as a result of the fact that they have generally delivered poor returns over the past few years. We continued to add to the fund's emerging market exposure during December, when Russian stocks in particular experienced severe falls due to the oil price decline and resultant rouble depreciation. We also added to the fund's Brazilian holdings as markets there declined. Almost half of the fund's equity exposure (46%) is now invested in emerging markets, with the other 54% in developed markets. South African assets still offer very little value in our view, reflected by the fact that less than 5% of the fund's assets are in SA. We did, however, buy a small Sasol position over the past few months as the share price collapsed along with the oil price. 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).

At present, 10% of the fund is invested in Brazil. Brazil has been one of the worst-performing emerging markets over the past several months and as such has been a detractor for the fund. Brazil has a poor macroeconomic outlook with ongoing negative newsflow. Very few investors like investing in stocks against this backdrop and Brazil is undoubtedly one of the most disliked emerging markets. By way of contrast, India (representing only 1.5% of the fund, excluding Tata Motors, which is in reality a global business) is almost universally loved. Its economic outlook is promising and the newsflow has been almost continually positive since Prime Minister Narendra Modi won the elections. Accordingly, in our view, expectations (and resultant valuations) in India are generally high and unattractive, while expectations (and resultant valuations) in Brazil are generally low, and very attractive. We make investment decisions based on the long-term prospects and earnings streams of individual companies as opposed to the shorter-term macroeconomic outlook or individual company prospects. In this regard, we are finding compelling value in Brazil. A research trip to Brazil in December, during which we met the management teams of all portfolio holdings, confirmed this view. The fund's largest Brazilian holdings include the country's leading private education business, Kroton, which now trades on 13x forward earnings; the biggest local life insurer, BB Seguridade, which trades on 15x forward earnings and with a very attractive dividend yield of just under 5%; Hering, one of the top five clothing retailers in Brazil, trading on 10x forward earnings with a 7% dividend yield; and the holding company of the leading private bank in Brazil, Itausa, which trades on 7.5x forward earnings and has a dividend yield of 5%. With these valuation metrics for what are all very good businesses, we believe the fund's Brazilian holdings will be meaningful contributors to performance in the years ahead.

On the developed market side, we continue to believe that the global luxury car companies (who in turn generate around half of their earnings from emerging markets) are materially undervalued. Porsche and Tata Motors (owner of Jaguar Land Rover) are the fund's two largest positions and together make up 9.4% of the fund. Both trade on single digit multiples. The alternative asset managers (KKR, Fortress, Blackstone and Apollo) also make up a material part of the fund (10% in total). Trading at around 10x earnings, with dividend yields in the 7% to 10% range, we continue to believe these stocks are very attractive. Whilst there are undoubtedly risks out there (specifically in the eurozone, China etc.) and valuations are not as attractive as a few years ago, we remain positive on the prospects for the fund.

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