Markets have come under further pressure this quarter, which ended up being the worst quarter since 2009. Over the period, in US dollar terms, the S&P 500 Index fell -14%, the Eurostoxx Index fell - 29%, the FTSE 100 Index fell -16% and our JSE All Share Index fell -21.3%. While the US and Euroland have faced slowing recoveries and default risks, politicians in both geographies dithered about making firm policy decisions. Risk aversion continues to dominate investors' behaviour, with markets reacting wildly to each new data point release. Amidst all this turmoil, the fund has done well and managed to outperform the JSE Top 40 Index over one year by 2.6% with a return of 6.14%. Our long-term performance has continued to be strong with outperformance over three, five and 10 years.

As resources have come under further pressure, we increased our exposure to resources stocks, particularly BHP Billiton. Billiton's commodity portfolio is very dependent on continued increasing infrastructure demand from China. While we acknowledge that growth in China may slow, there are still resilient underlying urbanization trends that will support future construction demand. Billiton expects Chinese urbanisation to increase from 47% in 2010 to 62% by 2030e and 73% by 2050e. Our stress testing of Billiton's valuation also indicates that there is still upside in a 'lower growth, lower commodity price' scenario. On our calculations, Billiton is trading on a 9x PE to 'normal' earnings and looks attractive. Aspen has been one of the stocks that has contributed to our alpha over the past year. Earlier this year, we introduced it into the portfolio as we felt that concerns over regulations and acquisitions were overdone. Aspen has a remarkable long-term track record. Over a 10-year period, it has managed to grow its headline earnings per share by 28% compound annually. Its 10- year average cashflow conversion (i.e. how much of its earnings it converts into cash) is 97%. It has grown from a South African based company to a geographically diversified entity, with a presence in sub-Saharan Africa, Latin America and Asia Pacific. 50% of revenues are now derived from offshore. Its latest acquisition, Sigma in Australia, was completed at an attractive valuation and puts them in a good position in this competitive market. Aspen expects to double Sigma's operating profit in less than two years through a combination of increased revenues, improved manufacturing efficiencies and better procurement. We continue to believe that Aspen's valuation looks attractive in the context of its future growth profile.

With the 'risk off' indicator very much a reality, our defensive positions in the fund have come through strongly performance wise, partly through re-rating and partly through recent rand weakness. We expect markets will continue to be volatile as long as uncertainty prevails. This volatility should provide us with ample opportunities to invest in order to continue delivering long-term, market-beating returns.

Portfolio managers
Neville Chester and Pallavi Ambekar

Global equity markets declined sharply towards the end of the quarter as risk aversion increased. This was led predominantly by concerns over the ongoing debt crisis in Europe, with Greece (again) at the centre as well as growing fears of slower growth in China. Despite this downturn, the fund managed to outperform its benchmark FTSE/JSE Top 40 Index by 2.1% over the period, with a return of 0.8% compared to the -1.3% delivered by the index. For the 6-month period, the fund returned 3.0% versus the index return of 0.9%. The fund continues to significantly outperform the index over all meaningful periods (3, 5 and 10 years).

A large part of the fund's positive return for the quarter came from our defensive positioning. British American Tobacco continued to contribute to the fund's outperformance and remains one of our top five holdings. Tiger Brands also made a pleasing contribution. The company has a diversified portfolio of well known consumer brands such as Albany, Tastic, All Gold and Purity. Despite rising input costs and increased competition, the strength of these brands has allowed them to defend their overall profitability. While the company remains committed to achieving organic growth, it is also taking the opportunity to expand into Africa through acquisitions. These acquisitions have been concluded at reasonable multiples and provide Tiger Brands with the opportunity to cultivate emerging brands as well as introduce existing brands into underpenetrated markets. The company trades on a forward multiple of 12.5 times, and remains one of the cheapest emerging market food producers. The market was led down by resources returning -5.7% for the quarter. Concerns regarding the macro outlook have dampened enthusiasm on commodities. As bottom-up investors we do not make investment decisions based on our view of how the economic environment will perform over the short term. As a result, we took the opportunity to increase our resource holdings and concentrated our exposure in Anglo American, which became relatively cheaper than BHP Billiton. Anglo American trades on a PE of 11.7 times our assessment of 'normal' earnings. We also continue to maintain our holdings in Sasol and Impala Platinum.

We remain positive about South African banks and have added to our position during the quarter. We continue to believe that these companies will deliver double-digit earnings growth on the back of further reductions in provisions, positive endowment and better cost discipline. In addition, banks remain well capitalised (even after Basel III estimates) and will possibly be in a position to return excess capital to shareholders.

Where valuations are supportive, our stock selection within the fund remains biased towards businesses with exposure to growth outside of South Africa. Our proven long-term investment philosophy allows us to patiently weather market fluctuations. We trust that this approach will serve us well as we attempt to continue delivering market-beating returns.

Portfolio managers
Neville Chester and Pallavi Ambekar Client

The start of 2011 has been eventful with uprisings in North Africa and the Middle East as well as the catastrophic earthquake in Japan dominating news headlines. Food and energy prices have risen sharply and global inflation expectations have increased. Commodity prices continue to trend upwards, but oil has been pushed up substantially on the back of the protests in the Middle East. World markets have been volatile with developed markets outperforming our local market. The S&P 500 and the FTSE 100 are up 5.92% and 3.5% respectively in dollar terms versus the FTSE/JSE All Share Index which is down -0.9% in dollar terms.

Against this backdrop the fund returned 2.2% versus the FTSE/JSE Top 40 Index return of 2.17%. Longer term, the fund has outperformed the index, returning 16.28% and 16.51% over a 3-year and 5-year period versus 4.68% and 12.5% for the index over similar periods. British American Tobacco (BTI), a top five holding in the fund, was the top contributor to performance for the quarter, returning 10.8%. Despite declining cigarette volumes, BTI has managed to grow revenues through pricing. This value over volume strategy combined with a cost saving programme has delivered earnings growth of 14% CAGR (in pound sterling) over the past 5 years. The company is highly cash generative, pays out 65% of earnings to shareholders as dividends and has re-initiated a share buyback programme. The company trades on a normal PE ratio of 12 times, with a 5% dividend yield and continues to look like a compelling investment.

Resources shares had a hard run towards the end of last year and this continued into the first month of 2011. We took the opportunity to reduce our holding in Anglo American and sell out of Exxaro. Anglos is now no longer the biggest position in the fund, but it remains a significant holding as we continue to believe that their future expansion in base and bulk metals will add value to shareholders. We have maintained our resource weighting by initiating a position in BHP Billiton. On the back of excellent interim results, Billiton announced a higher than expected $80 billion project pipeline over the next 5 years, which we believe will lead to good production growth. This in combination with a strong balance sheet and a willingness to return cash to shareholders makes Billiton an attractive investment.

Banks have underperformed the index for the quarter and we continued to maintain our exposure. Recent results showed muted revenues with the unwind in impairment provisions delivering some earnings growth. We continue to believe that the banks will deliver double-digit earnings growth on the back of further reductions in provisions, positive endowment and better cost discipline. In addition, South African banks remain well capitalised (even after Basel 3 estimates) and will possibly be in a position to return excess capital to shareholders.

The fund currently prefers exposure to companies which have global exposure and relatively defensive business models where valuations are attractive. In an uncertain environment, we will continue to invest your money in assets that we feel will deliver good returns over the longer term.

Portfolio managers
Neville Chester and Pallavi Ambekar

Equity markets went out on a high in the final quarter of 2010 as market participants generally took a more benign view on the overall economic outlook. Domestically, the resource shares in particular had a good quarter as commodity prices continued to soar. The fund returned 8.2% for the quarter to end the calendar year with a total return of 20.6% against the 17.2% delivered by the Top 40 Index.

It was a very good year for stock selection for the fund. A number of our big positions performed very well in the final quarter of 2010 including Anglo American (+21%), Impala Platinum (+29%), Sasol (+13%) and Naspers (+14%). The investment case for Anglo American in particular has come through nicely as the market started to appreciate that its expansion projects in South America will add significant value to shareholders. Once again, taking a long-term view on the valuation has proved its worth. As we alluded to in the opening paragraph, commodity shares have been the big winners this quarter, despite the rand strengthening over this period. Commodity prices have continued to soar globally as the US, and to a lesser extent Europe, keep pumping cash into the global economy. While these prices are way above normal, resource companies are able to generate cash which can be returned to shareholders every year the prices remain this high. We increased our weightings to resources early in the year when the market was less optimistic about the global recovery. Now that these stocks have run quite hard we are looking at reducing some of our exposure, even though we are cognisant that the rand is very strong and likely to weaken in the medium term.

We have continued to increase our investments into companies with a global presence as we feel these companies offer the best return potential in the long term. We have added Mondi and Investec, maintained our big weightings in companies like MTN and Naspers and added further to SABMiller. These companies generally have exposure to fast growing markets in which they can continue to grow revenue at a faster rate than the domestic economy, and importantly, are not priced for this superior long-term earnings growth. The exception is Investec which has an extremely low earnings base in its UK operations due to the global financial crisis. As the environment normalises we expect earnings growth to come through strongly.

In a similar context we have maintained our large exposure to the SA banking sector. We continue to believe this sector is one of the cheapest in the domestic market and offers good medium-term return potential as bad debts normalise and revenues pick up once lending returns to the market. They generally trade at about a 50% discount to the SA retail sector which has re-rated strongly over the past year.

Finally, a new addition to the fund is MMI, the newly created life insurer formed from the merger of Momentum and MetLife. This was unbundled from our FirstRand holding. We are very excited about the opportunities within the group for synergistic growth and cost savings. With a potential dividend yield of between 6% and 7% it offers investors a great payoff profile.

Portfolio managers Neville Chester and Pallavi Ambekar