The fund had another great quarter which topped off an excellent year. It returned 16.9% for the period against the benchmark return of 13.9%, and 34% for the year compared to the market's return of 29%. Importantly the fund return is net of fees. The long-term track record of the fund, which is the most important metric, continues to be impressive. Over the past ten years the fund has delivered a return in excess of 25% per annum. We caution investors that we think the absolute levels of returns generated by the SA market are unsustainable, but expect to be able to continue to add significant outperformance through our focus on long-term investing. The big contributors for the period were some of our mining exposures, which had been a drag on the fund till recently. Globally equity markets had become too pessimistic on the impact of the Chinese slowdown on commodity markets and many resource counters had been oversold. Across the board we saw an improvement in ratings for the resource shares and in our fund Anglo American and Sasol, in particular, contributed strongly. In addition ? while the strikes in the mining sector have continued ? the fact that they have been relatively peaceful also saw some of the SA-specific miners regain some of their ratings, with Impala Platinum having a noticeable impact on the fund. Our significant holding in Mondi, which is classified as a resources counter but is much more of an industrial packaging business, continued to outperform significantly for us; so did our fairly recent position in Exxaro. In the industrial space our long-held position in Naspers went from strength to strength; the recent performance driven by further re-rating in its Asian internet business. The market has re-rated all the big Chinese internet/mobile stocks as they have started to appreciate the different economic dynamics of these markets and the ability for the large players to successfully monetise their large market shares. This is something which we have yet to see in the more traditional western markets. Having avoided the expensive retailers for some time, we were pleased to see them fall significantly during the period, but with few exceptions we still think the sector does not offer investors much value and remain well clear of this sector. The results we have seen have generally been disappointing as the poor economic growth has started to impact on their earnings. In the financial sector our large holding in Nedbank has done very well for us as the bank has steadily clawed back its market share in the retail market. It has executed extremely well in this segment and has by and large avoided getting too deep into the unsecured lending bubble which is now busy unwinding. We continue to hold a fairly large position in the big four SA banks, but have significantly reduced our holding in Investec after the company performed very well on the back of a significant rerating. Overall the structure of the fund has not changed significantly. We have built up a position in Foschini as the share has underperformed the past year. We have also moved our position in MMI into RMI, mainly to gain access to the unlisted OUTsurance business. OUTsurance continues to trade very well domestically and increasingly in Australia, and makes up roughly a third of the RMI portfolio together with MMI and Discovery which make up the balance. The fund remains mainly exposed to relatively cheaper global businesses with better growth opportunities than domestic businesses that are both expensive and constrained by a low GDP growth environment.

It has been a volatile quarter in equity markets. US Federal Reserve chairman Ben Bernanke's comments about a slowdown in quantitative easing sent global markets into a 'taper tantrum' and the South African equity market was no different. The fund managed to successfully navigate this change in sentiment, with performance for the quarter continuing to be ahead of benchmark. Over one year, the fund has returned 24.3% (after fees) versus the FTSE/JSE Top 40 Index return of 21.8%. Longer term performance has continued to be good, with meaningful outperformance over three, five and ten years. Resource shares continue to be under enormous pressure as commodity prices fall. The gold and platinum miners in particular have had a torrid year. We have written about our negative view on (and zero holding in) gold shares in previous commentaries and our direct exposure to platinum shares remains small at 3% of fund. With the further decline in the commodity sector, we have taken the opportunity to increase our starter position in Exxaro. The business owns a diversified portfolio of assets, which includes Kumba Iron Ore (Kumba) and exposure to coal and mineral sands assets. Although Kumba is an excellent asset that produces high quality iron ore, we think that earnings are lofty with downside risk as iron ore prices normalise. We have incorporated Kumba into our Exxaro valuation at a normalised, long-term value that is lower than its current share price. Exxaro also owns long life, low cost scalable coal assets, which have produced fairly stable margins over the last decade. These assets are particularly attractive as they have long-term supply agreements with Eskom, which shelter the business from South African mining inflation and from any reduction in Chinese demand for commodities. Exxaro has a healthy balance sheet and valuation is undemanding. It trades on 8.3 times normal PE. Our domestic clothing retailers, which have been the darlings of the market, suffered a rather sudden and rude fall from grace. These businesses have been operating in favourable conditions for the last five years and we expect the consumer environment to weaken going forward. This is due to rising inflation, potential job losses and a reduction in unsecured lending volumes. Foreign ownership of these shares has only reduced slightly and most are still very expensive and trade on high multiples. We do, however, think there is some selective value and have started buying a small position in Foschini. The share has been disproportionately weaker than its peers and trades below its long-term rating versus the market. The business is now being better managed than in the past and has been adopting a number of self help initiatives in merchandising and supply chain which should improve margins in the future. Foschini's near-term ratings are not high (13.4 times one year forward PE) and our valuation indicates there is sufficient margin of safety. Banks have also had a weak quarter, mainly due to concerns around rising bad debts following the strong growth in unsecured lending volumes. We have used share price weakness to increase our holdings in Nedbank and Standard Bank. Personal (unsecured) loans make up a small percentage of their overall lending book and both banks are comfortably provided. The shares trade on attractive multiples (around 9 times normal PE) and have good dividend yields over 5%. We expect that negative news flow will be the predominant feature driving instability in the market, and this will provide further long-term investment opportunities. We will be disciplined and unemotional in selecting investments that meet our valuation criteria. In so doing, we aim to continue the fund's track record of generating alpha.
Portfolio managers
Neville Chester and Pallavi Ambekar

After a strong performance in 2012, the South African equity market has continued to rise, supported by foreign equity inflows. The fund's benchmark, the JSE Top 40 Index, returned 2.25% for the quarter. The fund outperformed the benchmark over this period, returning 5.06% after fees, assisted by its holdings in defensive global industrial stocks. Our long-term performance has continued to be good, with meaningful outperformance over one, three, five and ten years. Despite the rising market, commodity shares have had a poor start to the year, mainly due to concerns about the impact of moderating Chinese growth and an end to quantitative easing on the demand for commodities. The gold sector has been the worst performer this year and the fund's zero exposure to gold shares has helped its performance. Gold companies are poor quality businesses, which have not managed to monetise high gold prices. The combination of declining grades, high cost inflation and poor capital allocation has resulted in weak cash flows and profitability. Notwithstanding the poor performance of the shares, we still do not see long-term value in the gold sector. In a highly volatile market, where sentiment fluctuates from positive to negative on a daily basis, we find that investing with a long-term view and focusing on valuations can still yield good investment ideas. Barloworld is a good example of how this investment approach has worked. The share was introduced into the fund in 2012 when the market was anxious about declining global mining spend, labour unrest and strikes in the South African mining sector and the resultant negative impact this would have on sales of Caterpillar equipment. Even after forecasting a near-term decline in the South African order book, our longer-term forecasts incorporated good growth in revenues and profitability. This was driven by increasing regional mining spend in Mozambique, Zambia, Botswana and Angola as well as the inclusion of Bucyrus business (Caterpillar's most recent global acquisition). We also felt that there was an opportunity to support and grow margins through increasing after sales revenues. When these inputs were factored into our valuation, the share price looked attractive and provided us with an excellent entry point. Mondi is another example where short-term macro uncertainty in late 2011 impacted the share price and created an investment opportunity. Our intrinsic valuation showed material upside and gave us the confidence to take a large position in the fund. Subsequently, Mondi has been a star performer. As an integrated, low cost packaging producer Mondi has managed to improve returns, profitability and cash flows despite a tough economic environment. The management team are good allocators of capital and have increased dividend payouts to shareholders and made value adding acquisitions. The share currently trades on an 11 times normal PE and continues to look attractive. The fund still holds large positions in defensive global industrial stocks like MTN, British American Tobacco and Naspers. These shares benefit from rand weakness, are good cash flow generators and will grow earnings in the medium term. Their valuations are compelling, especially when compared to expensive domestic industrial shares. Our holdings in financial shares have also remained similar; with Standard Bank and Nedbank our preferred bank holdings. These shares trade on a normal PE of 10 times and reasonable dividend yields of 5%. As the year progresses, we expect to see further volatility in the market. Our bottom-up, fundamental valuation approach that focuses on normalisation of earnings levels, should enable us to 'see through the noise' and continue to make investments that will generate outperformance over the long term.

Portfolio managers
Neville Chester and Pallavi Ambekar

Despite the major concerns affecting the global economy - the breakup of the euro and the looming US fiscal cliff - global and local equity markets delivered very strong returns in 2012. The JSE Top 40 Index returned 26.1% for the year and the fund 26.9% after fees, outperforming the market. The fund significantly increased its exposure to resource companies this year, especially as growing concerns over a global slowdown resulted in a sell-off in resources, creating good value opportunities. We continued to add exposure in the final quarter of the year, investing in African Rainbow Minerals (ARM), a new position for the fund. ARM is a diversified mining company exposed to bulk commodities and precious metals. The recovery in commodity shares in the final quarter of the year saw the fund perform well over this period. As we have added to the fund's resource positions, we have further reduced the domestic industrial positions, which have continued to perform strongly, and some of the financial positions, which have done extremely well recently. The continued interest from foreign investors in South African equities has seen them re-rate to very high multiples, leaving very little value. The fund has maintained, and in some cases added, exposure to large global industrial business that still offer good value and potential growth outside of South Africa. Given the relative valuation differences between these large global businesses with growth potential in other fast growing emerging markets and the domestic companies mentioned above, it is clear that this is the area which still offers decent returns for investors. Over the past quarter we have increased our position in Barloworld. This business, which operates across sub-Saharan Africa and Siberia, has also been tarnished by the concerns related to resource companies. The business has strengthened its position in opencast mining through the acquisition of the Bucyrus business in its key operating regions. Barloworld also continues to find markets for its products in the new mining areas of Mozambique and Angola as well as growing market share in Siberia. The new management team has divested from non-core assets that were accumulated under prior management teams and renewed the focus on delivering appropriate returns from its core businesses. It trades at a discount to the local market and offers good relative value. In the financial sector we have reduced some of our big four banking positions as they have re-rated on the back of strong results and also on indications that the future regulatory environment will not be as draconian as initially expected. We have also reduced our holding in the life insurer MMI, which has delivered an extremely strong performance and is no longer as compelling an investment. The fund remains optimally invested to continue generating the long-term alpha that it has delivered since inception.

Portfolio managers
Neville Chester and Pallavi Ambekar