It has been an exceptionally difficult year for equity markets, and the fund, as global turmoil and a stalling local economy created a volatile market where we have seen incredible moves in share prices as all market participants try and identify winners and losers in a struggling global economy. For the year, the JSE All Share index returned 4.8% and the fund disappointingly was down 2.7%, although longer-term performance is still ahead of benchmark net of costs. Almost all of this underperformance happened in the month of September, which is explained in more detail below.

There were two major moves in the month of September, which impacted negatively on the fund's return. The first was the announcement of a potential takeout for SABMiller by AB InBev. The fund had until recently owned no SABMiller shares as the business was facing a number of challenges; from declining beer volumes in key markets to headwinds from weak currencies in most of its major profit pools. Given the fairly high rating accorded to the share historically, the fund felt there was no value in the company. After a number of years of the share not performing in hard currency terms, we had started to build a holding in SABMiller, but had only increased the position to 1% by the time the takeover was announced. Given the size of SABMiller in the benchmark, this resulted in significant underperformance for the month.

Secondly, also during September the US Federal Reserve (Fed) had the much anticipated meeting at which it was expected to announce the first interest rate hike since the move to extremely accommodative policy during the Global Financial Crisis (GFC). Despite the economy being in recovery and an employment rate at extremely low levels, the Fed chose not to hike interest rates, citing concerns over volatile markets. This did not have their desired effect of calming markets, but instead introduced a whole new load of uncertainty and volatility, which saw all risk assets sell off. Commodity prices were particularly hard hit and on the back of this we saw a very big sell-off on the mining and resource sector around the world, including the much publicised sell-off of Glencore which, peak to trough fell 52% in the month of September. While these kinds of moves may be commonplace amongst penny stocks, to see a $40bn market capitalisation share halve to $20bn in a matter of two weeks is a prime example of the level of volatility being experienced.

As we have spoken about often in the past year, the fund does have an overweight position in resource shares, predominantly through its exposure to Anglo American, Impala Platinum and Exxaro. While not as extreme as Glencore, these positions also experienced a significant sell-off in September with Anglo American declining 28% peak to trough, Impala falling 22% and Exxaro losing 26% (this latter move took place in the space of only seven days). It is quite incredible to see what should be rational markets behave in such a panicked way after just one Fed meeting where not a lot that's relevant was actually said. To our mind, these moves in no way reflect the change in the long-term values of these businesses. While the short-term outlook remains difficult, we believe the fundamental valuations of these companies and the mining operations they own remain significantly above their current share price levels.

Looking back over the year, it has really been these resource positions that have dragged down the overall performance of the fund. And while they were not that significant in the overall fund (excluding Mondi, resources have been less than 20% of the fund), the size of the declines experienced have had a significant impact. Against this backdrop, we have had a number of big positions perform well for us. Our holding in Mondi, which is classified as a resource position, has done incredibly well; up just on 60% for the past year. Our holding in Steinhoff has been equally successful (up 61%), so was our long-held position in Naspers (up 40%).

Also a positive contributor, and one that we think will continue to do well for us, is our holding in Intu (formerly named Capital Shopping Centres). Intu is a holding company for a portfolio of prime shopping centres in the UK. Following the GFC, the company struggled as retailers went into liquidation and the centres were looking tired due to lack of proper retail management. This has been turned around over the last four years through renewed investment in the centres (which remain positioned in prime locations) and coupled with the rebound in the UK economy, now stands well-positioned to benefit from these high quality assets.

While it is never pleasant to experience these occasional bouts of market volatility and draw downs, one has to recognise that it is part of investing in equity markets. Hence our emphasis on investing in equity funds being a long-term commitment of five years or longer. Over time, these fluctuations become smoothed out and the benefits of investing in equity for the long term show significantly better returns than other, lower-risk investments. However to reap these rewards, one needs to stomach the occasional bout of volatility. We remain steadfastly dedicated to delivering long-term outperformance through our commitment to our long-term investment policy that has delivered these returns over time.

Portfolio managers
Neville Chester and Pallavi Ambekar

The dichotomous performance of South African equity markets continues, with resources continuing its severe underperformance compared with the rest of the market. Overall the market is still in positive territory year to date, with the fund's benchmark (the JSE All Share Top 40 Index) delivering a return of 6.44%. The fund has lagged the benchmark with a return of 4.71% over this period. Over what we consider more meaningful time periods of 5 and 10 years, the fund continues to outperform the benchmark.

The performance of our three resource holdings in the fund (Anglo American, Impala and Exxaro) has been disappointing and has detracted from fund performance. Commodity prices have continued to decline over the last quarter and added further pressure on the share price performance of these counters. Near-term earnings and short-term prospects look poor. In addition, these companies are still dealing with the negative consequences of expensive capital allocation decisions made in the resources boom. We are cognizant of the risks these companies are facing and the difficult climate in which they operate. However, our valuations, which are based on normalised commodity prices and production levels, show that there is significant value to be had in these investments. While it is not comfortable to be invested in these shares, we continue to maintain our holdings so that we are well positioned when the environment does change. In total, resource holdings (excluding paper) make up approximately 21% of the fund.

China's slowdown in consumption has not just affected commodities, but has extended to luxury goods as well. The Chinese consumer is brand conscious and as wealth levels in China have increased, they have become a big consumer of luxury goods. As a new, emerging consumer, they have been indiscriminate, purchasing hard and soft luxury items across all brands. The custom of gifting has also contributed to the growth in luxury goods. With the introduction of anti-corruption measures, this practice has been drastically curtailed. Together with the slowdown in the economy, this has dampened the growth in luxury goods over the last two years. There are also some big shifts in the way Chinese consumers are purchasing luxury goods. They are more astute about pricing differentials in different countries and are becoming more selective in the brands they purchase. We have increased our position in Richemont as we think the business is well positioned to take advantage of these shifts. Their heritage watch and jewellery brands have maintained their equity and remain aspirational. Valuation levels are attractive and the group has built up a buffer of cash to protect itself in a slowing environment. Domestically, our bank holdings in Standard Bank and Nedbank, continue to remain core, trading on reasonable multiples and good dividend yields. Both banks have decent earnings growth prospects, driven by benign credit losses, rising endowment margins and strong growth out of Africa. We have also introduced Old Mutual into the fund. The business has a solid South African franchise, including a 54% holding in Nedbank. They have also put the building blocks in place to create a wealth and asset management business in the UK that is well positioned to take advantage of growth in the UK savings market due to regulatory changes. Old Mutual trades on 9 times our assessment of normalised earnings, which we think is cheap. In this period of extreme volatility and significant macro changes we find it even more necessary to stick to our investment process. It focuses the mind on the key tenets of normalised earnings, a long-term time horizon and valuation levels. This will help us remain disciplined as we strive to continue to deliver superior long-term returns.

Portfolio managers
Neville Chester and Pallavi Ambekar

After a shaky start the JSE powered ahead to another strong quarter, delivering a return of 5.8% for the period. Despite having a couple of our big holdings come through for us, the fund still lagged slightly over the quarter as our resource position continued to underperform, resulting in a return of 4.7% for the fund. Our resource exposure currently sits at approximately 23% of the portfolio since we exclude Mondi from resources as it is predominantly a consumer packaging business. Roughly two thirds of this exposure is made up of diversified miners (being Anglo American, Glencore and Exxaro), with the balance being platinum exposure via Impala Platinum. Resource companies are currently very much out of favour with the market as the majority of commodity prices have fallen the last few years. Commodities are cyclical and this is something we have become accustomed to in South Africa. The prospects for short-term earnings remain poor, but importantly valuations are incredibly compelling. While interest by foreigners in many South African retail and industrial shares are at an all-time high, the opposite is true of the resource shares where there is no interest at all, resulting in an enormous divergence in valuations. Anglo American is now trading below the level, in British pounds, that it troughed during the global financial crisis.

Impala Platinum is currently trading at a level it last reached in 2003, despite having one of the best balance sheets among the major platinum miners, and the fact that PGM markets are in a mined supply deficit while legislated demand continues to grow to meet increasingly tougher environmental legislation. While there is currently much consternation about the collapse in iron ore prices, on a look-through basis only 2.5% of the portfolio's earnings derive from iron ore, with the majority coming from platinum, coal, copper and diamonds. The outlook for these commodities is significantly better than iron ore due to the better supply discipline and less reliance on Chinese demand.

The inflection point for an improving outlook for commodities is never easily forecast. We have experienced a similar environment on the other side of this trade in 2008 when we were very underweight resources and they relentlessly moved to higher and higher valuations. All we can do is remain true to our valuation-driven philosophy and ensure we are invested appropriately to deliver long-term returns. The biggest position in the fund, Mondi, has had a phenomenal quarter as its excellent management team delivered a sterling set of results in a tough environment. With the weakening of the euro, they stand to deliver significantly better results as their exports become more competitive and the competition from imported product lessens. Our long-held position in Standard Bank has also made a pleasant contribution as they finally put the losses from the London-based office behind them, and their multi-decade investment is starting to pay off. Given the lead they have here over competitors, they are likely to maintain a leadership position in rolling out banking services across sub-Saharan Africa. Markets remain volatile, and earnings visibility in the short term is very opaque; however, through sticking to our investment philosophy, we believe we will be able to continue to deliver on our long-term track record.

Portfolio managers
Neville Chester and Pallavi Ambekar

The South African equity market has once again had a robust year. Low global interest rates and South Africa's relatively stable political regime (in an emerging market context) has led to the fund's benchmark, the JSE All Share Top 40 Index, delivering a 9.2% return over the last year. Despite a strong recovery in the last quarter, the fund did not manage to beat the benchmark for the year and came in with a return of 6.8%. Our long-term track record, however, remains solid with the fund outperforming the benchmark over 3, 5 and 10 years.

Resources de-rated sharply in the second half of the year. Commodity prices came under considerable pressure due to the slowdown of economic growth in China, US dollar strength and continued supply increases in certain commodities. Shares in the sector now look very cheap on a relative basis, but there is much near-term uncertainty and the path to normality could be very rough. Given this scenario, our resource exposure in the fund is to stocks where we see attractive valuations and where the underlying commodity fundamentals look fairly balanced in the longer term.

Our preferred resource holdings continue to be Anglo American and Mondi - both shares we have discussed extensively in past commentaries. We have used share price weakness to add meaningfully to our existing position in Impala. To date, platinum prices have been weaker than expected as the metal that had been stockpiled by producers in anticipation of a strike is worked down. In addition, Impala has struggled to return to production following the end of the strike and the collapse of one of their mines in Zimbabwe has not helped. On a longer-term basis, we think that Impala's normal production levels will be significantly higher than current, as the three new shafts they are sinking come on stream. This should have consequent benefits on unit production costs and should lead to a normalization of current elevated capital expenditure levels. Impala trades on 6 times our assessment of normal earnings. We continue to have significant exposure in the fund to global diversified industrials such as Naspers, British American Tobacco and MTN. These shares have benefited from the rand weakness and have contributed positively to the fund's performance. We have taken some profits on these shares at higher levels, but they continue to be core holdings in the fund.

SA domestic businesses face a challenging outlook in the coming year, with low GDP growth, a muted consumer outlook and disruptions from load shedding. Our exposure here is limited to selected defensive shares (Tiger Brands) and some interest rate sensitive shares (Imperial and Foschini). Although the decline in the oil price will provide some relief to constrained consumers, we are not finding much value in retail shares in general. On the financials side, we expect the banks to show muted advances growth, but earnings growth will be cushioned by generous provisions that have been built up. Banks have re-rated strongly over the last year, but both our holdings in Nedbank and Standard Bank continue to trade on reasonable valuations and dividend yields. In a market where there is much uncertainty, we will have to act nimbly and use our long-term investment philosophy to guide us through choppy conditions. This approach has been, and should continue to be, successful in delivering long-term outperformance in the fund.

Portfolio managers
Neville Chester and Pallavi Ambekar Client