The past quarter was generally a quieter period for financial markets. Global equity indices steadily ground higher over the period, with the MSCI All Country World Index (ACWI) generating a 5.2% return and finishing the period almost at an all-time high. This meant that the index's 12-month lagging return to end-September 2017 was an eye-watering 18.7%. The five, 10 and 15-year numbers are 10.2%, 3.9% and 9.1% (all annualised per annum) respectively. Global bonds had an uneventful quarter, returning 1.8% (of which a large proportion can be attributed to US dollar weakness as discussed in more detail below). Over the last year, global bonds yielded negative 1.3%, a reminder that a so-called low-risk asset class can still carry negative surprises if the starting price (in our opinion) is/was wrong. Even the five-year number for global bonds is negative 0.3% p.a. Global property returned 1.8% for the quarter, and a paltry 1.5% over the last twelve months. The asset class's five-year number of 8.2% p.a. is a lot more respectable than the return from bonds over the same period. While the gold price was down 2.8% over the last twelve months, it was up 3.1% over the quarter.
Events on the political front continued to occupy the minds and attention of investors over the last quarter, both on the US domestic front as well as between the US and North Korea where the spat is growing increasingly intense. While most market commentators continue to believe that common sense will prevail and a mutually acceptable solution will be found, the increasingly personal tone of the insults thrown between two volatile and unpredictable political leaders has started impacting financial markets towards the end of the quarter. The tropical storms and the resultant devastation on the East Coast of North America, while tragic and upsetting, have not had any major effects on markets, except predictably on the insurance sector. We have no exposure to this sector.

The US dollar continued to weaken against most major currencies, slipping 3.4% against the euro as an example. Emerging market currencies also strengthened significantly against the US dollar, with most now in positive territory (versus the dollar) over the last twelve months. While the dollar started showing signs of life against most currencies towards the end of the quarter, it is too early to signal a reversal of the bear trend.

Emerging markets continue to register superior returns relative to developed markets, outperforming by around 3% over the quarter and taking the outperformance since the beginning of 2017 to just over 10%. Over most longer time periods, developed markets have performed much better though. Europe marginally underperformed the US over the quarter, but the strong euro meant that in US dollar terms the region showed better numbers. Since the beginning of the year, Europe has now outperformed the US by almost 10% in US dollar terms (with most of the outperformance coming from a stronger currency), and has edged past the US over the last 12 months. Over the longer term, the US equity markets' outperformance is still material.

Amongst the various equity sectors the range of performances over the quarter was tight. Technology was the outperformer, with healthcare, consumer staples and consumer discretionary being the underperformers. Energy performed in the middle of the pack despite a 20% increase in the oil price over the period. Over the last 12 months, technology stocks were the best performers, with industrials and financials not far behind. The energy sector underperformed technology by almost 22%, with consumer staples also a noteworthy laggard by 25%.

The US listed property sector was dragged down by increasing investor concern around the prospects for retail mall and strip mall operators. Listed property returns in other regions of the world also found support in a weaker dollar.

The fund marginally underperformed its benchmark over the quarter, but is ahead year to date, over the 12 months and most longer time periods.

While our stock picking didn't result in positive alpha over the quarter, our credit positions performed well ahead of the overall bond market. Our property holdings lagged somewhat, but our gold positions contributed positively. Over the last 12 months, our equity selection was very good, offset by a low exposure to this wellperforming asset class. Property and credit selections both performed very well over the last year, offset to some extent by a disappointing outcome from our merger and arbitrage bucket (primarily the Rite Aid position). These trends are also true for the fiveyear attribution, although the property outperformance was only marginally positive.

The most notable contributor to equity performance over the past quarter was our position in Estácio, the second largest tertiary education operator in Brazil. After the proposed takeover by Kroton, the leading player in the space, was blocked by competition authorities, the stock sold off. During their more recent reporting period, the company produced very credible results, proving to the market that they would be able to effect much of the enhanced profitability measures that Kroton promised investors, even as a standalone company. The share price responded very positively, helped by some other positive news for the sector overall. We have reduced our position significantly, but remain positive about the longer-term prospects for the sector and for Estácio. Over the last 12 months all our holdings in the alternative asset managers also contributed meaningfully, led by the proposed delisting of Fortress. We have written extensively about the motivation for these holdings, and we continue to hold most of the positions, but in much smaller sizes.

The two equity positions that hurt performance the most over the three months were L Brands (which we featured in our March 2017 stock commentary) and Pershing Square Holdings, a portfolio of blue chip US companies trading at a significant discount and actively managed by Bill Ackman, a widely respected activist fund manager. We continued to add to both positions as we remain convinced of the long-term investment merits of both positions. Over the last year TripAdvisor was another disappointment, but in this case we sold out of our holding in light of another change in company strategy and continued (in our opinion) poor operational execution by management. Our holdings in the retail pharmacy networks in the US and the UK also disappointed. While we are closely monitoring Amazon's intentions and ambitions in this space, we remain holders of these stocks for now.

We entered the last quarter of the year maintaining relatively low exposure to equities, and with probably our lowest exposure to credit in the last five years. We have increased our property holdings slightly, both in the US and in Europe (after quarter end). We remain cautious on the outlook for global equities, and have continued to roll some of our equity hedges. We remain very negative on the outlook for global bonds as we are seeing more signs of inflation creeping back into the US economic system.

One of the new equity names introduced into the portfolio over the last three months warrant some additional commentary. The French media group Vivendi caught our eye when we started analysing its record label business called Universal Music Group (UMG). While the last two decades has been extremely tough for music owners as the methodology for selling music kept evolving in a digital age - consumption has continued to rise but monetisation has decreased substantially due to piracy, amongst other reasons - we have now seen a decided turn in fortunes for the industry over the last few years. Subscription services are growing handsomely in the developed world, and we believe in time this industry will relive its former glory days. UMG is the largest of three significant global players and owns the most comprehensive music catalogue, which we believe is underappreciated within the wider Vivendi group. The group holds other media and communication assets like pay- TV, telephony and more recently advertising agencies, and is controlled by a successful, if somewhat controversial, French industrialist family led by Vincent Bolloré. Although we would have preferred to own the music assets directly, we think the unique corporate structure and controversial family control is what has given us the opportunity to buy the position at what we believe is an attractive entry price. We will update clients on the future prospects of this investment.

Portfolio managers Louis Stassen and Neil Padoa

Please note that the commentary is for the US dollar retail class of the fund. The feeder fund is 100% invested in the underlying US dollar fund. However, given small valuation, trading and translation differences for the two funds, investors should expect differences in returns in the short term. Over the long term, we aim to achieve the same outcome in US dollar terms for both funds.

After an encouraging start to 2017, global financial markets continued their strong form into the second quarter of the year, buoyed by stronger than anticipated economic news out of Europe. Whilst economic data out of the US have generally been disappointing this year, corporate profits continued to surprise on the upside, providing further stimulus to the strong momentum these markets have enjoyed over the last few quarters. Commodity prices have retreated somewhat during the second quarter, led by the oil price that disappointed despite some decisive action by OPEC to constrain supply. The gold price has also been weak.
Global bond yields drifted down over the quarter, but rose quite sharply after the fairly hawkish statements by ECB president Mario Draghi towards the end of June. This resulted in bond markets yielding small positive numbers over the three months in local currencies, with some return pick-up due to US dollar weakness (see later sections in the commentary). Credit continued to perform well, with improving economic news around the world. Global property had a strong quarter in most regions, with Europe, Singapore, and Hong Kong leading the pack. The quarterly return of 3.0% was also positively impacted by the weak dollar. Japan produced poor returns, as did Australia as concerns over the impact of online retail hurt the listed mall owners.

From a political perspective the last three months brought more uncertainty, as president Trump continued to surprise both his supporters and his political adversaries with some of his erratic actions. Much-touted healthcare reform stalled due to a lack of support from within the Republican Party, prompting a reassessment of the likelihood that his promised tax reform will be implemented in 2017. The tepid outcome of the UK election contributed to intensified uncertainty regarding the Brexit negotiations. Despite this, the pound actually strengthened over the three months.

The US dollar continued to weaken against major other currencies as investors re-evaluated the prospects for the greenback. The euro was almost 7% stronger against the US dollar, and has now strengthened by just under 10% since the end of 2016. Emerging market currencies were however weaker, in line with weaker commodity prices, although some of their equity markets continued to perform well.

The MSCI ACWI index returned just over 4% over the quarter, bringing the year-to-date return to 11.5% and the 12 month lagging return to an impressive 18.8%. Emerging markets outperformed their developed peers over all of these time periods, with the 12-month emerging market performance being just over 5% higher than that of the ACWI. Europe outperformed the US during the quarter as the economic news out of the region surprised on the upside. The stronger euro also contributed to the outperformance. Over the last 12 months these markets have now produced very similar returns.

Towards the end of quarter, global equity markets witnessed some extreme sector rotation prompted by a sell-side broker report advising clients to take profits in the high flying technology sector. This correction gained momentum as an unprecedented large fine was levied on Google/Alphabet by the European Competition Commission. Over any longer time period, technology stocks have however outperformed all other sectors by a large margin. Energy, materials and telecommunication stocks were the laggards over the last three months. Over the last 12 months the energy and telecommunication sectors were significant underperformers, with consumer staples a surprisingly weak spot as well. We commented about this correction in a previous report. Besides technology, financial stocks did well over the last year, helped in the last quarter by a renewed focus on the benefits of deregulation in this sector in the US.

Your fund performed satisfactorily over the quarter, slightly underperforming the benchmark by 0.3% after all fees and costs. The 3- month number of 3.3% and the year-to-date return of 9.7% are strong absolute numbers. The 12-month lagging return of just over 17.8% is extremely gratifying, given the benchmark number of 10.0%. The fund has outperformed its benchmark over almost all periods by a significant margin after all costs and fees, highlighting the value proposition in this medium risk product.

Whilst asset allocation detracted over the period (fund was too defensively positioned in terms of equity exposure), this was made up for by good stock selection, especially within property and credit. Over the last 12 months very strong outperformance in terms of stock selection was achieved in equity, property and credit/fixed interest. Our gold holdings marginally detracted. This again highlights the benefit from investing in a multi-asset class fund, where the fund manager has more available tools to try and achieve a better outcome for investors. The since inception net return of 7.1% p.a. (over almost eight years) stacks up very well in a world full of uncertainty and negative surprises.

Within equities, the biggest contributors to fund performance over the quarter were the alternative asset managers, which continued to rerate as the prospects for enhanced short-term profitability improved with the strong equity markets. There was also some positive news regarding further fund raisings. This vindicated our long-held positive view on the sector, which even though it added volatility to the overall portfolio, more than compensated us in terms of superior performance. Other notable winners over the quarter included L Brands (featured in the previous quarterly report, but who issued a very disappointing trading update after quarter end), Yum China (a small position which we exited during the quarter), American Airlines and PayPal Holdings. The airline stocks also feature highly on the 12-month contribution list, as do JD.com and Charter Communications.

Detractors over the last months included Liberty Global (following immaterial restatement of financials due to fraudulent misrepresentation), Schaeffler (poor trading update), Urban Outfitters (very poor news flow from conventional retailers in the US), and Estacio (featured in a previous commentary; its proposed merger with Kroton was rejected by the Brazilian competition authorities). Over the last 12 months, our biggest mistake was holding TripAdvisor. Despite strong secular growth in the sector, poor operational execution led to very disappointing profit guidance. We have exited this position during the quarter as we lost faith in management’s ability to effectively compete with both established players like Priceline as well as new entrants in the sector like Trivago. Our exposure to retailers like Urban, L Brands and Walgreens/CVS Caremark also cost the fund relative performance over the last year.

We continue to be defensively positioned, as evidenced by our low equity exposure (relative to the 60% benchmark weighting). We believe that equity markets have started discounting a very benign outcome to the various political and economic challenges the world faces, and as such caution is warranted. We still hold some put options to protect the equity holdings to some extent, should there be a widespread sell-off. Over the quarter we increased the fund’s exposure to property, with US mall REITs introduced for the first time after they sold off in response to poor retailer trading numbers. We believe we have invested in the best quality portfolios, which should remain relevant in a digital world. Pro-active management teams will to continue to manage these dominant shopping centres to remain attractive to consumers and tenants alike. We have reduced exposure to credit by letting some positions mature. Given the increased uncertainty regarding the outcome of the Brexit negotiations, it came as no surprise that the UK property sector remained in the doldrums. We used this period of heightened uncertainty to add to our position in Intu Properties, making it a very material position in the fund. Intu owns a high quality portfolio of dominant retail centres in the UK, and whilst we cannot predict which way the negotiations will settle, we do think that over time this portfolio will retain its quality and relevance to the UK consumer, even in a world of increased online retail penetration. The share is trading at a significant discount to estimated net asset value, highlighting a stock that is discounting the worst possible outcome in our assessment. It also pays out a healthy dividend, with the share maintaining a dividend yield of 5.3%.

Portfolio managers
Louis Stassen and Neil Padoa as at 30 June 2017

All in all, the first quarter of 2017 was another good one for global asset performance. Although weakness in the US dollar somewhat flattered returns, almost every asset class delivered a positive return, with the exception of certain commodities. Gold reversed its position as the worst-performing asset class of the fourth quarter of 2016 to end at the top of the performance tables in the first quarter of 2017, rising 8.4%. This reflects heightened geopolitical concerns in various regions of the world, as well as slightly more scepticism over what US President Donald Trump can or may do over the next few years.
Global equities were amongst the global asset classes that did well, rising 6.9%, and thereby continuing its outperformance of bonds (as has been the case since the global low point in yields seen around the time of the Brexit vote). Within global equities, the best returns came from the technology sector, which rose 12%. Energy was the only sector that did not deliver positive performance, falling 5% on the back of lower oil prices.

In the bond and equity markets, returns appear to have largely followed a pattern commensurate with asset risk. Therefore, the lower the credit rating, the better the return. This was illustrated by the fact that despite the US Federal Reserve (Fed) hiking interest rates in March, emerging market debt (in local currency) performed very strongly, producing a total return of 6.4%. Additionally, returns were further boosted by the strength in emerging market currencies, with the Mexican peso, Russian rouble, and Korean won rising between 8% and 10% against the US dollar over the quarter. Interestingly, despite a more hawkish Fed, US Treasury yields moved lower over the quarter, albeit only marginally. In the currency market, the clear trend over the quarter was that investors' long-standing preference for the US dollar has declined, with the greenback underperforming every other major currency during the quarter. Global bonds returned 1.8% in US dollar terms over the quarter, but their 12-month lagging return remains negative 1.9% due to the significant correction following the outcome of the US election in the fourth quarter of 2016.

Global listed property recovered somewhat after the sell-off experienced following the US election, although the asset class lagged equities by a significant margin. For the quarter, listed property returned 2.3%, marginally ahead of bonds. The asset class also performed slightly better than bonds over the last 12-months (up 1.9%), but much worse than equities (up 15.0%). Over three and five years, however, the returns from property and equities are very similar.

The fund returned 6.2% over the three-month period, handsomely outperforming its benchmark return of 4.8%. As we have often argued before, this short-term performance is purely incidental, given the vagaries of financial markets over shorter periods of time. Our 12-month lagging return of 11.9% has been materially above the benchmark return of 8.0%. In fact, we are now ahead of the benchmark over all meaningful periods and the fund's annualised outperformance since inception stands at 0.3% p.a. This number puts the fund comfortably in the top quintile of global funds with a similar mandate.

A very satisfying feature of the past quarter's performance is that we have outperformed all the relevant benchmarks in the fund's respective asset class buckets. In hindsight, the fund's exposure to equities could have been higher, but within the asset class we comfortably outperformed the benchmark over both the quarter and the year. Our property holdings did well over the quarter, even though the 12-month numbers remain negative. Credit performed well over both the quarter and the year, and our gold holdings added significant alpha to the fund over the last quarter. Over the longer term, similar comments can be made about our stock/instrument selection within equity and credit, while the property holdings performed well relative to bonds. The only negative over the quarter came from a poor return in the merger arbitrage bucket, which was impacted by continued uncertainty around the Rite Aid deal. We are monitoring the developments closely, but remain convinced that the potential returns outweigh the risks, and have added to this position.

The highlight of our equity returns over the last quarter was Softbank's offer to acquire 100% of Fortress Investment Group (at the time a top five equity holding within the fund). The offer price represented a 60% premium to the undisturbed price, and while we think it still undervalues the stock by about between 20% and 30%, we recognised that the majority of the equity is held by management, who were supportive of the transaction and intended to stay on as part of the larger group. As such, even though we were a material minority shareholder, we could not influence the transaction outcome, and hence liquidated the position to invest the proceeds in other promising opportunities. We continue to believe that the alternative asset management sector offers interesting investment opportunities, and remain committed investors in stocks like Blackstone, Apollo, KKR and Carlyle.

Other notable contributors to the positive equity performance over the last year include Apollo, Estácio/Kroton (featured in previous commentaries), Amazon, and Charter Communications. We had two material detractors in Limited Brands and Tripadvisor. We will feature our investment thesis for Limited Brands at the end of this commentary. In the case of Tripadvisor, it was again a reminder about the importance of management and their ability to execute strategy that ultimately will be the largest determinant of success. At the time of investing in Tripadvisor, we also invested in Priceline, the online travel agency that owns powerful platforms like Booking.com. While TripAdvisor and Priceline operate in the same sector, and therefore benefit from the same strong secular drivers, Priceline's focus on driving simplicity and customer value has allowed them to significantly outperform TripAdvisor over the last few quarters, thereby creating exceptional value for shareholders. TripAdvisor, on the other hand, has been trying to migrate its business model to include other services and changed value propositions for its customers, in the process losing focus and making some operational mistakes. We are watching them carefully to see if they can ultimately monetise the strong brand and content that they are known for.

As equity markets continued to scale new heights, we have become more concerned about valuation levels. It is clear that markets have been giving Mr Trump the benefit of the doubt regarding his ability to reflate the economy and kick-start growth in the US, and ultimately across other regions of the world. We are more cautious and do not want to be paying for promises, especially coming from a volatile and inexperienced US administration. As such, we have bought more put options in the fund as protection against exogenous shocks. We have also reduced the equity exposure in the fund to around 57%, the lowest level since inception. The world remains an uncertain place, and while we embrace taking risk when we believe the odds are tilted in our favour, we have become a little more circumspect in this regard.

We have started adding some exposure to US property stocks for the first time in a while. These stocks sold off significantly following the correction in long bond rates, and most of the retail REITs were punished during this quarter as investor concerns focused on the potential 'death' of the US mall (which we discuss in more detail in the section on Limited Brands below). While we concur that the internet will continue to gain market share at the expense of bricks and mortar retailers, our view differs from that of the market - in our opinion, the listed portfolios of US retail REITs comprise top-quality malls which should remain relevant to their tenants even in a more challenged world.

Investment case for Limited Brands
Limited Brands is the owner of powerful brands like Victoria's Secret and Bath & Body Works. When we initially bought the stock, the investment thesis focused on a continued opportunity in the US for Bath & Body Works and, what we regarded as an outsized opportunity for Victoria's Secret in China. Since then, the competitive landscape (for Victoria's Secret) has intensified in the US, and coupled with continued pressure on footfall in conventional retail malls, investors have essentially given up on the company in terms of its ability to compete in its home market. While short-term profits have been rebased downwards, we continued to add to our position, such that Limited Brands is now a top five position in the fund. We regard the brands as very powerful and relevant for future consumers, and still believe in the longer-term opportunity in China. In the meantime, we are comfortable paying a 14 to 15 price earnings multiple for the reduced profit base with continued strong cash generation. We expect our patience to be handsomely rewarded at some point in the future.

Please note that the commentary is for the US dollar retail class of the fund. The feeder fund is 100% invested in the underlying US dollar fund. However, given small valuation, trading and translation differences for the two funds, investors should expect differences in returns in the short term. Over the long term, we aim to achieve the same outcome in US dollar terms for both funds.

The event that overshadowed financial markets this past quarter (and for that matter, the entire 2016) was the election of Donald Trump as the 45th President of the United States. For a second time during the 12-month period, opinion polls got the final result of a major election or referendum dead wrong. While commentators were united in expecting the worst for equity markets in the event of a shock result, the opposite happened. The market upheaval has been spectacular, and these newly established trends were continuing to play out at the time of writing.

Equity markets declined sharply for a short while on 9 November 2016 (the day after the US presidential election), but closed up 1.1% (S&P 500 Index) at the end of that day. Since the election date, the S&P 500 has now gained more than 6%. However, the most volatility has been experienced within sectors. Trump’s promises and threats regarding taxes and global trade reverberated across markets with spectacular results. Financial shares (more specifically banks) stood out and outperformed strongly (with the sector being up 21% for the quarter). This rally was fuelled by promises of higher economic growth, lower effective tax rates, and less regulation. Most cyclical shares rebounded, especially the ones that should benefit from the promised infrastructural investment programme and the ‘Made in the USA’ initiative. The energy sector benefited from both the anticipation that less regulation will facilitate volume growth and a renewed effort by the major oil producers to curtail production to prop up the oil price. The losers in this rotation exercise were healthcare (even though a Clinton election would arguably have been worse for the sector), consumer staples (also impacted by a sharp increase in long-term interest rates as discussed in more detail below), and information technology (although this sector should benefit from the proposed capital repatriation relaxation).

Some of these themes had a significant impact on other assets classes. The promise of stronger economic growth, lower tax rates (implying a higher budget deficit) and some hawkish comments in response to the actions of the US Federal Reserve led to a sharp adjustment in interest rate expectations. The US 10-year yield moved from 1.85% on election day to 2.05% two days later, and finished the year at 2.44% - a massive adjustment of 60 basis points in a very short space of time. Expectations for short rates also kicked up, albeit not as dramatically. The benchmark government bond index returned -7.1% for the quarter - one of its worst quarterly performances in the last decade or so. This benchmark return was impacted by the strength of the US dollar (discussed later in this paragraph). Over the last 12 months, the benchmark return was still positive 2.1%. As a result of these moves, the real estate sector sold off, becoming the second worst performing sector over the quarter after healthcare. For the threemonth period, our benchmark real estate index return was -5.4%, again impacted by US dollar strength. Over the last year this benchmark returned 5.0%. The US dollar strengthened from more than $1.10 to the euro to the current level of around $1.05. Perversely, emerging market currencies strengthened on the prospect of better global economic growth. The gold price fell from $1 275 to a low of $1 130 on rising inflationary expectations and the stronger US dollar, while the prices of most commodities (especially copper) rose.

All of this culminated in one of the most memorable quarters in financial markets in recent history. The global equity index (MSCI All Country World Index) returned 1.2% over the quarter and 7.9% for the last year. Within developed markets, the UK was a notable underperformer given the continued uncertainty prevailing after the Brexit vote. Over the course of 2016, US equities performed strongly, outperforming the global index by around 4%. While emerging equity markets underperformed during the final quarter of the year (as Chinese stocks declined on Trump’s anti-China rhetoric), they still outperformed the global index by 4.5% over the year. Brazil and Russia were the two stand-out performers over the 12-month period, supported by both currency strength and a strong equity rerating.

The fund performed well against this volatile backdrop. Its quarterly return of 0.2% outperformed the benchmark by a significant 2.4%. More importantly, the fund return of 8.7% exceeded the benchmark return by a very satisfying 3.0% for the 12-month period. We are very pleased with this outcome given the fund’s poor relative and absolute performance in 2015. Since inception more than six years ago, the fund has outperformed its benchmark by just more than 0.1% per annum.

The robust performance over the last year was partly due to very strong stock selection, where our equity carve-out outperformed the ACWI benchmark by a strong 6%. It was also due to a pleasing result from our merger arbitrage bucket, which returned 14.3% for the year. At year end, we still had a few positions open, but the opportunity set has shrunk somewhat. In addition, by being very hawkish on the outlook for developed market government bonds, and therefore hedging out the interest rate risk in our credit holdings, we have managed to avoid the bulk of the carnage in the bond market experienced over the quarter. As an illustration, our credit carve-out returned a very marginal negative 0.1% over the quarter, and a pleasing 7.7% for the year.

The negative contributors to performance include our property holdings (particularly over the last year), and our position in physical gold. We only initiated the gold position during 2016, which we considered as a form of protection or diversification. However, the poor performance in the price of gold was still disappointing. We also held a few protection strategies against our physical equity holdings which, given the Trump rally, have cost us some insurance premium. We will continue to add some protection to the portfolio to manage overall risk.

Within equities, most of our positions in the more cyclical shares and alternative asset managers made a positive contribution over the quarter. Notable contributors include KKR, Apollo, and Blackstone, as well as Tempur Sealy (featured in our September 2016 commentary), American Express, and the US airline positions. TripAdvisor continued to disappoint, after another poor set of results, while some of our technology positions such as Amazon and Facebook suffered from the vicious sector rotation. The fact that the fund still outperformed, despite being materially underweight US banks, shows that the bulk of the rest of the equity portfolio was very supportive.

The stocks that made the biggest contribution to the fund’s annual performance were Kroton/Estacio (Brazilian education stocks currently merging and explained in an earlier quarterly review), Apollo Global Management (alternative asset manager that has bounced back strongly after a prolonged period of poor share price performance), NetEase (Chinese gaming company subsequently sold after a very strong share price rerating), Charter Communications (still a big position within the portfolio) and Urban Outfitters (subsequently sold out and recently re-introduced into the portfolio). Losers over the period include TripAdvisor (mentioned before), JD.com (Chinese e-commerce operator still building scale), LPL Financial (financial advisory business sold after disappointing operational and strategic results), and Pershing Square (the renowned investor Bill Ackman’s listed vehicle which we discussed in previous review and still remains one of the fund’s biggest positions).

Investors that follow the portfolio closely, will notice that for the first time since inception, we have added meaningfully to the consumer staple sector. In recent years, consumer staple companies rerated and traded at a much higher premium to the market compared to the historical average. These companies were in demand not only for their defensive qualities amid a weaker world economy, but also as alternatives to government bonds (as they offered attractive dividend yields, low risk and the high probability of earnings growth). All of this changed as bond yields spiked after the Trump election result, and these shares were shunned (and heavily sold) in favour of more cyclical shares that would benefit from many of Trump’s proposed policies. We added roughly 8% of the equity portfolio to a basket of these shares. The biggest buys include British American Tobacco (1.7%), Anheuser-Busch Inbev (1.4%), Unilever (1.2%), and Heineken (1.2%). Seeing that we expect the long bond yield in the US to continue rising over the next few years, there might be more opportunities to buy some of these high-quality companies at attractive valuation levels, and we are standing ready to do so. However, we will always be conscious of valuation, seeking to pay a fair entry price as this will be the key determinant in whether a holding will add value to the overall portfolio performance.

Within property, we have reduced some of our positions, but also added to other holdings such as Cromwell (as the market sold off during the first six weeks of the quarter). We continue to monitor opportunities in the US, but have not acted on any as yet. In terms of credit, we are in the process of reducing the fund’s exposure as the Trump rally has positively impacted credit spreads. In turn, we have added to our gold position over the quarter into price weakness.

The global economy and markets enter 2017 on a considerably firmer footing than the prior year. However, markets have moved quickly to reprice assets that should benefit from this improved outlook, and as such we have become slightly more conservative in our equity portfolio positioning. Our equity exposure still sits just below 60% of the fund, and we have added to our put options (discussed above), as the cost of these protection strategies remain attractive in our opinion. Our property holding remains around 9% and credit has shrunk to about 10% of the fund. We continue to hold virtually no interest rate risk within the fund’s credit carve-out.