The fund has outperformed its benchmark by 1.3% p.a. over a rolling 5-year period (15.8% versus 14.5% p.a.) and by 2.3% p.a. (16.8% versus 14.5% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods. Chairman of the US Federal Reserve, Ben Bernanke, signalled to the market in May that it was contemplating an exit from its aggressive quantitative easing policy. Markets reacted violently to the news in what is now known as the 'taper tantrum'. US bond yields spiked dramatically and emerging market bonds followed. The US dollar strengthened, the gold price fell sharply and most emerging market currencies weakened. We highlighted in our previous commentary that authorities are unlikely to sit back and watch bond yields kick up too quickly and risk stifling growth. In September, the FOMC meeting announced a delay to tapering, citing low inflation and some doubt over the strength of the US economic recovery. Bond yields fell on the news and markets rallied strongly. There appears to be no end to market volatility and at the time of writing, the US government shutdown has entered its second week (with little sign of resolution between the Democrats and the Republicans over the budget). This means that fiscal policy will remain too restrictive given the sluggish growth of the economy. This, in turn, means that the full burden for stimulating the economy will rest squarely on monetary policy. Consequently, the unwind of quantitative easing is likely to be slower, and interest rates are likely to remain lower for longer. In such an environment, equities remain our preferred asset class for producing inflation-beating returns. We continue to favour global over domestic equities. The valuation of global equities remain attractive with some of the world's best companies trading on compelling PE multiples, with fortress balance sheets and all the while growing their earnings and dividends at a steady rate. Our domestic balanced funds remain at the maximum 25% offshore limit. Domestic equities, in general, remain fairly valued. We continue to favour the quality, global stocks that happen to be domiciled in South Africa, such as MTN, British American Tobacco, Naspers and SABMiller. Although these shares have performed extremely well relative to the broader market, they remain attractive based on our assessment of their intrinsic value and particularly attractive relative to pure domestic businesses. British American Tobacco and SABMiller are high quality global consumer staples. They have robust business models, are diversified across numerous geographies and currencies, and enjoy immense pricing power. They trade on similar ratings as their global peers and will comfortably grow earnings in real terms. We continue to have meaningful positions in both stocks. As valuation-driven investors, we are comfortable owning shares that trade on high near-term PE multiples provided that the PE multiple based on our assessment of normal earnings is attractive. This is the case for Naspers. The current and near-term earnings of Naspers are depressed by significant investment into the pay-TV business (as it grows its subscriber base) and Tencent (as it aggressively builds its ecommerce platform). Longer term, however, we believe that this investment will create significant value for patient shareholders. At quarter-end, approximately 70% of our equity portfolios were invested in rand-hedge counters. We have owned very few domestic businesses, especially consumerfacing, on the basis that valuations were not attractive. This view has been vindicated thus far, with retailers among the worst performers in 2013. We have used further weakness to increase our holdings in The Foschini Group and Clicks Group. While the earnings base for both businesses remains high, the ratings are attractive, providing an adequate margin of safety to build a position in these counters. The All Share Index returned 12.5% for the quarter. Industrials returned 11.3% and financials 6.9%. Resources were the best performer with a 19.7% return. Over the long-term, however, resources have underperformed the All Share Index over 3, 5 and 10 years. We maintain a healthy exposure to resources in our equity and balanced funds. Our preferred holdings remain the diversified miners (specifically Anglo American), Mondi Limited and Sasol. We continue to favour platinum over gold producers and our preference remains the low cost platinum producers, Impala Platinum and Northam. Banks returned 11.5% for the quarter, outperforming the broader financial index. Net interest margins should benefit once interest rates are eventually hiked. While this will be offset by rising credit loss ratios, banks have used the current environment to bolster general provisions, which should blunt some of the impact. Current earnings for the large commercial banks approximate our assessment of normal. Valuations are reasonable and we have maintained our weighting. Life insurers, on the other hand, currently trade on premiums to their embedded value and do not offer value. The bond market returned 1.9% for the quarter, outperforming the cash return of 1.3%. Inflation-linked bonds, once again, underperformed nominal bonds with a return of 1.2% for the quarter. The volatility caused by the on-off tapering rhetoric by the Fed provided some excellent trading opportunities - we bought and sold some long-dated government bonds very profitably during the quarter. We believe the real returns from cash and bonds are likely to be relatively poor over the long term, both from a local and global perspective. As a result, we hold zero exposure to domestic and global government bonds in our portfolios. Instead, we have held on to our significant holding in inflation-linked bonds and maintained good exposure to local corporate bonds. Listed property returned -1.3% for the quarter. The returns from this asset class over the last decade have been exceptional as yields declined in line with falling interest rates and property re-rated relative to nominal bonds. At current levels, we believe property yields are still too low and do not offer value. Volatility in financial markets is likely to be influenced by political brinkmanship, particularly out of the US. The absence of any immediate compromise between the Democrats and Republicans adds to investor uncertainty, as a failure to reach a separate agreement to raise the debt ceiling by 17 October will result in a US default. Financial markets have so far reacted relatively calmly to the impending debt deadline; however, a default could inflict significant damage on financial markets and the global economy. As long-term investors, we strive to 'cut out the noise' and capitalise on any mispriced opportunities that may present themselves.

The fund has outperformed its benchmark by 2.9% p.a. over a rolling 5-year period (13.4% versus 10.5% p.a.) and by 2.4% p.a. (16.5% versus 14.1% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods. We have highlighted in previous commentary that monetary policy in the world's major economies was very accommodative, with interest rates at multi-decade low levels. It was very much a consensus view that this would remain the case for the foreseeable future as authorities, through their actions to date, would not risk jeopardising the global economic recovery. This has fuelled the risk trade as 'free money' scoured the globe in search for yield. The result was significant capital inflows to emerging markets as foreigners bought our equities and bonds, causing prices to appreciate and our currency to strengthen. This has by and large been the case over the past four years since the global financial crisis. However, interest rates close to zero are not normal. Towards the end of May, financial markets were reminded of this reality when the chairman of the US Federal Reserve, Ben Bernanke, announced that risks to the global economy have decreased and policymakers will look to taper its bond purchases with the view of stopping completely in mid-2014. While this should be seen as a positive - the global economy is healing - it spooked markets. Financial markets started to anticipate the normalisation of interest rates, resulting in rising treasury yields around the world and capital fleeing risky assets for the traditional safe-haven status of developed markets. This is reflected in the performance of the MSCI World and Emerging Markets indices, which returned 0.8% and -8% respectively (all returns in US dollars). South Africa was not spared either, with the FTSE/JSE All Share Index declining 6.7% (in US dollars) and the currency depreciating by 6.5% during the quarter relative to the US dollar. While markets may have been caught off guard by Bernanke's comments, authorities are unlikely to sit back and watch bond yields kick up too quickly and risk stifling growth. As a result, expect the current accommodative monetary policy to remain as authorities are prepared to tolerate higher inflation in the future. In such an environment, equities remain our preferred asset class for producing inflation-beating returns. We continue to favour global over domestic equities. The valuation of global equities remain attractive with some of the world's best companies trading on compelling price earnings multiples, while growing their earnings and dividends at a steady rate. Our domestic balanced funds remain at the maximum 25% offshore limit. Domestic equities, in general, remain fairly valued, current fair value upside is the lowest it has been in six years. We have owned very few domestic, especially consumer-facing, businesses on the basis that valuations were not attractive. This view has been vindicated so far with retailers among the worst performers in 2013. Further weakness may provide an opportunity, but at quarter-end we owned virtually no retailers. Despite the rand weakening by 14.9% relative to the US dollar for the first six months of the year, we believe it remains vulnerable. This view is predicated on South Africa's deteriorating fundamentals - domestic companies becoming increasingly uncompetitive versus global peers as a result of significant cost pressures (labour, electricity, property rates and taxes), a current account deficit that has reached chronic levels and a highly inflexible, militant labour force. The rand remains the release valve for all these evils. We therefore, continue to favour the quality, global stocks that happen to be domiciled in South Africa, such as MTN, British American Tobacco, Naspers and SABMiller. While these shares have performed extremely well, they remain attractive based on our assessment of their intrinsic value and particularly attractive relative to pure domestic businesses. At quarter-end, approximately 74% of our equity portfolios were invested in rand-hedge counters. The All Share Index returned -0.2% for the quarter. Industrials were once again the best performer with a 6.9% return. Financials returned -1.6% and resources, again the laggard with a -11.8% return. We maintain a healthy exposure to resources in our equity and balanced funds and have used further weakness to add to this position. Our preferred holdings remain the diversified miners (specifically Anglo American), Sasol and Mondi Limited. We continue to favour platinum over gold producers. South Africa produces 70% of the world's platinum. In short, the world needs our platinum, thereby affording our platinum producers pricing power. This should allow them to protect their earnings as metal prices adjust higher to reflect the significant cost pressures facing deep level mining in South Africa today. The same cannot be said for gold producers - the world does not need our gold. Our preference remains the low cost platinum producers, Impala Platinum and Northam. Banks returned -6.2% for the quarter, underperforming the broader financial index. While the current low interest rate environment has impacted net interest margins adversely, this has been offset by improving credit loss ratios. Current earnings for the large commercial banks now approximate our assessment of normal. Valuations for the large commercial banks are reasonable and we have maintained our weighting. Life insurers, on the other hand, currently trade on premiums to their embedded value and do not offer value. The bond market had a poor quarter, returning -2.3%, underperforming the cash return of 1.3%. Disappointingly, inflation-linked bonds have underperformed nominal bonds with a return of -4.9% for the quarter. We believe the real returns from cash and bonds are likely to be relatively poor over the long term, both from a local and global perspective. As a result, we hold zero exposure to domestic and global government bonds in our portfolios. Instead, we have held on to our significant holding in inflation-linked bonds and maintained good exposure to local corporate bonds. Listed property returned -0.4% for the quarter. The returns from this asset class over the last decade have been phenomenal as yields declined in line with falling interest rates and property re-rated relative to nominal bonds. At current levels, we believe property yields are still too low and do not offer value. Despite the current volatility in financial markets, our investment views have not changed - we remain committed to our proven investment philosophy of investing for the long term. In fact, volatility is the friend of the patient investor and we are ready to capitalise on any mispriced opportunities that may present themselves.

Portfolio managers
Karl Leinberger and Quinton Ivan

The fund has outperformed its benchmark by 2.1% p.a. over a rolling 5-year period (12.5% versus 10.4% p.a.) and by 1% p.a. (15.8% versus 14.8% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods. Global equity markets rallied in the first quarter of 2013, with the MSCI World Index up 7.9% in US dollars. This is despite concerns over Europe's recession and sovereign debt crisis, fears of a pronounced economic slowdown in China, and political shenanigans over the US's fiscal position. It is clear in their actions to date, that governments are determined to avoid the globe slipping back into recession and will be extremely accommodative. This will take the form of low interest rates, growth-oriented monetary and fiscal policy and general back-stopping of any unforeseen threats to economic recovery that may occur. Given this backdrop, interest rates are likely to remain at multi-decade low levels as authorities are prepared to tolerate higher inflation. In such a world, equities remain our preferred asset class to protect the purchasing power of our clients against rising inflation. We continue to prefer global over domestic equities. The valuations of global equities remain attractive, with many quality multinational companies growing their earnings and dividends at a steady rate and maintaining very healthy balance sheets. Our domestic balanced funds remain at the maximum 25% offshore limit. Domestic equities, in general, remain fairly valued and we expect future returns to be more muted given the average industrial company's high earnings base. The expectation of prolonged low interest rates has resulted in significant flows into high-yielding emerging markets as investors shun risk in their desperate search for yield. South Africa is no exception, and together with a ballooning current account deficit is increasingly reliant on these capital inflows to balance the books. Notwithstanding the recent sell-off, the rand remains vulnerable to any reversal in foreign sentiment. We therefore continue to favour quality, global stocks that happen to be listed in South Africa such as MTN, British American Tobacco, SABMiller, Naspers, Capital Shopping Centres (now Intu Properties) and Capital & Counties. All are attractively valued relative to pure domestic businesses. As at quarter-end, approximately 73% of our equity portfolios were invested in rand hedge counters. The All Share Index returned 2.5% for the quarter. Industrials were the best performer with a 6.3% return. Financials returned 5.9% and resources lagged with a -6% return. Not only have resource stocks underperformed financials and industrials over 3, 5 and 10 years, they have also underperformed cash over these periods. We maintain a healthy exposure to resources in our equity and balanced funds, with selected resource shares trading at less than 10 times our assessment of normal earnings. Our preferred holdings remain the diversified miners (specifically Anglo American), Sasol and Mondi. We also continue to favour platinum over gold producers. Despite both facing significant cost pressures and increasing labour unrest, the pricing power enjoyed by South African platinum producers should protect earnings as metal prices adjust higher to incentivise new production. Our preference remains the low cost producers, Impala Platinum and Northam. Banks returned 1.8% for the quarter, underperforming other financials. While the current low interest rate environment has adversely impacted net interest margins, this has been offset by improving credit loss ratios. Current earnings for the large commercial banks now approximate our assessment of normal and we have used periods of share price strength to take profits. In previous commentary, we raised concerns over the high earnings base and ratings of consumer-facing businesses. Over the quarter, these concerns were somewhat vindicated as retailers were aggressively sold off, with the share price of the average retailer declining by close to 20% during the quarter. Despite this recent decline, we believe current share prices do not provide an adequate margin of safety and we continue to hold virtually no exposure to retailers. The bond market returned 1%, underperforming the cash return of 1.3% for the quarter. We believe the real returns from cash and bonds are likely to be relatively poor over the long term, both from a local and global perspective. As a result, we hold zero exposure to domestic and global government bonds in our portfolios. Instead, we have held on to our significant holding in inflationlinked bonds and maintained good exposure to local corporate bonds. Listed property returned 9.1% for the quarter. The returns from this asset class over the last decade have been phenomenal as yields declined in line with falling interest rates and property re-rated relative to nominal bonds. At current levels, we believe property yields are still too low and no longer offer value. Looking forward, the investment environment is likely to remain volatile and challenging. While there are some signs of an economic revival in the US, prospects remain dire elsewhere; manufacturing activity continues to fall in Europe and the unemployment rate remains high. In a world where excessively low interest rates encourage investors to forget risk and focus too much on return, we remain committed to our proven philosophy of investing for the long term.

Portfolio managers
Karl Leinberger and Quinton Ivan

The fund has outperformed its benchmark by 0.6% p.a. over a rolling 5-year period (10.8% versus 10.2% p.a.) and by 1.4% p.a. (16.1% versus 14.6% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods. The world today, just over four years since the global financial crisis, is characterised by low economic growth, low inflation, very high levels of government debt and very low interest rates. In short, the global economy remains in a precarious state. Yet, financial markets continue to trend higher with the S&P 500 Composite Index now only 6% off its pre-crisis peak. There remains a clear disconnect between financial markets and underlying economic reality. In a low interest rate environment, where money is essentially free, capital scours the globe in search of yield. This has resulted in significant capital flows into high yielding emerging markets, pushing up equity prices and compressing bond yields. South Africa has been no exception. At the time of writing, the FTSE/JSE All Share Index is at an all-time high. The last decade has really been a purple patch for local investors with very healthy returns earned across all asset classes. An investment in domestic equities and listed property would have increased by approximately 6 and 10 times respectively over the last decade. Local investors benefited from significant tailwinds over this period: a strengthening currency for most of the decade, strong economic growth, benign inflation, an explosion in corporate earnings and a re-rating of equities, bonds and property. Over the same period, global equities (as indicated by the MSCI World Index) returned 8.6% p.a. in rands - below the returns generated by local cash. Given this backdrop, we think returns over the next decade will be more muted. Many of the tailwinds that buoyed returns are unlikely to be repeated: local asset prices are high, corporate earnings are high, local fundamentals are deteriorating as evidenced by the size of the current account deficit and numerous service delivery protests and inflation risks are to the upside (administered prices and real wage increases). Domestic equities, in general, remain fully valued. Global equities on the other hand, are discounting some of the concerns around Europe, government indebtedness in the world's major economies, political brinkmanship in the US and an economic slowdown in China. Unlike the height of the dotcom bubble, ratings are attractive. Many multinational blue chip companies are trading on 13x PE multiples with strong balance sheets and attractive dividend yields of 2% - 3% (in hard currency). Our domestic balanced funds remain at the maximum 25% offshore limit. There is a consensus view that interest rates are likely to remain low for the foreseeable future. This is fuelling what we believe to be a bubble in nominal bonds. Foreign investors now hold meaningful amounts of emerging market government bonds - South Africa is no exception with nearly a third of its government bonds in foreign hands. A widening current account deficit (now around 6% of GDP) means that South Africa has become increasingly reliant on capital flows to balance the books. This makes the rand very vulnerable to any reversal in foreign sentiment. We therefore, continue to favour quality, global stocks that happen to be domiciled in South Africa such as MTN, British American Tobacco, SABMiller, Naspers as well as Capital Shopping Centres and Capital and Counties. They remain attractively valued relative to pure domestic businesses and have robust business models as a result of being diversified across numerous geographies and currencies. At year-end, approximately 75% of our equity portfolios was invested in rand hedge counters. The All Share Index returned 10.3% for the quarter. Industrials were the best performer with a 12.4% return, financials produced 9.9% and resources lagged at 7.3%. Resource stocks have now underperformed financials and industrials over 3, 5 and 10 years. We maintain a healthy exposure to resources in our equity and balanced funds with selected resource shares trading at less than 10 times our assessment of normal earnings. Our preferred holdings remain the diversified miners (specifically Anglo American), Sasol and Mondi Limited. We do not have any exposure to gold miners as we remain concerned by continued pressure arising from declining grades and rising costs (labour, electricity and water). South Africa produces a small portion of the world's gold and as such, our gold producers lack the pricing power required to pass on these cost pressures in the form of higher metal prices. This is contrary to the platinum producers. South Africa mines approximately 70% of the world's platinum, which will allow local platinum producers to recoup rising costs in the form of higher metal prices over time. Our preference remains the low cost producers, Impala and Northam. Banks returned 11.8% for the quarter, outperforming other financials. While we believe earnings for the large commercial banks are not high, we used the period of share price strength to take profits. We remain concerned over the earnings base for the average industrial company, especially consumer-facing businesses. Aggressive buying by foreigners has resulted in a significant re-rating of these businesses and current valuations now combine a high rating with a high earnings base. Consequently, we have virtually no exposure to retailers. The bond market returned 2.6%, outperforming cash which returned 1.3% for the quarter. We believe the real returns from cash and bonds are likely to be relatively poor over the long term, both from a local and global perspective. As a result, we have no exposure to domestic and global government bonds in our portfolios. Instead, we have held on to our significant holding in inflation-linked bonds and maintained good exposure to local corporate bonds. Listed property returned 2.8% for the quarter. At current levels, property yields are still too low and no longer offer value, especially in light of the once-in-a-lifetime bull market enjoyed by property over the last decade. The investment environment is likely to remain volatile and challenging for the foreseeable future, making stock-picking and alpha generation that much more important. In the short term, alpha is incontrovertibly random - patience, courage and a long time horizon are required to make rational, long-term decisions. A long time horizon is more relevant in today's volatile financial markets where asset prices are determined by the news of the day. In a world where time horizons are collapsing, we remain committed to our proven philosophy of investing for the long term.

Portfolio managers
Karl Leinberger and Quinton Ivan