The fund had a strong quarter, delivering a return of 5.7%. Its long-term track record remains compelling, with the fund performing well against both its peer group and the quantitative benchmarks over most meaningful periods.

Notwithstanding the latest turbulence in the White House; ongoing acrimonious Brexit negotiations; rising populism in a number of countries; and long range missile tests in North Korea, global equities delivered another strong performance over the quarter, with prospects for synchronised global economic growth more than offsetting these multitude of concerns. The MSCI All Country World Index returned 5.2% in US dollars for the quarter (18.7% over a rolling 12 months). Emerging markets continuing their strong rally, returning +8% for the quarter (+22.9% over a rolling 12 months), and outperforming developed markets which returned +5% for the quarter (+18.8% over a rolling 12 months). Our large weighting in global and, in particular, emerging market equities, significantly added to fund performance this quarter. Although we maintain a healthy weighting to global equities, we have used the continued strength to reduce our exposure. Furthermore, we still hold some put options to protect these equity holdings to some extent in the event of a widespread sell-off. We have used the proceeds from our reduction in global equities to gradually increase our domestic equity exposure on further weakness in the rand and local equity markets.

Locally, headlines continue to be dominated by the political backdrop which remains volatile. The political and policy uncertainty has wreaked havoc on business and consumer sentiment with South African business confidence slumping to a 32-year low. This has filtered through to a weak and deteriorating economic growth outlook. Disappointing fiscal revenues, together with further state-owned enterprise bailouts, are undermining fiscal consolidation and have increased the probability of additional credit rating downgrades. These factors, coupled with our view that global bond yields remain at unsustainably low levels, have informed our position of maintaining very low exposure to domestic fixed-rate bonds. This is partly offset by our overweight position in listed property - especially the A property shares, which we believe offer very attractive risk adjusted returns.

The rand proved remarkably resilient for most of the quarter but then weakened materially in September on deteriorating South Africa sentiment. The rand ended the quarter down 3.6% against the US dollar and almost 7% against the euro.

Overall, the JSE had a good quarter, with the All Share Capped Index returning +8.4% (9.4% over a rolling 12-month period). Returns for the quarter were driven by a strong performance from the resources sector (+17.8%) and outsized returns from some of the large industrial sector constituents such as Naspers (+15%) and Richemont (+15%) which masked the poor performance of many SA-focused domestic shares. The financial sector lagged the overall market returning 5.1% for the quarter with life insurers underperforming in this challenging operating environment.

We continue to maintain a reasonable exposure to resources in our equity and balanced funds based on our assessment of their long-term value. Our overweight positions in Anglo American (+41%), Exxaro (+35%), Glencore (27%) and Northam (+16%) have all contributed meaningfully to performance over the past quarter but we still see value in these stocks from current levels. As examples; Anglo American is trading on c9x and Exxaro c7x our assessment of normal earnings respectively. An interesting theme buoying commodity markets of late has been China’s increasing focus on air pollution. The Chinese government has clamped down and enforced production cuts in a number of commodities. These include coal, steel, iron ore and aluminium. This has had a series of knock-on effects as in some cases China has had to increase imports, thereby buoying prices. Oil prices also moved sharply higher during the quarter (+14.5% in US dollars) as OPEC producers adhered to planned supply cuts. However, gains in Sasol were muted due to the announcement around the unwinding of its BEE scheme and the potential dilution from the replacement scheme. We have used price weakness to increase our position. The company’s $11 billion Lake Charles Chemical project on the US Gulf Coast will be starting up in the next 18 months. As the capital spend on this project tapers off and the plant ramps up, Sasol will start to generate significant amounts of free cash flow. This will enable de-gearing of the balance sheet and support healthy earnings growth in the medium term.

Earnings disappointments, deteriorating investor sentiment and large share price declines have provided an opportunity to increase our stakes in some defensive, highquality, domestic businesses. We have bought broadly in names including Spar, Netcare and Curro. Funding for these positions has come predominantly from a reduction in the size of the Naspers position. This has certainly not been an easy call to make. The Naspers investment case remains compelling; Tencent is a phenomenal business and is at the core of a rapidly growing Chinese internet economy with numerous opportunities to further monetise its massive user base. As an example; we believe that Tencent’s move into payments and financial services creates a market opportunity several times the size of its current gaming business. Naspers currently trades at an almost 30% discount to its Tencent stake alone - in our view, a complete pricing anomaly. Furthermore, we have been very encouraged by the steps Naspers management have taken to streamline the rest of the Naspers portfolio. Although Naspers remains the largest single position in the fund, we felt that the absolute size of this position had grown too large for a clean-slate fund and had created stockspecific risk for investors in absolute terms.

The local equity portfolio remains skewed towards stocks with large offshore earnings exposure (Naspers, British American Tobacco, MTN, UK-listed property holdings and Steinhoff). We believe valuations for these businesses are extremely attractive. As an example:

· Steinhoff: After significant underperformance over the past 12 months, Steinhoff is now trading on a 10x 1-year forward PE multiple and c8.5x our assessment of normal earnings. We acknowledge the risks in the investment case (aggressive tax planning, high gearing levels, continuous M&A activity) but still believe the stock is breathtakingly cheap and we rate the management team highly.
· MTN is a business that has been undermanaged for a number of years and although there have been several positive developments in recent months, this has yet to reflect in market sentiment towards the stock and in its share price. The history of operational disappointments in Nigeria and South Africa, which have decimated the earnings base; the current negative investor sentiment towards volatile markets like Nigeria, Iran and Syria; and the regulatory headwinds across its various geographies have scared off many in the market. However, given this low base, coupled with the sweeping management changes that took place over the past 12 months, we are very excited about the opportunity for a significant turnaround. MTN is trading on 9.5x our assessment of normal earnings.
· UK property stocks: The share prices of these stocks have been hit hard by the uncertainties surrounding Brexit. It is difficult to know with certainty how these will play out, but Intu, Hammerson and CapCo currently trade at substantial discounts to their reported NAVs (43%, 31% and 23% respectively) and the former two produce forward dividend yields of 6.4% and 5.0%. While the disclosed NAV rests on a number of assumptions regarding future events and may fluctuate somewhat over time, the attractive dividend yields afford one the opportunity to wait for the impact of a more stable environment to manifest.

Domestic listed property delivered a strong performance for the quarter with a return of 5.7%. After holding up better than the other property sectors over the past few years, retail has also started to show signs of strain in this recessionary economy. Underlying retailer trading densities have slowed and as a result, renewals have come under pressure. Tenant retention ratios have also started easing. This will start filtering through to lower distribution growth. We continue to tread cautiously and prefer to stay invested in the higher-quality property names and A property shares, which we believe will produce better returns than bonds and cash over the long term.

In this uncertain world, our objective remains on building diversified portfolios that can absorb unanticipated shocks. We will remain focused on valuation and will seek to take advantage of attractive opportunities that the market may present and in so doing generate inflation-beating returns for our investors over the long term.

Portfolio managers
Karl Leinberger, Sarah-Jane Alexander and Adrian Zetler as at 30 September 2017

The fund has delivered a return of 12.3% p.a. over a rolling five-year period (in line with its benchmark), 10.4% p.a. over 10 years (outperforming its benchmark by 0.4% p.a.) and 15.1% p.a. since inception (outperforming its benchmark by 1.7% p.a.).

Global equity markets continued to climb a wall of worries in the second quarter, with the MSCI All Countries World Index returning 4.3% in US dollar (18.8% over a rolling 12 months). The fund has benefited from a contrarian overweight position in global equities. We acknowledge the very real risks inherent in our overweight position (amongst others: higher valuations than in the recent past, the likelihood of higher interest rates in the future and the worrying consequences of rising populism in many parts of the world). However, we remain steadfast in the view that global equity returns are likely to exceed those of other major asset classes. We believe that valuations are fair (outside of a few overvalued pockets) and believe that the global economy continues to heal (albeit slowly).

Emerging markets continued the strong rally that began in the first quarter of 2016. The MSCI Emerging Market Index returned 6.3% in US dollar over the quarter and 23.8% over a rolling 12 months. The fund benefited from a meaningful overweight position in emerging market equities. Although we believe that a desperate search for yield has driven bond yields in some emerging markets to undeserved levels, we do not believe this is the case for equities. Despite the challenges faced by many important countries such as Brazil, China and Russia, we continue to find exceptional businesses with good long-term prospects trading at undemanding ratings. In the past, investors had to pay high prices for good quality companies. Emerging market indices trade close to c.20% below their absolute peaks and offer a large margin of safety in our view. Two good examples would be JD.com and Sberbank. JD.com is a leading Chinese online retailer with very exciting long-term growth opportunities that trades on a very undemanding 5.5% free cash-flow yield. Sberbank is the leading bank in Russia. It has many enormous competitive advantages, such as its unrivalled access to cheap retail deposits and its impressive use of technology, which will give the bank a strong lead in the digital future that awaits all banks. Sberbank trades on an enticing 5.1 forward PE and a 5.4% forward dividend yield.

The JSE had another poor quarter, with the JSE All Share Capped index returning a negative 1.0% (1.4% over a rolling 12-month period). The local equity market has now delivered a paltry 3.6% p.a. return over the last three years. The local savings industry is not accustomed to so many years of anaemic, low-volatility returns. As a result, we believe that many investors are abandoning equities in favour of the yielding asset classes that have outperformed over this period. We believe this to be an error. We believe that fixed-rate bonds are overvalued, and that equities offer more value than at any other time in the last five years. Over the last two years we have been steadily increasing equity exposure from a low base. We consider our current equity exposure to be marginally overweight, the first time we have been overweight in many years.

The local economy remains mired in recessionary conditions. It is, in fact, deteriorating at an accelerating rate as business and consumer confidence has evaporated in response to a tough economy and very concerning political developments. The defining position in our local equity portfolio remains the high-quality global companies that happen to be listed on the JSE (Naspers, British American Tobacco, UK listed property holdings and Steinhoff). However, we have used the weakness in domestic stocks to start accumulating high-quality stocks that have started to discount the bad news. Examples include Spar and Pick n Pay. These businesses are battling in the tough trading environment. However, both are high-quality businesses that have multi-decade track records of performing well in tough economic times. High-quality businesses always fare better than poor-quality businesses in times of adversity.

The much-feared mining charter was gazetted in the past quarter. This is a draconian piece of regulation (it is technically not legislation because it was not passed by parliament), that would ultimately destroy the mining industry if sanity does not prevail. The local mining industry is on its knees and has shrunk meaningfully over the last decade. The decline over the last decade will be minor compared to the damage this charter would do to the industry, its employees and the surrounding communities. South Africa cannot afford such a damaging outcome. We hold some local mining stocks, although they are largely ones that have excellent empowerment credentials (Northam and Exxaro). No miner will be immune, but these companies will suffer less collateral damage than the rest of the industry.

A high exposure to UK property stocks remains a big differentiator in our fund. They delivered marginally positive returns in the quarter. We consider our three holdings (Intu, Hammerson and Capco) to be exciting opportunities for the patient investor. Our largest holding is Intu, which owns a portfolio of high-quality shopping centres. It currently trades on a 5.5% forward dividend yield and at a 34% discount to net asset value (NAV). The NAV represents the value that independent valuers believe the portfolio is worth in the current depressed retail environment (post a c.6% knock taken for transaction costs). At these yields, we are happy to earn a dividend yield of more than 5% and wait for the uncertainty surrounding Brexit to clear. Although we expect Brexit to be damaging to economic activity, we think that economic considerations will be increasingly prioritised as time passes and reality sinks in for the UK electorate. We therefore do not expect a hard Brexit, one that would permanently and meaningfully destroy the economic prospects of the UK.

Domestic listed property returned 0.9% for the quarter. In a weak economy, distributions have generally proved resilient, although isolated disappointments have started to come through. We expect the sector to show mid-single digit growth in distributions over the medium term. Reasonable distribution growth, combined with a fair initial yield, should result in an attractive holding period return. We continue to hold the A property shares and higher-quality property names, which we believe will produce better returns than bonds and cash over the long term.
We remain of the view that global bonds are in a bubble. Yields in most developed countries trade close to multi-century lows. Notwithstanding this demanding base, the World Government Bond Index has produced negative returns over one, three and five years. We have seen only the smallest of cracks in one of the great bubbles of our time. We remain of the view that the risks of further capital losses are high and therefore do not have any developed market government debt exposure in the fund. We also have very low fixed-rate bond exposure in South Africa. We believe that fiscal discipline is wavering at a time of steadily increasing government indebtedness. In addition, there are risks to the very strong monetary discipline we have seen in SA since the introduction of inflation targeting in 2000. Should these concerns prove correct, then the outcome will be painful for holders of fixed rate government debt. We believe that pricing is currently asymmetric, with limited return for the risks investors bear.

Markets remain as uncertain and challenging as ever. However, we are comforted by the fact that we find more value today than we have at any time over the last five years. Volatility is not to be feared. It typically presents great opportunity to the patient, long-term investor. We remain alert to opportunity. We also understand the risks that the current environment presents to the real value of our clients’ retirement capital. We believe that it is in these difficult times that we can add most value to our clients.

Portfolio manager
Karl Leinberger as at 30 June 2017

The fund has delivered a return of 12.4% p.a. over a rolling five-year period (in line with its benchmark), 10.6% p.a. over 10 years (outperforming its benchmark by 0.4% p.a.) and 15.3% p.a. since inception (outperforming its benchmark by 1.7% p.a.).
Global markets continued to climb a wall of worry in the first quarter of 2017, with the US equity markets leading the charge. The S&P 500 delivered a quarterly return of 6.1% (17.2% for the rolling 12 months), roughly in line with the MSCI All Country World Index return of 6.9% (15.0% for the rolling 12 months). The rand ended the quarter 2.1% stronger (up 9.3% over the rolling 12 months), reducing investors' returns in rands. Although the rand has weakened since quarter-end, we believe it is still pricing in a relatively optimistic political and economic outcome.

While we remain concerned about the risks that a Trump presidency poses to the global economy, we are comforted by the strong system of checks and balances that exist in the US democratic system (as recently demonstrated by the resistance to Trump's attempts to push through certain legislative changes). We remain overweight global equities in the fund. The global economy continues to heal, with all key metrics recovering strongly and interest rates finally on the path to normalisation. Global equity valuations are not cheap, but when assessing all the major asset classes, we remain of the view that global equities will deliver the best long-term risk-adjusted returns to investors.

Emerging markets sustained their rally into the new year, after a strong 2016. We remain strongly overweight emerging markets. Despite the challenges faced by countries such as Brazil, Turkey and Russia, we continue to find exceptional businesses with good long-term prospects trading at undemanding ratings. This is very different to history where one had to pay high prices for good quality companies. Emerging markets still trade close to 30% below their absolute peak and offer a large margin of safety in our view. A good example of the compelling value we are finding is Kroton, the leading private education company in Brazil. It is one of the best companies we know, with exceptional long-term growth prospects and an outstanding management team. Yet it trades on less than 11 times forward earnings.
The local economy weakened in the quarter with real retail sales dipping into negative territory for the first time since the global financial crisis. A fragile economy was further undermined by political events towards quarter-end. The firing of former finance minister, Pravin Gordhan, damages fiscal credibility. As the ANC leadership battle continues to play out in the lead up to their national conference in December, we expect significant volatility and uncertainty to prevail. The outcome of this conference will prove to be a defining one for all stakeholders.

We see value in SA equities, which have delivered close to zero return over the last three years. Our rand hedge holdings, in particular, offer compelling stock-specific fundamentals. These remain the cornerstone of our domestic equity position. An example of where we have increased exposure during the quarter is MTN. After many years of misguided investment in the business, we are very encouraged by the new management team's actions to date. We think there is enormous opportunity to rejuvenate the company, improving capital expenditure efficiency and driving margins across the group. The share has halved from its peak a few years ago and sentiment is currently very negative. Although the risks inherent in regions like Nigeria and Iran are high, we believe that the potential upside in the stock justifies our current weighting.

Prices in the resource sector spiked towards quarter-end due to the earnings protection they offer as a result of the weaker rand. Stock picks that performed well include Northam Platinum (up 27%), Exxaro (up 32%) and Glencore (up 13%). Although we have taken profits in some of our resource holdings, we retain a meaningful weighting in the sector. The platinum sector remains an interesting one. Although the equities have recovered strongly off their lows, they remain depressed. A stock like Impala trades 87% off its peak at the top of the commodity market in 2008. It trades at a 50% discount to its book value and only breaks even at current platinum group metals (PGM) prices. PGM markets are in deficit and mine supply is likely to continue to reflect the mining companies' underinvestment over the last 10 years. The industry cannot survive at current prices. We think there is significant optionality, should prices increase to a level sufficient to keep platinum miners in business. Northam is our key pick in the sector. It is a low-cost producer with less labour intensive operations than its peers. A strong balance sheet and significant optionality in its ore bodies supports its ability to grow relatively quickly, should the cycle turn.

Financials underperformed for the quarter as the market priced in the ramifications of rising capital costs and a more challenged domestic economy. Reliance on external funding and heavily geared balance sheets make banks extremely vulnerable to shocks of this nature. We have not yet considered taking advantage of the lower prices in the sector as we believe the risks are skewed to the downside, given the market's very benign reaction to recent developments. In terms of asset allocation, equities remain our preferred asset class. We have increased our weighting in domestic equities, although we retain our preference for global equities. We remain underweight in bonds, although this should be seen in the context of a high weighting to properties, both domestic and global (mainly UK property stocks).
UK property stocks were largely flat for the quarter. We consider this to be an exciting opportunity for the patient investor. Our largest holding is Intu, a portfolio of high-quality shopping centres. It currently trades on a 5% dividend yield and a 30% discount to net asset value (NAV). The NAV represents the value that independent valuers believe the portfolio to be worth in the current depressed retail environment (post a c.6% knock taken for transaction costs). At these yields we are happy to earn a 5% dividend yield and wait for the uncertainty surrounding Brexit to clear.

Domestic listed property returned 1% for the quarter. In a weak economy, distributions have proved resilient. We expect the sector to show mid-single digit growth in distributions over the medium term. Reasonable distribution growth, combined with a fair initial yield, should result in an attractive holding period return. We continue to hold the A property shares and higher-quality property names, which we believe will produce better returns than bonds and cash over the long term.

The world remains as uncertain as ever. Internationally, 2017 has thus far not delivered the kinds of surprises that we saw in the prior calendar year. With the upcoming elections in France, a volatile US government and rising US interest rates, we remain alert to opportunity. The South African political environment has been less benign. In aggregate, we think the portfolio is well positioned with offshore exposure close to maximum levels, low holdings in domestic government bonds and local equities tilted towards businesses with offshore earnings streams. We do not believe that the decline in domestic valuations compensate investors for the deterioration in the macroeconomic environment and enhanced risk. Our disciplined and long-term investment philosophy, and the advantage it typically provides in volatile periods, remains our anchor in these uncertain times.

The fund has delivered a return of 12.7% p.a. over a rolling five-year period (marginally underperforming its benchmark by 0.1% p.a.), 11.1% p.a. over 10 years (outperforming its benchmark by 0.3% p.a.) and 15.3% p.a. since inception (outperforming its benchmark by 1.7% p.a.).

2016 was a year full of surprises. Against the backdrop of Brexit and the election of Donald Trump as the next US president, not many would have anticipated the resilient performance delivered by global markets over the 12-month period. In US dollars, the MSCI All Country World Index returned 7.9% for the year, while the MSCI Emerging Market Index delivered 11.2%. For investors in rand-based funds, these strong returns in US dollars were dampened by the performance of the local currency, which strengthened by 12.6% against the US dollar over the period. It is principally this strength in the rand that resulted in the anaemic returns from local equities for the year. The FTSE/JSE All Share returned 15.9% for the year in US dollars, but only 2.6% in rands (this comparison is necessary in an equity market where more than 50% of that market has rand-hedge qualities).

The strong recovery in commodity prices in 2016 surprised all and sundry. This resulted in a very strong performance for resource shares, which returned 34.3% for the year, comfortably outperforming industrials and financials (that returned -6.6% and 5.4% respectively). Some of the notable moves (in US dollars) in commodity prices included zinc (+61%), oil (+52%), and palladium (+21%). The fund accumulated an overweight position in resource shares in 2014 and 2015 which detracted from performance over that period. However, much of this underperformance was recouped in 2016 with the surprising recovery in the sector vindicating our view that markets cannot be timed.

As expected, the US Federal Reserve continued the process of increasing interest rates off multi-century lows. Our base case remains that the pace of interest rate normalisation will be gradual and that interest rates will remain at historically low levels for longer. Despite the obvious political uncertainties inherent in a Trump presidency, markets have taken the view that accommodative monetary policies, fiscal stimulus (lower taxes and increased state spending on infrastructure), and a commitment from the US government to cut regulation and support business will be very positive for equities.

Locally, the political backdrop remains volatile; however, with the progress made since Nenegate, we have seen some improvement in investor sentiment. We expect the outcomes of the ANC elective conference in December will prove to be a defining moment in SA’s history. Despite the weak base set in 2016, the domestic economic growth outlook remains anaemic.

Notwithstanding the very strong performance of the resource sector in 2016, the longer-term underperformance relative to industrials and financials remains stark. Based on our assessment of fair value, resources are attractive enough to warrant a reasonable weighting in portfolios. We have however trimmed some positions into strength given the reduced margin of safety. Our preferred holdings remain Anglo American, Mondi, Exxaro and the lowcost platinum producers Northam and Impala Platinum. We continue to favour platinum over gold producers.

We believe the global businesses listed in SA are attractively valued and, as such, our portfolios have healthy weightings in stocks such as Naspers, Steinhoff International Holdings, British American Tobacco and Anheuser- Busch InBev. These businesses are exceptionally well managed and are diversified across numerous geographies and currencies, which make for a robust business model and protect the companies from an earnings shock in any single market. High weightings in these stocks reflect our view on underlying valuations and not a view on the currency. We do not currently have a strong view on the currency, believing it to be fairly priced.

We continue to hold reasonable positions in the food retailers and producers as well as selected consumer-facing businesses (Woolworths and Foschini). These businesses are exceptionally well managed and trade below our assessment of fair value.

Banks returned 11.0% for the quarter, outperforming the broader financial index. Valuations remain reasonable on both a price-to-earnings and priceto- book basis. These businesses are well capitalised, well provided for and trade on attractive dividend yields. Our preferred holdings are Standard Bank, Nedbank and FirstRand, and we have increased our exposure to the sector over the last six months. Life insurers returned -2.2% for the quarter. We prefer Old Mutual and MMI Holdings, both of which trade on attractive dividend yields and below our assessment of their intrinsic value.

In terms of asset allocation, equities remain our preferred asset class for producing inflation-beating returns. We prefer global to domestic equities on the basis of valuation and remain at the maximum 25% offshore limit. The strength of the local currency (as mentioned before) had a negative impact on the rand-returns from global assets in 2016 and is the primary reason behind the low return of the fund in rand terms over the 12-month period.

The bond market returned 15.5% for the year. These returns are flattered somewhat by the low base, with bonds performing very poorly in the month of December 2015 following the sell-off in the wake of Nenegate. We believe that yields on global bonds are too low and do not offer value. We do however believe that the yields on local bonds are attractive, especially given a more favourable outlook for inflation in SA over the medium term. The risk premium implied when comparing the yields of local bonds to other developed and emerging market bonds suggests that the market has largely priced in most of the political uncertainties in SA.

Listed domestic property returned 10.2% for the year. We expect domestic properties to show reasonable mid-single-digit growth in distributions over the medium term. Reasonable distribution growth, combined with a fair initial yield, should result in an attractive holding period return. Within our property holdings, we continue to hold the ''A'' shares and higher-quality names, which we believe will produce better returns than bonds and cash over the long term.

As we start a new year, we are bombarded with predictions from numerous financial experts about what lies ahead in 2017. History has taught us that our ability to forecast the immediate future is limited. We will remain focused on long-term valuations and seek to take advantage of whatever attractive opportunities the market presents us to generate long-term rewards for our investors. In an incredibly uncertain world, we continue to strive to build diversified portfolios that can absorb the many surprises that are likely to come our way in 2017.