Market review
In financial markets good news can sometimes become bad news. This proved true in the second quarter of 2013. The good news - better economic data - prompted the US Federal Reserve (Fed) to indicate that it may start to wind down its quantitative easing (QE) programme. The bad news was the reaction by markets. Fears that such a withdrawal would drain some of the liquidity currently supporting markets, led to a massive sell-off in the bond market. Fed Chairman Ben Bernanke's announcement that the central bank could begin to slow the pace of its asset purchases if unemployment drops as projected, led to a sharp upward move in bond yields. The period witnessed large outflows from fixed income funds. As panic spread, global equity markets were also impacted as anxious investors rushed to sell their holdings. This pushed down all markets, with emerging market equities particularly hard hit. The MSCI AC World NR Index returned -0.4% in dollars over the quarter. Emerging market equities underperformed developed market equities, with the MSCI Emerging Markets NR Index losing 8.1% over the quarter.

Portfolio review
The portfolio produced positive returns over the quarter, ahead of the MSCI AC World NR Index. Japan Tobacco experienced another good quarter in terms of performance. The company continued to gain market share in the local market, reaching 60.7% during May. We believe it remains attractively priced, with a free cash flow yield of 5.7%, despite its improving capital allocation and accelerating best-in-class earnings growth. Microsoft was a major driver of our positive performance during the period. The company announced the availability of Windows 8.1, highlighting the faster pace and cadence of innovation. The announcement of its partnership with Oracle Corp software to share intellectual property on its cloudbased platforms was also encouraging. It increases the overall value proposition of the Windows Azure platform, making it easier for many existing on-premise enterprise apps to move to Azure. Despite the strong performance this year, it still trades on a free cash flow yield of 12%. SK Telecom, South Korea's leading mobile operator, enjoyed a strong rerating over the past year, buoyed by impressive first quarter 2013 numbers. Two of the market's key concerns surrounding the company have been the regulatory environment and the group's investment in SK Hynix. For now, the industry appears to be enjoying a let-up in regulatory pressure, with less rate cut pressure and better management of subsidies. Meanwhile, SK Hynix has benefited from an upturn in the dynamic random-access memory (DRAM) cycle and the potential for a less competitive framework, thanks to industry consolidation. Medtronic also performed well during the quarter. Our belief that the slower growing parts of the group - Cardiac Rhythm Management and Spine - were on the verge of being superseded by more important, faster growing areas such as Cardiovascular was confirmed by the fourth quarter 2012 results, thanks to success in capturing market share. Management has high expectations going forward, driven by new product launches and emerging market growth. As with last quarter, gold shares continued to be a drag on performance. Already under significant pressure due to poor cost discipline and capital allocation by previous management, historically low valuations provided no support for the slump in the gold price. The second quarter of 2013 witnessed gold's worst quarterly performance since President Richard Nixon cut the link between the yellow metal and the dollar in the early 1970s. The falling gold price has magnified gold shares' leverage to the metal, both in terms of tighter margins and also through financial leverage owing to weakening balance sheets. The portfolio has exposure to high-quality, low risk investments (78%) and out-of-favour turnaround stocks (22%).

Portfolio positioning
Emerging markets suffered a volatile quarter, with all markets posting a loss over the period. Despite the short term pain, we believe the long-term growth story in these markets remains enticing. Indeed, the consumption per capita trends in emerging markets compared to that of Europe or the US, show ample scope to grow. Add to this a growing population and improving GDP per capita, and you have an enticing cocktail for rapid volume growth. Superior volume growth can also translate into superior revenue growth - brands with excellent market positions and pricing power can raise local currency prices to offset any currency-led depreciation against a basket of developed world economies.

Market review
Equity markets generally gained strongly over the first quarter, with the MSCI AC World NR Index adding 6.5% in US dollars. Developed markets equities, led by stellar returns in the US, outperformed. The MSCI Europe NR Index recorded gains of 2.7% and the MSCI Japan NR Index added 11.6%. Emerging markets were weaker, with the MSCI Emerging Markets NR Index losing 1.6% over the quarter. Returns, however, varied greatly across countries and regions.

Portfolio review
The Investec Global Equity Fund of Funds had a good quarter, producing returns ahead of its benchmark.

Portfolio positioning
Recent events in Cyprus have further illustrated how the economic environment has changed in recent times. The world seems to have transitioned from mild financial repression, where savers are not rewarded given the near zero interest rates, to a potential scenario where deposits are no longer guaranteed. This has huge implications psychologically for investor behaviour. In an environment largely devoid of meaningful merger and acquisition activity, H.J. Heinz was taken private recently with a price tag of $28 billion. This was the biggest deal for Warren Buffett since 2009 and the largest acquisition in the history of the food sector. On face value, at a free cash flow yield of 4.2% and trailing 12-month price earnings multiple of 20.2x, the deal might not look particularly attractive. So why would he purchase a business at a 19% premium to an all-time high share price? Buying a company that mainly sells ketchup is not a particular sign that he is bullish on the economy. With a beta of 0.59 to the US market, it is clear that consumers use similar amounts of ketchup, irrespective of economic conditions. It is also not just to be opportunistic by taking advantage of the availability of cheap credit, as Berkshire Hathaway (of which Buffett is chief executive) holds $186 billion of cash. Forgetting for the moment that the preference shares issued to Berkshire attract a 9% yield, and that G3 Capital have a history of cost cutting to add value, the cash flow dynamics are really interesting. It is not clear whether Warren Buffett thinks the economy is at an inflection point or that H.J. Heinz is a particular bargain or even that he is taking advantage of the credit markets. Rather than considering just the intrinsic value of the assets, he assessed the earnings power of this strong franchise that had only six chief executives and five chairmen during their 144 year history, with dominating market positions in the majority of their products. Within an environment where cash might no longer be deemed safe, what alternatives do investors have? In a world where quality is just as important as safety and safety just as important as price, it is very important to consider strong durable franchises at attractive valuations. Quality should be defined, in our opinion, by businesses whose competitive advantage or franchise is dominated by intangible assets that will lead to high sustainable returns on capital and strong free cash flow. We have found that a strong franchise is a product or service that is able to resist the incursion of competition and consistently meets the needs of customers. Safety should be defined by strong balance sheets. The credit markets already recognise the fact that the typical global franchise business is safer than most governments, yet the high quality global franchise companies trade on a yield advantage to most governments. While we did not own Heinz, we hold a collection of great businesses that have similar or better qualities and have a superior margin of safety, positioning these assets for respectable performance, even without leverage. Within the portfolio, 77% is invested in high quality, low-risk investments and 23% in out-of-favour turnaround stocks. Within the high quality portfolio, we are pleased that our low-risk strategy saw performance for the quarter ahead of the market, with lower volatility. Japanese stocks had another good quarter helped by the Bank of Japan. The new-found love of money printing has been well received by the two local real estate plays, Nomura Real Estate Office (REO) Fund and Sapporo Holdings. Nomura REO's implied cap rate to Japanese government bond yield spread remains just above its ten-year average, but already the same cannot be said for a number of its peers.

Market review
Risk assets seemed to shrug off continued concerns about the fragile global economy, with equity markets posting strong returns over the last quarter of 2012. Very low global interest rates coupled with unconventional policy support provided an attractive backdrop for risk-taking. The MSCI World Index added 2.6% in US dollars over the quarter, with Germany (+8.1%), France (+11.6%) and the emerging market composite (+5.6%) showing particularly strong gains.

Portfolio review
The past year delivered a return above our expectations, partly as the equity markets have surprised on the upside and many of the extreme tail risk events did not materialise. The return was also partly due to solid organic operational performances from the companies in the portfolio. Risk is usually ignored in buoyant markets and, after 4 years of upwardly trending markets, we could possibly be entering such a phase again. In insurance parlance, just because a motor vehicle owner and driver may have had an accident-free year, does not imply that the probability of a claim did not exist. The portfolio underperformed its benchmark over the quarter.

Portfolio positioning
Of the core portfolio, 75% is invested in high quality, low risk investments and 25% in out-of-favour turnaround stocks. Multinational beverage and brewing company, AB Inbev, delivered strong returns and contributed positively to the portfolio's performance throughout the year. Conversely, tobacco shares, apart from Japan Tobacco, delivered a pedestrian performance. However, this is not out of line with absolute returns from previous years, and is well in line with the operating fundamentals of the businesses. We are most disappointed with the share price performance of American software corporation, Microsoft. We expected that the company's new operating software for mobile devices would revitalise the consumer business and allow the market to put a rating on this part of the company which, in our view, is non-existent at present. We will be revisiting the investment case as new data becomes available, and as other opportunities arise. Samsung Electronics has been a stellar performer for us. The increased penetration of the smartphone market, attractive price points of handsets, and opportunities to improve margins, as well as continued low equity valuation, we believe, point to continued positive performance. We made a key investment in Coach, a luxury goods retailer providing consumers with lifestyle accessories. The company has a clear dominance in the US and a fast growing presence in Asia. We believe that the market has given up on the growth prospects for the company, as consumer spending in the US is maturing. The business has always been able to deliver, and despite this being a higher investment year, we do not believe that operating performance will stagnate. Regionally, in the key opportunistic investments, Japan was a leader rather than a laggard. While this part of the strategy's performance clearly benefited from an overweight allocation to the country, it was unfortunately negated by stock selection, in particular mobile operator and mobility solutions provider, NTT Docomo. The fourth quarter of 2012 - and the year as a whole - was not the time for being light financials. The sector made strong gains over the year, but over 5 years, the sector's performance remains at the bottom of the pile. In addition to being underweight rising financials and holding the wrong stock in Japan, the other area detracting in 2012 was the strategy's exposure to precious metals miners. With the caveat that the spot price of gold has more than doubled from its low in late 2008, which was when we did most of our gold company purchasing, the gold miners look fundamentally more attractive now than they did then. Price to net asset value ratios for the senior and intermediate gold producers are at multi-year lows. Despite what appears to be a significant margin of safety, there is still the issue of where the gold price itself may be heading in the future. We see gold as a play on macroeconomic instability in general, and investors' faith in paper currencies, in particular. We are confident that there are sufficiently diverse drivers of returns in this portfolio, and the relative strength of the rand in December has afforded a rand-based investor an attractive entry point into this portfolio.