Performance
The fund returned -2.08% vs. the sector average, which returned 1.19%. The highlight of the quarter was the Rand strengthening by 7.4% versus the dollar. This actually made South Africa the best performing Emerging Market over the period. The best performing sector was local banks, given the fall in local bond yields.

The fund is overweight this sector and owns Capitec and FirstRand, which both performed well. The telecommunications sector was a poor performer, having declined 11%. MTN particularly, felt the impact of the Naira and the Nigerian fine. We are underweight this sector as we only have exposure to Telkom.

Domestic Equity
Clothing retailers have performed poorly this quarter. The new Credit Act has also hurt companies exposed to credit granting. Sector revenue growth has fallen to 8% and margins are also under pressure. Our exposure to this sector is via Woolworths. About 50% of Woolworths’ profits relate to their South African business. Its SA clothing business is doing better than both Truworths and Mr. Price.

Our main motivations for owning the company are its SA food business, which it is growing in excess of 10%; and the turnaround potential of David Jones in Australia. In addition, it has one of the lowest dividend covers in the retail sector at 1.5. This means that it is still managing to convert a lot of its earnings into cash and can still invest. Woolworths has a forward PE of 16 and a 12-month forward Dividend yield of 4%. A combination of the strong rand and weaker precious metals prices have put pressure on the mining sector, particularly on gold and platinum.

Prices have been further influenced by the Fed’s starting to raise rates. Our only exposure to the sector is Anglo Platinum. The diversified miners have done better, given higher iron ore and coal prices. The market’s valuation is split between very cheap domestic cyclicals and expensive offshore defensive counters. By way of illustration, 50 of the 170 shares on the JSE have a dividend yield above 5%; yet the Rand hedge defensives have a forward PE of 24. The fund is still looking for domestic counters that have decent dividend growth prospects, such as Capitec, AVI and Pick n Pay, which we already hold in the fund.

Global Equity
Our global equity component performed in-line with the benchmark, returning -1% in Rand (+6% in USD). The fund has 27% invested offshore. Given the strong Rand, this detracted from performance vs. the JSE SWIX. This year has seen both strong US markets and global Technology. The fund is well positioned in both areas. The strongest earnings growth remains in the US and we have seen a string of earnings upgrades.

Unemployment is low, house prices are moving in the right direction and credit extension is happening. This is a very different picture from Europe and Japan, where credit extension remains anaemic and structural problems such as demographics and the financial sector are yet to be resolved.

To provide investors consistent returns with capital growth in excess of the South African Inflation rate.

Macro
Apart from Major developed equity indices, which ended the quarter flat, all other asset classes had strong returns. South Africa was a beneficiary of these positive global trends with the Rand appreciating by 4.8% and the JSE Swix returned 5.9%. Locally, food inflation has risen to 8.8% as the combination of the drought and the weaker Rand over the last 12 months feed through. Although interest rates were hiked once again, perhaps we are nearer the end of the hiking cycle. South Africa remains one of the few markets with real rates.

Local Equities
The quarter has seen a large rebound in resources, as well as some of the domestic value cyclicals. The stocks that did poorly were the defensive Rand hedges. Of course, this is quite a big reversal of the last 18 months. We think it is still some time before we see a sustained positive market for commodities. Typically we need to see supply closures and / or coordinated global GDP growth. As food inflation has risen, this has helped Spar. We expect that as long as they can maintain market share and contain costs, their earnings growth should provide an inflation hedge.

Capitec produced good results, with a growing dividend and an ROE above 25%. It continues to gain market share from its competitors. Capitec is an example of a company that we like in this low growth, low yield environment. Namely - dividends in excess of 10%, growing market share and ROE in excess of 15%. Many domestic cyclicals' earnings and outlooks have become depressed, so we have added to our holdings in FirstRand. The fund still has a large exposure to Rand Hedges and this, while being beneficial in 2015, has not been helpful this quarter.

Global Equities
The global portfolio had a challenging quarter, lagging the World Index by 3% in US$ terms and Rand strength further detracted from investment returns. This was a reversal of the outperformance in the prior quarter and is attributable to having no Emerging Market exposure; and our investment strategy, which focuses more on high quality, stable growers. This approach tends to direct our portfolio toward healthcare , consumer and technology companies - which did relatively poorly - and away from defensives and cyclicals which did relatively well during the quarter.

At a stock-specific level, we saw a reversal, with some of our best performers of the prior quarter being our worst performers. Fuji Heavy Industries, the manufacturer and exporter of the Subaru automotive brand, fell 20% off the back of Yen strength. Top performers during the quarter were management and technology consulting business, Accenture, which raised guidance based on strong digital services demand; Samsung Electronics; and FedEx, after beating earnings expectations.

During the quarter, a new investment was made into Broadcom, a semiconductor business. There has been a significant drive by tech companies to take advantage of the opportunities afforded in Cloud-based technologies. This has seen strong capital spend on this technology, with Broadcom being one of the largest beneficiaries. The recent merger between Broadcom and Avago Technologies has created the 3rd largest pure-play semiconductor company in the world, giving it leading market positions across all of its core offerings. A combination of scale benefits and cost reductions should support high returns and growth for the foreseeable future. We continue to position the portfolio towards high quality businesses with good growth prospects.

Performance
Fund performance was down -4.4% over the quarter. The main contributor to underperformance was overweight Rand Hedges and underweight resources. The portfolio is still positioned the towards high quality businesses with good growth prospects.