One month is an irrelevant time period over which to provide meaningful interpretation of market price movements controlled by the collective actions of many millions of market participants. Market price changes are something over which we have no control andconsequently, lose no sleep over. We can only describe the thinking behind some of the actions we’ve taken on behalf of our clients and our own savings.

It is worth keeping in mind that even though this is a monthly commentary we will always endeavour to extend the duration of your thinking with regards to market observations.
For the month of September we really don’t have much to comment on with regards to the fund composition. Significant activityonthe selling side since July has abated as we finished repositioning the fund for the latest price-to-value relationships prevailing.Ultimately, it resulted in the fund carrying around a 52% exposure to domestic equity, with a further 20% invested in the RE.CM Global Fund that itself is currently about 35% in cash. On an add-up basis, the equity exposure is, therefore, approximately 65% with the balancein cash and related yield instruments. Interestingly, a steep yield curve in the short duration debt markets (up to a year) in South Africa prior to the latest two MPC meetings, allowed us to term out 5% of the fund in one-year NCDs with a yield to maturity of 8.4%, a 160 basis points spread over the current call rate. Evidenced by the Reserve Bank’s track record since 1994 of maintaining rates for some time when at low inflection points, the political unpopularity of an early increase in rates and the strong domestic currency, it appears unlikely to result in a rapidly increasing rate cycle over this timeframe.

As significant investors in our own unit trust funds applying the same philosophy and process we are fairly comfortable at present. Both the domestic and global equity segments are still at a reasonable margin of safety to fair business value. Please note our usingthe word ‘reasonable’, not ‘exciting’. Our funds currently have a sizeable cash component, which we can deploy if and when the market offers any sensible opportunities.

We couldn’t help but notice the above-average levels of optimism expressed by various market and business commentators of late, but also of share price movements, most of whom did not make much sense to us as valuation-based investors. We understand why it happens, but we simply fail to see the wisdom of buying overvalued merchandise in the hope of its prices going higher, thereby offloading to a greater fool. Of course it can and does happen, but there is simply no guarantee that a greater fool will be around to bail one out.

As you know, we are very aware of the level of churn in our funds. In the third party investment business there is perhaps nogreater misunderstanding than the confusion between a fund’s TER (total expense ratio) and the actual total costs of the management actions of portfolio managers. This revolves largely around portfolio activity, or churn. Transacting retail sized amounts of money carriesvery little market impact, and the total cost is very close to the amount of brokerage paid. However, transacting institutionally sized amounts of money is a different matter altogether, where there can be very significant hidden costs, basically broken down into two components -market impact; and opportunity cost. There is a third one, capital gains tax at fund level, that is not (yet) an issue in theSouth African money management industry, but is common practice in developed markets.
For our clients, shining the spotlight on these hidden costs will not change the way we go about managing money, as our levels of fund activity is extremely low already, despite it being far above our seven-year average over the past 18 months.

Very rarely in the history of finance, when secondary markets behave in an excessively volatile fashion in both directions compared to the norm, valuation-based investors can take advantage of significant dislocations by effecting transactions above their normal activity levels. The past 18 months have been one of these occasions and we certainly anticipate fund activity levels to return to ournormal low levels.

One month is an irrelevant time period over which to provide meaningful interpretation of market price movements controlled by the collective actions of many millions of market participants. Market price changes are something over which we have no control andconsequently, lose no sleep over. We can only describe the thinking behind some of the actions we've taken on behalf of our clients and with our own savings.

In our monthly commentary, we will always endeavour to extend the duration of your thinking with regards to market observations.

With very strong positive price movements in several portfolio counters in both domestic and global equities since March 2009, our portfolio managers have, perhaps not surprisingly, been taking some money off the table on selected holdings where the price to value relationships have closed considerably. For example, the share price of one of our top domestic holdings, Standard Bank, is up from R60 to R90 over this timeframe, fully 50%. In our global fund, the price of one of our larger equity holdings, New York listed Legg Mason(a fund management business) went from US$11 to US$25.

This would be quite remarkable if not for the fact that our assessment of history suggests that it happens regularly (to be fairevery five to seven years or so one appears to get a decent buying opportunity in the equity of good businesses), despite the mumblings of the Nobel-prize winning theorists that hypothesized the ridiculous notion of efficient markets between largely uninformed counterparties.

It is of course highly unlikely that our assessment of the real world business values of Standard Bank and Legg Mason has gone up by 50% and 150% in a matter of four months, with the result that in Standard Bank's case the shares that we have been happily buying recently at R60 at around 65 cents in the rand is suddenly trading fairly close to our estimate of intrinsic value.

Despite a frame-worthy list of seemingly excellent macro-economic reasons why not to own equities in the first three months of 2009, we continued to inform our investment actions by the price to value opportunities on offer and as a result, our bottom-up stock selection process resulted in the fund carrying a reasonable exposure to equity.

But just as our analysts were getting more excited about the lengthy list of attractive opportunities, the market defied consensus opinion and started climbing the proverbial wall of worry. What an apt description. Now that the really easy money has already been made, the theorists are claiming a 'green shoots' new dawn, but fail to recognise that the current equity rally has largely been led bythe previous market leaders, the equity of cyclical and relatively poor quality businesses.

In any event, regardless of our (probably wrong) musings on these 'bigger picture' matters, the investment actions we take are always driven by three key questions that we demand answers to before committing fund capital to any asset:

a) Do we understand it well enough to value it with a high level of confidence?
b) Is it a good, average or poor quality business?
c) Does the current share price offer an acceptable margin of safety?

The current situation is that the fund owns a selection of predominantly high quality businesses around the world that we understand well enough to value with a high level of confidence and that is priced at around 70 cents in the rand and dollar.

We believe that remains a good value for money proposition.

One month is an irrelevant time period over which to provide meaningful interpretation of market price movements controlled by the collective actions of many millions of market participants. What makes it even worse is that the majority of these participants handle other people's money. Market price changes are something over which we have no control and consequently lose no sleep over. We can only describe the thinking behind some of the actions we've taken on your behalf (and with our own savings).

We continued being net buyers of domestic and global equities in particularly the first half of March, buying more of the merchandise we like the most that is being offered on sale, with some of it on fairly distressed terms from our perspective. Three examples bear expanding on in the context of our longer term perspective.

It is worth keeping in mind that even though this is a (thankfully short!) monthly commentary we will always endeavour to extend the duration of your thinking with regards to market observations.

One of the largest purchases by value in the fund during March was the shares of Metropolitan, coincidentally, also currently the largest domestic equity holding. Despite Metropolitan knocking the stuffing out of Anglo American and most other listed companies since 2003 in terms of total returns (including dividends) to shareholders, including our clients, most people still think of it as a dull, boring company not worth doing much research on. We love that. It is offering excellent value at these price levels.

One of the largest sales by value in the fund during March was the shares of Standard Bank. The market can engineer some truly spectacular price changes over short periods. So when we opened the newspaper on Monday morning the 2nd of March and saw Standard Bank shares offered at R60 we made sure that all our clients had as much as they needed, as we believe at that price it offers a significant margin of safety. When we checked in again 18 trading days later, on Thursday March 26th there were buyers at R85. Now a 42% move in the price of a large business over 18 days is extraordinary, while a 42% move in the value of a large business over the same timeframe would be pretty much beyond what we can imagine. It should not be surprising that we've taken some money off the table.

From May 2008 through to August 2008, we sold a fairly significant chunk of the holdings in Omnia above R80 per share. We reduced this position to help make space for other cheaper ideas in the fund. It was still cheap enough to hang on to the balance, which we did. Since then, the company has released an excellent set of interim results, for the second time in five years, producing more profit in the first 6 months of the financial year than in the previous full financial year. More recently it also updated shareholders on profitability trends in the second half of the year and again, the news was very good. By all accounts this will be a record year for the business, amid significant volatility in operating conditions. Despite this, our assessment of its value has not changed, but the price certainly has, it hit a low of R40 in early March. It is so hard to understand this that we don't even try. We just say thank you and this is why Omnia is also one of the top purchases in the fund in March.

One month is an irrelevant time period over which to provide meaningful interpretation to market price movements which is controlled by the collective actions of many millions of market participants. Come to think of it, what makes it even worse is that the majority of these participants handle OPM - other people's money. Market prices are something over which we have no control and consequently, lose no sleep over. We can only describe the thinking behind some of the actions we have taken on your behalf (and with our own savings).

After several months of selective net purchasing, December 2008 turned out to be a month of net sales for the fund. As the 'quiet time' over the holidays is typically a time for reflection, we reflect on the fact that the prices of several of our holdings have exhibited strong positive movements since June 2008. Perhaps not surprisingly, our portfolio managers have used this absolute and relative strength to take some money off the table.

There were no sales where we exited our entire invested position. Our largest sales-by-value were all of holdings where we remain significantly invested, such as Pick n Pay (up 39% since June), Woolworths (up 27% since June), Tiger Brands (up 27% since June) and JD Group (up 44% since June). In all these cases we still see good value, but obviously not as compelling as before.

Our assessment of the underlying intrinsic value ranges of these businesses have not changed, and in fact, does not change much on an annual basis. This resolute focus on 'real world business values' as opposed to stock market participant short run voting - share prices - remains a key aspect of both our investment philosophy and process and, we believe, a key differentiator in managing our co-investors and our own life savings.

Another key differentiator is in the way we define risk. To us, risk is losing money, period, not underperforming relative to an index or relative to our peers. We believe this particular aspect of our investment philosophy is perfectly aligned with what most individual investors ultimately demand of their managers, particularly the investor that is saving with an aim to generate long-term returns in excess of inflation.

Living by this definition of risk proved itself over 200 years to be highly rewarding to long term investors, but not necessarily to investment managers as businesses. There can be times (and definitely will be again!) like the first six months of 2008 where our short run relative pricing outcomes appear downright shocking as we position the fund to preserve capital. This is a tough time for such an investment management business as clients understandably become edgy. The ability to withstand these pressures and remain true to our investment philosophy and process is another key differentiator for Regarding Capital Management, but more importantly to our clients as well.