A regular question at the moment revolves around the potential impact of the brewing debt and currency crisis in Europe. I will attempt to answer this by applying RE:CM's way of viewing the world.

So, let's start by posing a question: What are the observable facts?

1. Credit spreads on government and corporate debt in various countries in Europe have spiked significantly this year. More specifically, EU member Greece is, for all intents and purposes, in default on their debt repayments.
2. Market price volatility has increased rapidly (please note that the values of most businesses have not changed at all).
3. The rand has sold off fairly significantly against most cross currencies.

Now, what opinions have been drawn and cast based on these facts? Some suggest this spells the end of the European Union common currency, the euro; and some suggest that economically weaker countries like Greece could be disbanded from the European Union altogether; others suggest this could lead to another global banking crisis.

In navigating through all this information we concern ourselves with two basic questions:
1. Within our existing circle of competence (defined as businesses that we understand well enough to have confidently valued), are there any investment opportunities where the price has dropped enough below fair value to warrant an allocation of our clients' capital?
2. Outside of our existing circle of competence, are there any situations that we should be looking into which may lead us to doing the homework in order for us to consider expanding our circle?

Macro-economic considerations can be fun to think about and can make one seem very intelligent when talking about them in highfalutin language. However, our experience over 20 years has been that dwelling (in this instance dwelling can be defined as more than 1% of our available time to think) on the subject distracts us from generating investment returns for our clients. As a general business principle, and more specifically within our investment process, we do our absolute best to make our decisions based on observable facts. We prefer not to make decisions when we don't have the facts. We know that this approach contributes to very useful outcomes, for example if one of our investee companies suddenly announces what appears to be significant news and the share price changes dramatically. In this situation there are two options:
1. panic in some or other way; or
2. spend the time to gather the facts and then to make a decision based on an unemotional evaluation thereof.

In conclusion, we have been able to use the recent price volatility in the markets to somewhat increase the equity component of the RE:CM Global Fund from 74% in July to the current 80%. In addition, our analysts have identified a long list of new ideas worth pursuing. Hopefully a few of these, which exceed our hurdles, can compete successfully for your savings.

Notable transactions during September in domestic accounts were that fund management continued to allocate fund capital to Amplats and Sun International, while further reducing exposure to Tiger Brands.

Broadly speaking, it appears that our conservative stance and our preference for assets based outside of South African borders are being vindicated by market developments over the last six months. Our equity and asset selection added significant excess returns for clients who rely on outcomes relative to market indices. Against the backdrop of significant negative market price changes, these are credible outcomes that support our strongly held conviction that losing the least on the down-swing allows us to meet our clients' expectations over the long run..

This month we reflect on the way that a roulette table operator calls ‘no more bets’ when it looks likely the rotating ball slowed enough to drop down into the wheel. We think similarly about investing using the stock market – you have an opportunity to allocate your portfolio capital, but there comes a point where an investor (should) call time on themselves. After that, you trust your research and process, and let that most precious of commodities, time, run its course.

The problem with the stock market is two-fold:
Firstly, many market participants don’t seem to realise that the frantic daily trading (ie the ball rotating) is not implying you have to place a bet; and secondly, no one ever calls time!
We add to this by reporting that we did not do any transactions in the RE:CM Global Fund this month to date. We checked again and our dealer informs us stock markets were open for (brisk) business. Our brokers might not be so happy about it, but we take pride in this outcome, as we do of the fact that this portfolio’s annual turnover rate over the past four years looks as follows:

2007: 18%
2008: 25%
2009: 31%
2010: 30%

We submit these numbers to you as evidence to support our single laying claim to being long-term investors. This forum has routinely espoused the under-appreciated and significant costs of transactions, including direct costs of commission as well as hidden costs such as market impact, taxes and replacement (finding another good investment idea to replace the one you sold).

Following a veritable drought of sensible investable ideas in the South African market over the past 18 months or so, Mrs. Market has been kind enough to offer an investment opportunity in the platinum sector, making Amplats our largest purchase.

The investment case is that it is a high quality business with superb economics over many decades and that it got cheap enough on an absolute basis to successfully compete for portfolio capital. Historically, Amplats has been evidenced to offer good value below a multiple of 3x NAV. We think the business cycle is still on the mid-to-high side, but it meets our criteria for being unpopular. Linking this to the real world out there, we think the management of Amplats have over promised and under delivered on production volume growth over the past 10 years. This means we can understand why it would be unpopular, which is an important aspect of the way we think about statistics - the numbers are the numbers, but they also have to make sense.

The combination of quality, cheapness (margin of safety), a fairly high point in the business cycle and unpopularity, calls for a reasonably average sized at cost position in our domestic capital pool. If the business cycle deteriorates much from this point on, our investment process would call for a bigger exposure, to which we would expect to oblige.

If someone suddenly declared ‘no more bets’ and the world’s stock markets physically shut down for the next 10 years, we would be very comfortable having portfolio capital committed to such a good business as Amplats, at the average price we’ve paid to date.

In South Africa, the most interesting development we took note of was the significant change in the business model of Brait, causing a substantial decreasein our estimate of its intrinsic value. This resulted in it being our largest sale by value in the month of March. Brait essentially changed from managing a combination of client capital and on-balance sheet capital, thereby capturing the attractive economics of the asset management industry (and valued accordingly), to managing only on-balance sheet capital, which demands a wholly different valuation methodology. This was an especially surprising change from our perspective given the large increase in the addressable client base effective July 1ston the back of the new Regulation 28 pension fund legislation. Our sell discipline involves three scenarios:

1) we made a mistake;
2) the asset reached fair value; and
3) an event results in a significant decrease in fair value, as in this case.

This is our second ownership cycle of Brait in the past 10 years. The latest development is a disappointment, but despite that, our clients have received good returns on this capital allocation over the years. This was principally due to our insistence on a healthy margin of safety to a conservative estimate of fair value, combined with sizeable purchases while a very steep discount to fair value was on offer during the midst of the global financial crisis.
When it rains it pours. The tragic recent events in Japan resulted in seemingly panicky liquidations of Japanese-listed equities, including some of our portfolio holdings. This allowed us to meet these fire sales of good assets with our cash. We were able to deploy portfolio capital into existing holdings Hamamatsu Photonics andTokyo Gas, both at particularly attractive price-to-value relationships. Incredibly their prices have recovered to above their pre-tsunami levels in the space of a few weeks.

In the past three months, our investment team debated 20 new investment opportunities, of which seven are listed outside South Africa. Our portfolio managers have made sizeable allocations of capital to three of these new global ideas, Intel, Zimmerand Amgen, while the lack of investability of good new ideas in South Africa meant that relatively small amounts of portfolio capital could be put to work here. Lately, we have found that our analysts complete most of their homework on good quality South African assets only to find that they are not cheap enough to buy for the portfolio managers. We know from experience that this is not a waste of time or resources, as it represents future investment opportunities in assets we have come to better understand and include in our evidenced circle of competence. Opportunity comes to the prepared and we only have to wait for Mr. Market to provide us with the opportunity. We are ready to recognise and take advantage thereof.

Our global team of analysts continues to put our collective foot on the gas to produce meaningful research that end up in the pool of our top new ideas that can compete for the attention of your savings.

Firstly, for the past three and six months, market breadth has been wide. Everything is apparently fine and Mrs. Market has rewarded stock investors indiscriminately, possibly with the only exception being that of long suffering South African gold mining shareholders (including RE·CM's relatively small exposure).

Secondly, over the slightly longer timeframes (one through three years), it's quite striking to what extent the averagestock outperformed the market cap-weighted indices. The current bull market has truly been the triumph of small and exciting (read 'emerging markets'!) over large and boring (read 'developed markets'!). As you know, 'large and boring' is very well represented in our crop of global businesses under ownership.

A sign of the times was heard recently (November 2010) in New York at a consumer goods industry conference attended by one of our analysts when the Colgate Palmolive CEO, Ian Cook, called Asia "…a newer geography in the world." If this comment could be attributed to a small industrial company in Wyoming, one could perhaps let it pass by, but the British born CEO of one of the world's best and geographically dominant businesses is another matter. We're not quite sure where Mr. Cook thought Asia was all these years.

We estimate that Pepsi's US$6 billion takeover of William-Bill-Dann, the largest foreign acquisition of a Russian company, cost them more than doublea reasonable multiple for a typical food & beverage business. They competed with French company Danone in this instance. After Danone lost this fight, they charged out to buy Russian dairy business Unimilk for US$1.3 billion. Unfortunately, multiples were not available, but cynically it seems as long as it had the word 'Russian' in the company description it met their acquisition criteria.

A perfect storm is now in full swing. Many developed market corporations with loads of free capital that earn almost no interest are meeting overvalued (and relatively small) emerging market assets and due to the inherent bidding process, ably assisted(read 'facilitated') by their teams of bankers, paying top Rouble, Real, Renmimbi, Rupee and Rand for exposure to the 'growth' that investors are supposedly demanding. We say 'what about value'?

A significant potential risk to our holdings in businesses that are overcapitalised is that they are swept up in this perfectstorm and make deals that will ultimately disappoint by virtue of high prices paid. Our only comfort is in our partnership approachwith management we admire (admittedly from afar in most instances, we're not invited to their kids' parties!) by virtue of theirsensible capital allocation track records. We can only hope that they maintain their record, but if they start doing deals it'd be time for us to take another hard look.