The wonderful thing about markets is that they always seem to give you a second chance to enter a transaction which you may have missed the first time round. As correctly put forward by Ben Graham, the father of value investing, the market is there to serve you.
At present, the market has lost its pessimistic view of the world’s future and developing markets have been major beneficiaries of inflows. The South African stock market has appreciated by 19 % and the rand, with the exception of the Brazilian Real, is the strongest currency year-to-date.

I have mentioned in the past that part of our return is determined by the level of the currency. I believe it is now appropriateto realise South African assets and to transfer the proceeds offshore. Investors will be locking in the first part of their total return. Assets in certain offshore regions are not expensive, but more than likely, are due for some correction.
The second part of our return is determined by the price one pays for assets. Should there be some correction, we should be able to purchase world class, developed assets that will benefit by being the survivors of the current crisis. These companies are either number one or two in their respective markets, and in the long run, the long-term prospects look very exciting.

The fund is well placed to employ the above strategy, and to this end, we are now 80% off shore. We have lowered our equity exposure and our powder is dry for when the next opportunity prevails. It is not fun earning 0.5% on cash, but it’s better than overpaying for an asset.

Finally, as an afterthought on our local currency and the dollar, I am no expert on currencies, but talk of the demise of the dollar is premature. I will leave you with this question:
Should you decide to visit the darkest part of Africa, which currency would you take? The rand, US dollar or the Chinese yuan. I know my answer.

Over the past six months I have travelled extensively overseas owing to the many interesting opportunities that have arisen from the pessimism created by one of the largest recessions seen since the seventies. I've done four trips since March, with the happy and unusual occurrence that the trips got increasingly more affordable. Certainly, when comparing flights, hotels room rates and services in rand terms, everything got steadily cheaper. It struck me that while this is great for the South African consumer, it cannot be good for the local exporter of goods.

In prior periods when the rand experienced extraordinary strength, the producer was bailed out by either high volumes or higher US dollar prices for their goods. Importers who imported at a weaker rand could offload the "expensive stock" perhaps at a lower margin or at least get it out of the yard as quickly as possible and import the next batch at a lower price and sell it for the same price or maybe a little higher than the previous batch. This was, however, against a backdrop of lowinterest rates, higher employment, economic confidence, a global boom primarily fueled by excessive leverage and in the ability of government to manage and sustain the country's growth. This is not the case today.

South Africa will perhaps fare better than other regions around the world, but to my mind the valuations reflect this already. Margins will more than likely narrow over time and share prices can be expected to correct. In our travels, we are finding more attractive opportunities off shore and the fund allocation to these investments reflects this. Investors will notice an increase in the fund's offshore activities and the intention is to build this exposure to 85% of the fund's assets.

An investor mentioned to us that we had become more volatile compared to our past history and to other relevant funds. I thought I would share with investors some characteristics that may contribute to this perception.

First of all, there is no doubt that the markets are more volatile than in the past. The fund has also changed quite a lot to the extent that currency and regional differences can create big timing variances. Since late December, we have had a yen/rand currency swap which is marked to market in real time, at 3pm each afternoon, while the underlying investment is only priced the next day. To complicate the issue, this instrument, Morant Wright, is yen/pound based. Orbis Asia is only priced once a week on a Friday. If we do not receive the update by 3pm it will only get priced on Monday. Both these investments make up 20% of the fund.

The USA has become a much larger region for us and it also priced a day later. We have been reducing our South African exposure and transferring our cash offshore, and this brings another dimension as cash translates immediately into volatility if the currency swings in the late afternoon as has been the case of late. Furthermore, the global markets have turned back the clock (Day-light saving) and as their markets open, we have already priced at 3pm and our markets respond in the very late afternoon. Finally, we have increased our exposure to volatile assets and we should be at the margin more sensitive.

At the end of the day this changes very little in the risk of the fund or the performance of the fund. Overpaying for assets is our real risk and our risk has been going down as share prices have fallen. As prices fall, we have allocated more to investments such as Dell and The Post. In the past, our investments have been more widely spread and less focused. This has now changed as risk has decreased.

Many of the fundamental concerns we expressed over the last two years concerning the state of the world economy came to fruition. More importantly, our suspicion that most assets were overvalued came true. Our sanguine view allowed us to produce a return of -4.4% for the 2008 calendar year. At first glance, this may appear disappointing, but seen against arguably the worst stock markets performance since the 1930's this return may be viewed as acceptable when compared to funds with similar mandates (foreign and worldwide funds). Most of our negative return was generated in the last three weeks of the year. More importantly, most of this negative return has been recouped.

However, our job is to beat inflation and produce real returns of 5% per annum and we have been lagging over the last year. In discussing fund performance with another fund manager, what surprised us the most was how relative performance can change so quickly. It will not surprise me if, in 12 -18 months, something extraordinary may happen in the markets. Many of the shares we own and others we are looking at have at least 50% upside and it is these investments that we think will assist us in achieving our goal. We will also have to make sure we do not lose permanent capital.

Much of what is read today is very confusing, and literally exhausting. Many market participants are all trying to predict the future. In conclusion, I have to say the prophets of doom seem to have as much chance of being right as the optimists. In the end, Aylett & Co has a framework which is tried and tested, and we tend to pick stocks irrespective of where the economy or the markets are going. In my view, pessimism is on the side of the buyer.

Good Investing!