Our factsheets over the last twelve months have consistently expressed our concern about the level of global markets. This has been further expressed in our low risk portfolio; (lots of cash), very little exposure to risk assets (emerging markets), no precious metals and hardly any exposure to high yielding assets. In short, it's a boring portfolio.

Until last week, we were underperforming the market and our peers by almost all measures and yet in the last week, markets have seen a small correction. It's been quite surprising to see how fast this has changed. An informed investor phoned to tell me that our conservatism has paid off and my response was that it is too early to tell.

Now might be a good time to revisit some of our concerns. A word of warning: our concerns are not to be interpreted as forecasts. In this department, we have failed dismally and have often proven to be too early.

By now it seems safe to say that the markets, the USA in particular, have been driven by the expansion of the Fed balance sheet. This balance sheet expansion is coming to an end. I think that the market may decide that once the Fed has finished tapering, it will not be quick to raise rates. This could be a mistake. The economy could do just fine but the stock market may not.

The strong dollar may have serious disadvantages for economies that have benefited from a weaker dollar; suddenly their products become more expensive for their customers. Think of a European retailer paying for a garment from Hong Kong. The low interest rates are allowing disruptive technology companies to fund their expansion while not charging for their services. How many of us have had free rides from UBER for referring friends and family to their service? Another disadvantage of these disruptive technologies is the havoc they have unleashed on existing "old world" businesses. Again, think of UBER versus the London taxi industry where it can be 30% cheaper to use UBER than a black cab. In the USA the purchase of a small device called Magic Jack, plugged into your computer, allows you to speak unlimited to a USA / Canadian number for 3 dollars a month! Take that, Telkom.

By referring to these examples, my point is that we are entering a world where comparisons to the past will lead to outcomes that may not turn out as expected. Capital loss may become permanent and risk will be defined as it should, by the loss of your purchasing power (after allowing for inflation) and not after some Greek symbol.

Finally, we would like to reiterate an important ingredient for wealth creation - patience. Be patient, disregard the short term noise and volatility and think about the long term. This has often rewarded investors.

Over the past year, our high cash holdings have penalised the Nedgroup Investments Bravata Fund on a relative basis. As a consequence of most of our cash being offshore, the weaker rand provided us with some additional return. One might ask why, when it is known from numerous studies that equities over the long term outperform other asset classes, would you not hold 100% of the fund in equities instead of cash?

One of the consequences of the policies of financial repression followed by the central bank governors has been the increased correlation of all risk assets. In other words, they go up and down together providing the patient investor with no diversification benefits. Furthermore, equity returns looking out 10 years look to be lower than their historical norms of about 6% real growth.

Robert Jeffery defined risk “as the likelihood of not having cash to buy something important”. Besides our belief that risk is overpaying for assets we cannot help feeling the above definition comfortably explains our rationale for holding significant cash. On too many occasions I have witnessed fund managers not having enough cash to purchase bargains when the market obliged. What was worse was buying from fellow colleague fund managers who had to sell the quality and scarce stocks and for these forced trades to be booked at bargain basement prices to my fund. Sometimes the selling was due to panic selling (outflows) only to buy (later inflows) back these investments at higher prices.

In the past we have always been too early to build up cash in the fund and so we may again be too early but to do otherwise would not fit with our philosophy of investing.

We do not suffer from quarteritis (the continuing short-term focus on many markets participants) nor do we envy the performance of others. We only care about preserving purchasing power in real terms.

A distinct advantage of Bravata’s flexible mandate is our ability to invest both locally and offshore, unlike many of the global mandates which are required to invest only outside of South Africa. This means that when, as in the last month, we receive significant rand inflows into the Fund, we are not required to automatically convert those rands into foreign currency. Our cash currency exposure (the currency in which the Fund’s liquid assets are denominated) is a function of the opportunity we see in individual markets as opposed to a firm view on the currency.

The retention of cash locally is an indication of the opportunity we are starting to see in the South African markets. As the foreign tide of easy money has receded, it has left some exciting opportunities exposed. One of these, which we have discussed before, is Reinet. Our investment has proven successful thus far with the share appreciating in excess of 20%. The bond market was also affected by foreign selling and gave us a reasonable entry point into the R157. At time of writing the R157, which matures next year, will return 7% to maturity - a good return relative to the very low risk.

The volatility in listed South African banking shares such as African Bank and Barclays Africa (previously called ABSA) have also provided some fertile ideas. At a share price of R9.30 for African Bank we were able to write put options at volatility levels in excess of 40%, which if exercised would allow us to buy African Bank shares at R8.40; a price at which we would comfortably own the business. The options we have written expire in the middle of June and if the African Bank share price is above R9.00 at expiry, we shall not buy African Bank shares, but shall instead have received a 60 cents premium per option written. These are terms we like. In a similar way, we have also invested in Barclays Africa, capturing a yield of between 10% and 15 % by writing a combination of put and call options. In the space of nine months, we have received three dividends totalling R15.28 per share, and have earned a premium on the options written with little associated risk.

In addition to the above, the Fund has also added to its position in Investec and we continue to look to add to the RECM and Calibre position should the market provide us an opportunity to do so.

During the month, the Fund established an investment in Transaction Capital. Transaction Capital has two main operating subsidiaries, the bigger being SA Taxi Finance which is an asset backed lending business that finances minibus taxis. It also owns a debt collection business that collects distressed debt on behalf of lenders and buys distressed loan books for fractions of the original loaned amount with the goal being to collect debts greater than the cost of the book and the associated costs of collection. Transaction Capital also has in excess of R900 million cash on the balance sheet and a management team that is young, sharp and has significant skin in the game (they own in excess of 50% of the business).

In conclusion, it is our belief that the worldwide flexible category is an asset class that makes sense for most investors in South Africa, regardless of the exchange rate, local sentiment or the attitude of the world towards South Africa and ‘emerging markets’. You have a Fund manager who is more accessible than one managing your money offshore, has a little local knowledge (which we hope we have demonstrated above certainly helps) and is able to, because of location and a flexible mandate, take advantage of opportunities quickly as they arise.

The Nedgroup Investments Bravata Fund returned 42.8% for the year ended 31 December 2013 and has compounded at 12.2% per annum since its inception.

It is pleasing to note that much of this return was generated from ideas implemented five years ago, ideas which at the time were very unpopular. Our investment in Japan is one such example. For many years investors questioned our allocation of capital to this region. Not only did we believe that the stocks were cheap, but also that the yen was weak and would strengthen, providing an additional advantage. During 2008/2009, as other developed market interest rates fell, the carry trade began to unwind and money flowed back into Japan, strengthening the yen by 38% against the dollar. Later, as it became obvious that the government would follow policies that would weaken the yen, we were able to swap the yen back into US dollars.

There were many other investments that have contributed to the Fund's performance (they have been spoken about over the past twelve months), but the central theme running through the vast majority of these is that the investments were made at a time when the future looked very gloomy.

Some of our best investments are made when the Fund performance appears poor. Typically, initial positions are small and more capital is added as the market provides additional opportunities to add to the position. This means we are able to buy the same business for less and less, which in our books is a good thing. The short term downside of this is however, as the position is marked-to-market, performance looks poor and pressure mounts on the fund manager to capitulate. Fortunately we have always been happy to stick with the philosophy of doing unpopular things and operating independently.

Regrettably, the exact opposite appears to be happening currently and the risks of overpaying for assets continues to rise. We cannot predict the future, but what we do know is that the cost of money is starting to increase and the effects this has on valuations will start to be felt. The Fund is conservatively placed, patiently waiting for the markets to provide the next opportunity to make new investments. Cash currently makes up almost half of the Fund and eighty per cent of the Fund is offshore.

Courtesy of Bob Bernanke's lack of tapering, the markets we operate in continue to go up and up.

Part of our success as fund managers is that unless something has changed, we sell assets that reach our target prices. This selling, combined with increased fund inflows as a result of good performance, has resulted in a build-up of cash.

Our decision to reduce equity exposure is not as a result of a bearish view on markets, but the lack of ideas and opportunities on our terms. As many of you already know, we thrive on pessimism, less so on optimism. Our real challenge now is to not allow the cash to burn a hole in our pocket and to ignore the impulse to be active just because we have sold investments at good prices.

As ever, our strategy will be to let the cash pile up, hopefully act in a rational manner and do intelligent things with your money. Conditions at the moment don't seem to favour action. Should the Rand weaken and the markets correct, the Nedgroup Investments Bravata Worlwide Flexible Fund will do very well, should markets continue to rise and already expensive (riskier) assets get more expensive, you should expect us to underperform. We think our investors are better served being positioned for the former rather than the latter.

The good news is that things change very quickly in markets. Those who have left the decision making and asset allocation to us have done and will continue to do very well.