A year on since the collapse of Lehman Brothers, the global economy has stabilized with the recovery appearing to be on track and gaining momentum. The low interest rate environment together with the significant stimulus packages provided by Governments globally has been a major driver of this and should continue in the near term as infrastructure related spending picks up in the months ahead. Globally, corporates have responded aggressively to the current environment with significant de-stocking and cutting production. At the current utilization levels, any uptick in demand should provide a substantial boost to economic growth globally. Risk appetite appears to have returned to pre-Lehman collapse levels as noted by the normalization of spreads in the credit markets as well as the Volatility Index being close to its one year lows. On the back of this increased risk appetite, improving economic prospects and better than expected corporate results, global equity markets have continued on their upward trend during the past quarter. Emerging markets in particular have outperformed their developed market peers substantial~ with rising commodity prices appearing to be very supportive to these markets and their currencies. Corporates globally have used this easing of the credit and equity markets to shore up and strengthen their balance sheets. A significant increase in capital raising and bond issuances were noted over the past few months with capital raised in the past 2 quarters being one of the highest over the past few years. This has started to lead towards increased M&A activity globally as corporates become increasingly positive on the economic upturn and sustainability of it. We continue to focus on companies that are market leaders, have great franchises, sustainable profitability, proven management, sound balance sheets and robust cash flows. Importantly, these companies will benefit from any uptick in demand due to their operating leverage, while having the ability to sustain themselves if the recovery is slower than anticipated. Our portfolios remain exposed to the higher quality companies such as Mayr Melnhof while at the same time continue to trade at 20-30% discounts to the global equity markets across various measures. Importantly, the ROE% gap between our portfolios and the market has widened with companies in our portfolios delivering more sustainable ROE's through the economic cycle. A company in our portfolios signifying these characteristics is an Austrian paper and packaging company called Mayr Melnhof.

The Mayr-Melnhof Group is the world-leader in coated recovered cartonboard and is Europe's leading manufacturer of folding cartons. The company's primary focus is on the manufacturing and processing of carton board and all resources are utilized with this in mind. The Company was founded more than 100 years ago and has become the European market leader in its business segments over the last 25 years. The group is a very impressive cash generator who finds itself in a net cash position while its major peers are all highly indebted with a couple of peers facing going concern risk. Mayr Melnhol's strong balance sheet thus provides the group a significant competitive advantage in today's volatile market. They are one of the only European packaging players with the capability of participating in value-creating acquisitions or capital intensive growth opportunities. Over the last 12 months the group used some of their resources to expand into some of the regions which border Europe, such as the Middle East and North Africa where there are relatively few local packaging players and areas which continue to register positive economic growth. In stark contrast, most of the other European packaging players have halted any expansionary plans and currently they are only spending the absolute minimum on maintaining their current production facilities. Mainly due to the above factors, we are expecting Mayr Melnhof to show strong market share gains over the next few years. As the European economy recovers, boosted by returns from the company's investments in emerging markets, the company is expected to continue to generate both strong earnings growth and significant free cash flow over the medium term while trading at an unjustifiably substantial discount to global equity markets.

The macro environment indicates that the global economy continues to face serious headwinds in the form of banks and households de-leveraging, so demand for consumer durables amongst individuals will remain subdued for some time. In addition, the industrial capacity built up over the past few years to service an ever expanding demand now seems far too much, but government bailout efforts are preventing the closure of excess capacity, which means that competitors to the government -supported companies do not have pricing power. There also remains the problem of how to exit from the monetary and fiscal stimulus with a legacy of higher taxes, increased regulation and higher cost of capital the net result of the current survival efforts. Global equity markets have moved up from their troughs seen in March earlier this year, on the back of better than expected first quarter results as well as optimism that the worst of the recession may be behind us. Investors globally appear to have "brushed aside" potential risks as noted by the significant decline in volatility as well as the surge of flows back into emerging markets. Despite the tough economic environment where earnings and financial health of companies have come under pressure, the poorer quality companies with higher cost of capital and lower ROE's have outperformed their better quality peers by a substantial margin this year. Historically, in an environment where the profit cycle has decelerated, the higher quality companies have outperformed. During this cycle however, this has clearly not been the case with indiscriminate buying and selling of equities appearing to be the "order of the day". Highlighting the absurdity of this even further, is the valuation gap that exists between the high and lower quality companies, increasing the downside risk for poorer quality companies in future. The recent underperformance of the higher quality companies together with the compelling value being offered, strongly supports our focus on great quality companies in our portfolios. With the economic and operating environment expected to remain challenging, we believe companies with high operational and financial gearing with no competitive advantages will be impacted severely and struggle to survive. Our portfolios are exposed to companies that are market leaders, have great franchises, sustainable profitability, proven management, sound balance sheets and robust cash flows. These companies will survive the current downturn and emerge stronger as the economy recovers. A company incorporating these characteristics and trading at a significant discount to the market and its intrinsic value is Verizon. Verizon is the largest mobile telecom operator in the US and the 2nd largest telecom operator in the country. The US telecommunications industry has undergone significant consolidation since the TMT bubble burst in 2000. This has resulted in the smaller and weaker players being acquired by the market leaders, resulting in Verizon and AT&T becoming the dominant players in the industry. Verizon's traditional fixed line business remains under pressure as unemployment rises and corporates cut costs across the board but the benefit from the rollout of their next generation network is a positive for the future. The wireless business has also grown at a rapid rate over the years and is now a significant contributor to operating profits for the company. Although mobile subscriber growth in the US is expected to slow over the short term, the increasing proportion of subscribers acquiring smartphones provides Verizon with an opportunity to drive data related revenues. With their capex cycle starting to decline the free cash flow generation is expected to be robust going forward. Verizon is currently trading at a significant discount to the market and its long term average. The company is providing investors with an attractive and sustainable real dividend yield which is very competitive in relation to government bond offerings. The significant FCF yield provides management flexibility in delivering sustainable returns to shareholders while maintaining a strong balance sheet.

The time since 15 September 2008 - now called Lehman Monday - has been harrowing for investors, regulators, ratings agencies, hedge funds and ordinary citizens around the world, as the media indulged in an excess of negative reporting and the blame game. The Lehman bankruptcy announcement was the catalyst for the worst financial crisis the world has seen since the Great Depression. The speed and impact of the slowdown has been catastrophic on highly-geared balance sheets, whether they are countries, companies or citizens. The latest estimate is that more than 40% of paper equity wealth has been wiped out in the past year. The major countries, of which South Africa is one, in the Group of Twenty (G20), met in Washington in November 2008 at which time they deferred substantive issues to the London meeting in April 2009. In the interim, several governments announced their own fiscal response to the crisis as detailed in the table below. At the 2 April 2009 meeting, the G20 committed $1.1 trillion to help address global trade and support those merging market countries not represented at the G20 meeting. Policy makers seem to have studied their economic history in order to avoid repeating the mistakes of the past and have acted aggressively in cutting central bank policy rates and where necessary moving to quantitative easing, which involves the buying up of debt by the central bank. This is a lesson learnt not only in the 1930s, but also in the 1990s, when Japan failed to act aggressively enough, so that economic malaise lingered for almost two decades and Japan is expected to be one of the large economies hurt the most as it has increased its dependency on exports over the past decade as domestic demand has been so subdued. Central banks have decided that the path of least regret is to err on the side of cutting too much rather than cutting too little. Equity markets are starting to discount a revival in growth in the second half of 2009, but on a year-on-year basis, which is what determines most company earnings, the comparison with a still buoyant first half 2008 will be challenging to say the least. The fiscal and monetary stimulus packages are finding traction with most monthly comparisons better in March than in January, but in many cases it is a case of bottoming rather than recovery. Already there are various "green shoots" in March 2009 indicating that the worst may be behind us. Globally companies are experiencing a cyclical downturn in earnings with the impact of the slowing economy and the credit crisis working their way through. We anticipate earnings will remain under pressure over the next two quarters as the benefits of the fiscal and monetary stimulus start to come through in the latter half of 2009. Companies with high operational and financial gearing and no competitive advantages will be affected severely. Companies that are market leaders, have great franchises, sustainable profitability, proven management, sound balance sheets and robust cash flows will benefit from this economic downturn. These companies will not only survive this downturn, but emerge stronger with fewer competitors and increased market share as the economy recovers. One of our top holdings is US healthcare company Johnson and Johnson (JNJ), which has reported sales growth of 10% per annum for the past two decades. During this period earnings growth has outpaced sales growth with the result that operating profit has grown by a compound annual average growth rate of 13% as it has improved operating efficiencies. For the most recent year-end, Johnson and Johnson reported profit growth of 22% showing that good quality companies continue to deliver solid results and sustainable cash flow in a tough economic environment. JNJ boasts a very defensive product portfolio with sales revenue split between the pharmaceutical (39%), consumer (25%) and the medical devices and diagnostics division (36%). Having already established its pharmaceutical portfolio which addresses key growth areas like arthritis, epilepsy and cancer, J NJ is leveraging on its market leader position to continuously increase its presence in the consumer segment with products like Listerine, J&J baby care products as well as skin and hair care products like Neutrogena. The company's leading market position is clearly reflected in the numbers where the company has managed to grow earnings and sales revenue continuously over each of the past 20 years. Moreover, robust cash generation has allowed JNJ to continuously buy-back its shares, consequently increasing value for shareholders. With a current free cash flow yield of almost 8% and a strong un-leveraged balance sheet, the likelihood of higher dividend payments and further share buybacks remains very strong. Given its market leader position across all the divisions that it operates in, a sustainable earnings and cash generating business model and an inherently defensive nature of revenue stream, we believe there is significant upside potential to be realized.

The past year has been an eventful one, to say the least, characterized by a financial crisis, corporate failures and government bailouts. Major financial institutions including the likes of Lehman Brothers and Bear Stearns, are no more, unable to weather the storm that swept through financial markets. The Lehman crisis appeared to have been the catalyst that led to the worst financial crisis the world has seen since the Great Depression. The crisis drove down confidence in financial markets to new lows with the effect flowing through into the real economy. Governments around the world have responded decisively and substantially to the crisis thus far. This is in stark contrast to the 1929 crisis, were government action occurred only after 3-4 years. Globally, reserve banks have also been fairly aggressive on the monetary policy front with interest rates declining faster than expected over the past quarter. However, the pace at which the real economy has been impacted by this financial crisis is unprecedented. Unemployment has risen rapidly in the major developed economies as corporations around the globe restructure and downsize their operations, with the US alone having lost 304m jobs since the start of the recession in December 2007. One of the key risks to have emerged from the current financial crisis has been the lack of regulation for major parts of the financial sector. We anticipate substantial changes relating to the compliance and supervision of banks and financial institutions which will set the platform for stability and success in the sector over the long term. Equity markets globally experienced the largest annual decline in over 75 years, driven by several factors. Indiscriminate selling of listed equities on a large scale was the major driver, despite many companies being fundamentally sound. This was on the back of deleveraging of investment banks and other financial institutions, scaling back of proprietary trading by these institutions, aggressive selling by hedge funds due to client withdrawals and last but not least, the significant shift in asset allocation with both retail and institutional investors moving out of listed equities and property into cash and government bonds. Companies globally also experienced a cyclical downturn in earnings with the impact of the slowing economy and the credit crisis working their way through. We anticipate earnings will remain under pressure over the next 2 quarters as the benefits of the fiscal and monetary stimulus start to come through in the latter half of 2009. Companies with high operational and financial gearing and no competitive advantages will be affected severely. Our global equity portfolios are well positioned for any further fall out in equity markets with our focus on high quality companies who are market leaders, have great franchises, sustainable profitability, proven management, sound balance sheets and robust cashflows. These companies will not only survive this downturn but emerge stronger with fewer competitors and stronger market share as the economy recovers. Our lower exposure to the energy and commodity related sectors should result in lower earnings downside and volatility. The portfolios are currently offering great value trading at substantial discounts across various measures relative to the global indices. The companies in the global portfolio are offering attractive dividend yields in a declining inflationary environment. With money market yields close to zero and government bond yields being very low, the search for yield will ensue in the months ahead. As this outflow from cash to equities gains momentum during the year, listed equities offering attractive real dividend yields should outperform. This expected surge from cash to equities during the year should provide support for equity markets globally.