The Cadiz Mastermind Fund delivered a return of 1.8% during the quarter. Equity returns continued to be hampered by poor performance from the fund's cyclical shares. The largest detractors were Impala Platinum (-10.9%), Fortesque Metals (-14.7%), Wilson Bayley (-7%) and Anglo American (-3.4%).

During the quarter, platinum and iron ore related shares pulled back sharply. Platinum shares were impacted by the extended strike, while iron ore prices fell by more than $20 per ton due to downgrades to Chinese demand. The market remains generally averse to mining shares despite record low price book ratings and profitability. These negative contributions were more than offset by strong performance from our cheap defensive and small cap shares. The largest individual positive contributors were Astral Foods (+44%), Capitec (+16.9%), Barclays Africa (+8.4%), British American Tobacco (7.8%) and Howden (+8%). The fund's foreign investment in Contrarius Global Equity delivered a return of 4.5%, adding to the portfolio's return while simultaneously increasing diversification.

High yield remains a core focus of the fund in this low return environment. New positions bought into the fund include:

Tiger Brands: Negative sentiment towards its troubled Nigerian assets pushed the share into value territory. Due to its high quality brand portfolio, profitability and cash generation attributes, Tiger Brands has rarely traded at a discount. We took advantage of this, but the opportunity was short-lived. The share rerated shortly after, which limited our ability to build a meaningful position.

High Yield Preference Shares: Preference shares offer an excellent opportunity to enhance yield in a fully valued market. We added ABIL and Imperial preference shares during the period. Both shares offer annualised forward yields well in excess of 10%. With inflation expected to average 6%, these relatively low risk instruments offer real returns of more than 4%.

These positions were funded by selling our holding in Naspers. Naspers has performed exceptionally well since its inclusion in the fund. While its unique business model is appealing to us, Naspers' P/E rating of 90x is very demanding and reflects expectations of future growth that are likely to disappoint. In this event, there will be little underpin to the share price.

The equity market is in its 6th year of a very strong bull market. The P/E of the market is at one-standard deviation above the long-term trend. This trend has been driven by the multinational component of the All Share, where P/E's are 2 standard deviations above trend. Despite extended valuations, the bull market can sustain itself for a while yet due to strong supporting factors. Global rates are at record lows and liquidity is abundant, due to accommodative global central banks. The global economic recovery is firmly underway, led by the US. Corporate earnings are improving, while strong balance sheets are supporting share buybacks and mergers. As these trends gain traction, the rotation into cheap cyclical shares becomes inevitable. Evidence of this is beginning to emerge with early cycle commodities, nickel and copper, having moved up strongly over the last 3 months. Global industrial production is also pointing to recovery, which should sustain these trends. The fund is well-positioned to capitalise on this trend shift.

The fund's value attributes remain attractive, although the market rally has reduced the pool of opportunities. The fund's 2 year forward PE, PBV and DY are 11.7x, 1.7x and 4.0%, respectively compare favourably with the SWIX ALSI, which yields respective metrics of 13.4x, 2.0x and 3.6%.

Local equities ended the first quarter of 2014 with a return of 4.78%, buoyed by the resilience of their international peers; a resumption of international flows into our markets (helped by an oversold currency); weakness in the US dollar as its safe-haven appeal diminished, and a related bounce in commodity prices. The JSE crested new highs, driven largely by those shares that were unloved in 2013 and some profit-taking in those that had outperformed, such as Naspers and the retailers.

The Cadiz Mastermind Fund delivered a return of 3.35% over the same period. The largest positive contributors were Anglo American (+20.3%), Angloplatinum (+20.2%), Barclays Africa (+16.2%), Nedbank (+9%) and British American Tobacco (+8.3%). These contributions were, however, diluted by weak performances from our small and mid-cap holdings. Cashbuild (-16.5%), Astral (-15.3%), Grindrod (-8.5%) and Capitec (-6.6%) all experienced large negative returns during the quarter. The fund's offshore investment in the Contrarius Global Equity Fund also lagged, returning -1.3%.

During the quarter we increased the offshore exposure to 22% (December 2013: 18%) by switching our entire holding in Kumba Iron Ore into Fortesque Metals Group (FMG). FMG is an Australian listed iron ore mining company in the latter stages of an expansion program. Annual production is set to grow from 133 million tons to 155 million tons in the next 12 months, while capital spend should fall sharply. The combination of volume growth and lower capital spend implies very strong cash flow growth in the coming 3 years, despite much lower iron ore prices. FMG's free cash generation ranks amongst the highest in the mining industry, allowing for debt to be repaid quickly and supporting a high dividend yield. Because of negative investor sentiment towards iron ore, FMG trades on a forward PE to June 2014 of 4.4X and a dividend yield of 4.2% in Australian dollars (AUD). Note also, the earnings base is well below normal levels. Management has guided to a dividend yield of 6.5% 2 years out. Our valuation points to significant upside from current levels. We believe that investor sentiment will turn positive when FMG delivers on its volume growth and debt reduction promises. Kumba, while cheap in an SA context, doesn't offer as much value as FMG. The switch enables us to diversify from the rather volatile, strike-ridden SA mining complex, while retaining exposure to a cheap, high quality offshore miner with strong growth prospects and a very attractive dividend yield. Also, we retain exposure to the much anticipated cyclical upswing.

The amount of attractive value opportunities available in the local market has shrunk dramatically. In aggregate, the industrial complex remains overpriced, while financials are fairly valued and resources are cheap. We continue to systematically shift the fund's exposure into cyclical resources on the basis of valuation. During the quarter we reduced exposure to Naspers and MTN and applied the proceeds to Anglo American, BHP, British American Tobacco and Wilson Bayley, thus concentrating the portfolio further into our high conviction ideas. Encouragingly, Anglo American and Angloplatinum delivered strong quarterly contributions signaling that the market's negative sentiment toward cyclicals may well have come to an end. The value embedded in these cyclical stocks, combined with declining systemic risk and recovering global economic growth provides the confidence to execute on our strategy. After exhausting the early cyclical opportunities, the market's attention is likely to turn to the higher beta commodity stocks.

The fund's value attributes remain attractive, yielding a 2yr forward P/E, P/BV and dividend yield of 12.7x, 2.2x and 3.9%, respectively. These compare very favourably with the SWIX ALSI, which yields equivalent metrics of 14.5x, 2.2x and 3.3%, respectively.

The highlight of the quarter was the US Fed's announcement that tapering would begin in January 2014. Initially, liquidity injections would be lowered by US$10bn per month and would be lowered systematically throughout the year. Contrary to the expectations of some, global markets took the tapering announcement in their stride - the MSCI World Index delivered a dollar return of 8.1% during the quarter. Emerging Markets continued to underperform their developed market peers, delivering just 1.9% over the same period. The primary reason for this is that relative profitability has deteriorated within EM. These economies, SA included, have struggled to adapt to the changed dynamics brought on by the Great Recession ('GR'). Most are running current account deficits, have weak currencies and are facing issues that prohibit any kind of reflationary exercise.

In rand-terms, our market delivered an admirable 6% during the quarter. The Cadiz Mastermind Fund, by comparison, delivered a return of 2.94% over the same period. The fund's return was impacted negatively by big moves in just a handful of stocks. Exxaro (-14.6%), Wilson Bayley (-9%), Vodacom (-8.6%) and Anglo American (-7.2%) all experienced large negative moves. These returns were buffered to a large extent by our winners, which included Naspers (+18%), Grindrod (+12.7%) and Howden (+10.6%). The fund's offshore investment in the Contrarius Global Equity Fund performed exceptionally well, delivering a return of 10.9% during the period.

During the quarter we increased the offshore exposure to 19% of the fund. The amount of attractive value opportunities available in the local market have shrunk dramatically, particularly in the financial and industrial space. The investment in Contrarius allows us to capitalise on the wider pool of true value opportunities available in the global market, while simultaneously increasing the fund's level of country specific diversification. Also, despite having depreciated significantly over the last 12 months, the Rand remains vulnerable to further deterioration in the current account deficit, and populist rhetoric in the run up to the elections.

The offshore investment was funded predominantly by selling down our holdings in industrial and financial shares. We have retained those opportunities where the earnings and profitability are well-below trend and supported by strong balance sheets and improving fundamentals. Wilson Bayley is one such company where we have used the share price weakness to materially increase exposure. At just 14%, WBHO's current profitability, measured by the Return on Equity (ROE), is its lowest on record. In contrast, its 10- and 15-year averages weigh in at 27.9% and 27.3%, respectively. Our analysis leads us to conclude that a number of non-recurring factors have temporarily depressed the most recent reported earnings. These include:

o Provisions for the Competition Commission penalty and loss-making Australian projects
o Restructuring charges incurred following the merger of two businesses in Australia
o The completion of projects awarded in the midst of the economic turmoil when competition was extremely fierce and tender margins at their lowest

The project order book of R23.9bn is up 15% on last year and, more importantly, is of much better quality in terms of profit margin. The balance sheet is also extremely strong. For construction companies, this is particularly important due to the potential for large loss-making projects to sink a business. Based on the last reported figures, WBHO held a net cash balance of R3 billion, equivalent to 31% of its market value and 68% of its net asset value. This gives us comfort that the business can withstand the pressures associated with market downturns and emerge on the other side in a very strong position to take advantage of the inevitable market upturn.

Most importantly, the valuation is attractive. WBHO trades on a current price-to-earnings (P/E) ratio of 13x, a massive 30% discount to the ALSI P/E. But the company's earnings are currently well below normal levels. Based on our assessment of normalised earnings, WBHO trades on a P/E of 9x, which is a 15% discount to its long-term average of 10.5x. The ALSI, by contrast, trades on price-to-normalised earnings of 22x. Not only does WBHO provide excellent long-term upside as its earnings normalise but it is also positioned to protect the investor capital far better than the general market, which has run hard over the past 18 months.

The fund continues to favour cyclical resources exposure on the basis of valuation. The value embedded in these cyclical stocks combined with declining systemic risk and recovering global economic growth provides the confidence to execute on our strategy. Macroeconomic evidence of the last quarter supports our view that the global economy is headed for recovery and this is likely to gain momentum in the coming months. After exhausting the early cyclical opportunities, the market's attention is likely to turn to the higher beta commodity stocks. The fund's value attributes remain attractive, yielding a 2yr forward P/E, P/BV and dividend yield of 12.2x, 2.4x and 4.0%, respectively. These compare very favourably with the SWIX ALSI which yields equivalent metrics of 14x, 2.2x and 3.5%, respectively.