The third quarter proved tough for the fund, with a return of -2.4%, versus the benchmark MSCI Emerging Markets Index return of 2.5%. Most of the decline can be attributed to the fund's Brazilian exposure, with elections in that country (as opposed to companyspecific factors) sending markets down heavily. The one-year performance of the fund (+12.7%) is in line with the benchmark, but we believe looking at returns over longer periods is more appropriate to draw meaningful conclusions. In this regard, the fund has returned 12.0% per annum since inception in July 2008, representing annualised outperformance (alpha) of 4.6% over the benchmark. The alpha over the last five years and three years amounted to 2.7% and 4.9% respectively.

Macroeconomic sentiment and political events continue to weigh on some individual emerging markets. The best example of this is Russia, where the market is down 20% (in dollars) so far this year due to the ongoing conflict in Eastern Ukraine. Western sanctions were initially treated as an irritant, however Russia has now retaliated with measures such as an import ban on foodstuffs from several countries that sanctioned Russia. Some of our portfolio holdings have been impacted by this, for example the food retailers Magnit (5.3% of fund) and X5 Retail Group (3% of fund). Both import part of their assortment from sanctioned countries and have had to try find alternative suppliers. However the impact has been limited as the proportion of sales affected is less than 10% in both cases. As the two largest formal players in the Russian food retail market, they are probably best able to source replacement products with manageable disruption to operations. This may end up enhancing their value proposition relative to their smaller competitors. Magnit, for example, has been able to grow its market share during the course of this year as small players have struggled. Its sales growth has accelerated from 25% year-on-year earlier in 2014, to 33% in recent months. Overall food inflation has picked up due to scarcity and the falling exchange rate, which is generally positive for food retailers; particularly for X5, who has struggled with static basket sizes for some time now. Having sold a significant part of our X5 exposure at above $22 per share in July, barely a month later we started buying again at below $17 (25% lower than where we were selling). In our view, the fair value of X5 based on our long-term earnings projections did not change materially in that time, yet speculation triggered mass buying and selling of the company during that short period.

More recently, Brazil has been extremely volatile due to presidential elections. Many investors do not believe that the incumbent Dilma Rousseff and her PT (Workers') party are capable of delivering the reform that Brazil's highly bureaucratic and poorly performing economy requires to grow sustainably at the rates achieved during the boom years of 2003 to 2012. These growth rates came at a time of highly favourable terms of trade for the country, with some of its major exports like iron ore and agricultural products enjoying prices well above historical levels. The situation is very different today and Brazil's mediocre growth and deterioration in terms of trade will require significantly better government policies than those that are currently in place. At the time of writing, the first round of voting has resulted in a runoff election between the incumbent and Aecio Neves from the more pro-business party that launched economic reforms and stabilised inflation in the early 1990s. Political fears sent the Brazilian market down 19% (in dollars) during the quarter. This sort of panic-driven selloff does cause short-term pain to the funds we manage. Some 23% of the Global Emerging Markets Equity Fund was invested in Brazil at the start of the quarter and many of our holdings came under severe pressure. In the long run, however, we view these developments as buying opportunities. It would be understandable if huge swings in share prices were in reaction to swings in profitability (both current and future) of the underlying companies. But the reality is that these two factors are completely divorced from each other. In an environment of high single-digit nominal GDP growth, several of our Brazilian holdings have delivered truly astonishing results. In the first half of 2014, the private education company Kroton (4.2% of fund) has seen organic revenue and profit growth of 42% and 93% respectively - and this was before consummating its merger with Anhanguera. The transaction should solidify Kroton's position as market leader and deliver further scale and cost benefits. Lojas Renner (1.5% of fund) has likewise delivered growth of 15% (revenue) and 42% (net profit) over the same period in an environment where most other fashion retailers have really struggled. Although this is just a sample of our holdings, it illustrates a general principle of our investment approach which is seen across our portfolio: individual companies, while subject to the vagaries of the general economic environment, are not beholden to GDP growth. Often the intrinsic drivers of company performance are under their own control. We strongly prefer companies whose brands are highly sought after, so consumers stay loyal even in tough times. Smart, appropriately remunerated management teams whose interests are aligned with shareholders can deliver consistently stellar results - even when facing economic headwinds. Kroton and Lojas Renner are both examples of these types of companies.

On the flip side of this equation, some companies we own are struggling in the short term. Both Hering and Marisa, despite operating in the same industry as Lojas Renner, have delivered poor operational performances. Their share prices are down more than 50% from their respective peaks in 2012 and 2013. The challenge for us is to identify whether this is due to a permanent erosion in the value of their businesses, or if the operational underperformance is temporary in nature. To cite the example of Hering, it appears the company has simply failed to keep its offering of basic clothing fresh, and sales suffered as a result. Gaps in the price points caused by inflation have also hurt the group. For example, prices of Hering's basic T-shirts moved from R$20 to R$25 over the last few years, leaving a gap at the original price point. In our view, the company has made mistakes, but the damage to its long-term brand is minimal. Internal and external surveys suggest that the brand remains top of mind for consumers and traffic continues to be strong. Unfortunately the group's poor assortment means it has failed to convert this interest into sales. The company has taken steps to rectify these issues. With the new summer collections making their way into stores, we should be able to judge the success of these corrective efforts in the coming quarters. If, as in our view, the problems have been adequately addressed, then the earnings base of the business can grow very strongly from here. Hering trades on 12x forward earnings, which is very attractive. Earnings have stagnated at 2011-levels despite revenue growth of 30% in the intervening period. Historically, these sorts of opportunities to buy market leaders at low ratings on depressed earnings are often where we have made the most money for our clients. In the event the problems take longer to sort out than we expect, the fairly low rating does offer some protection against further declines in the share price. Hering is a good example of how we approach investments; when the share price reached its peak in 2012 we sold out completely due to valuation concerns. Following a decline, we gradually built up our position size to reach 3.5% of fund today. We are comfortable that the current portfolio has significant upside. The average upside to our fair values for the stocks held is approaching 60% (weighted by position size), which is significantly above the average level of 50% for the fund since we first started tracking this measure four years ago. We also continue to look for new ideas with regular research trips. Several team members will be in Asia during the fourth quarter with a particular focus on China (23% of fund).

Portfolio managers
Gavin Joubert and Suhail Suleman

Emerging markets recovered somewhat in recent months and the fund has now returned 6.9% year to date, lagging the benchmark MSCI Emerging Markets Index (+9.2% in USD). Over the past one-year period, the fund has generated a return of +27.6% after fees compared with the +23.5% return from the index. Over this period, the five largest contributors (all returns in USD) include Baidu (+103%), Naspers (+61%), Brilliance China Automotive (+68%), Axis Bank (+75%) and Porsche Automobile Holdings (+36%). In terms of detractors, only two stocks had a materially negative impact on the fund: Marisa (-29%) and Daphne (-53%). We believe investors should ideally look at performance over periods of five years and more in evaluating the fund's performance. In this regard, the fund has outperformed the market by 3.3% p.a. over the past five years and by 5.7% p.a. since inception just under six years ago. Amid the ongoing volatility in emerging markets we are continuing to find good selected value. At the end of June, the weighted average upside to fair value of the portfolio was 49.7%, which is broadly in line with the portfolio's average upside to fair value of around 50.9% over the past 4 years (since we started tracking this measure).

We have been reasonably active over the past few months as the volatility in a number of individual stocks presented opportunities. The fund's Russian exposure increased from 12% to 15% (predominantly through three new positions: Mail.ru, Yandex and Lukoil); Chinese exposure rose from 19% to 25% (primarily through two new positions in the internet companies, JD.com (e-commerce) and Soufun (property portal)); and the Indian exposure grew from 4% to 8% (due to a new 4.5% position in Tata Motors which we discuss lower down). At the same time, the fund's exposure to developed market stocks decreased substantially from 17% to 10% (largely through the selling of AB InBev and Heineken), while its Brazilian exposure dropped from 27% to 23% (largely due to having reduced the Anhanguera position from 6.5% to 4.0% of fund in response to substantial share price appreciation as the proposed merger between Anhanguera and Kroton moved closer to being finalised).

Over the (short) 6-month period, collective market participants have gone from concluding that Mail.ru is worth $45 a share (1 Jan 2014) to deciding that the same company is worth only $25 a share (merely 4 months later) to finally assessing that the company is worth over $35 a share (just two months after the $25 bottom). Our view has been somewhat different. Throughout the 6-month period, Mail.ru has in our opinion been worth around $40 a share. Over the past few months, and in particular before we started buying, we reassessed whether there would be any impact on the company's long-term (5 years+) earnings stream (which is what drives our fair value) as a result of what was happening, or could happen, in the Ukraine. While we concluded that shorter-term earnings could be slightly weaker than what we had thought pre-Ukraine, there was little change to our long-term earnings estimates and hence little change to our fair value estimate of around $40 a share. Mail.ru's earnings stream is reasonably defensive - only 30% of revenue comes from advertising (potentially more cyclical), with the balance coming from increasing internet usage driven by growing internet penetration and rising ARPU's (the amount spent by each user). In addition, the company is in a net cash position and as such higher funding costs or a shutdown of Western funding sources to Russian companies will have no meaningful impact on the business. At the beginning of the year - at $45 a share - Mail.ru was overvalued in our view, and we had no exposure. At below $30, however, it started to become very attractive and we initiated buying and accelerated our buying as it declined all the way to $25 a share. At these lows, Mail.ru was trading on around 10x the next year of earnings, after stripping out the net cash position and its stake in Russia's no.1 social media network, VKontakte (which does not contribute to earnings as it is still in the early stages of monetisation). After declining 40% earlier this year, Mail.ru has now recovered 40% from its lows and we have started to reduce the position as it moves closer to what we think the business is worth, which (as mentioned before) has remained around the $40 level throughout this period.

The largest buy in the fund over the past few months has been a new position in Tata Motors (4.5% of fund). While being an Indian company (with a domestic Indian car business), the value of Tata Motors sits in its ownership of Jaguar Land Rover (JLR), which it acquired from Ford in 2008. In fact, 95% of our fair value comes from JLR and it is this asset that attracts us. Given that the fund also has large holdings in Porsche/VW and Brilliance China Automotive (BMW JV in China), an important point to make is that our attraction is more towards the premium car companies specifically and not just to car companies in general. We believe the growth of the premium car market is structural (see chart below for a history of the premium segment's market share in Western Europe over the past 15 years), driven by a number of factors which include the wealth effect; the introduction of more entry level models by the premium car companies; and the growth in the SUV market where the likes of Audi, BMW, Land Rover and Mercedes have been particularly successful. In addition, we believe the good premium car companies are better businesses than mainstream car companies because of stronger and more desirable brands, greater pricing power, higher margins and higher return on capital. The other point we have made before is that even in poor, cyclical, capital intensive industries (like the car industry) there are longterm winners. In our view, Porsche/VW, BMW and JLR all fall into this camp.

On JLR specifically, while the company is of British origin, today it is a truly global business. Of its revenue 33% is generated in China, 16% in the UK and Europe, 14% in the US and 21% in the rest of the world (a large part of which would be emerging markets). JLR have seen a significant reversal of fortunes over the past five years and today produce some of the most desirable premium cars in the SUV segment in particular. Their pipeline of new product launches over the next few years is also attractive and includes new versions of already very successful models (such as the new LR Discovery) and continued moves into the fast-growing premium compact crossover market (where they already have a presence in the form of the highly successful RR Evoque and will be introducing a Jaguar model as well). The management team at JLR is almost entirely German, and of high pedigree with most being heavyweight ex-BMW and Porsche executives. We believe that Tata Motors will generate earnings growth of more than 15% p.a. over the next five years, driven by JLR. Yet Tata Motors trades on just 8.5x the next year of earnings, which we believe is very attractive given the quality of the company's earnings profile and that of its main asset (JLR).

Portfolio managers
Gavin Joubert and Suhail Suleman

In what was a tough year for emerging markets (MSCI EM index -2.27% in USD), the fund generated a return of +12.50% in USD. In ZAR the fund's return was +38.55% compared to the +20.45% return of the MSCI EM index, and in doing so outperformed the market by 18.10%. Whilst we are naturally pleased with such large outperformance, we would point out that 1 year is a very short time period and ideally one should look at 5 year+ periods when evaluating performance. In this regard, since the fund launched 6 years ago in December 2007, it has generated a return of +12.79% p.a. in ZAR, which is some 6.52% p.a. ahead of the market's return of +6.27% p.a. over this same period.

For the calendar year, the nine largest positive contributors were Naspers (+83%), Magnit (+85%), Porsche (+52%), Great Wall Motors (+113%), Brilliance China Automotive (+52%), Axis Bank (+40%), Cognizant Technology Solutions (+50%), Baidu (+96%) and Coca-Cola Hellenic (+85%). The point has been made that we have done well over time because a large part of the fund has been invested in high-quality consumer stocks that have done well. We disagree with this point and a perusal of this year's big contributors serves as backup. In this regard, of the nine largest contributors, only two (Magnit and Coca-Cola Hellenic) could be classified as traditional high-quality consumer companies. Of the other seven, no less than three are car companies (not exactly your average high-quality consumer company), three are technology companies (although one of these, Naspers, is strangely classified by MSCI as a consumer company) and the final one is a bank.

The fact is that we haven't actually owned most of the very high-quality emerging market consumer stocks (BIM, ITC, Hindustan Unilever, Ambev, Walmex, Femsa, Shoprite, etc.) in all cases because of valuation. And whilst all of these stocks have done very well over long periods of time, owning them over the past year has generally been a poor investment strategy as they derated from absurd valuation levels. As a result, a few of them are now starting to look somewhat more interesting to us. We continue to do work on them and wait patiently for the required margin of safety before buying.

We were reasonably active over the past few months and sold out of six positions as they continued to appreciate strongly and reached or approached fair value (Great Wall Motors, New Oriental Education, SABMiller, M Dias Branco, YUM Brands and Colgate Palmolive). Whilst we take a long-term (5 years+) view when thinking about, modelling and valuing companies, we are certainly not 'buy and hold forever' investors: if a share approaches and reaches fair value, we will typically be selling, which is exactly what happened in the case of all six of the sells above. At the same time, we bought five new stocks of note: Netease (2nd largest online gaming company in China), Credicorp (largest bank in Peru), Eurocash (Poland's leading cash and carry retailer), Carlsberg (3rd largest beer company in the world) and Gerdau (Brazil's largest steel company). Over the past few months we also added to the fund's position in Porsche, which is now the single largest position at 7.7% of fund. Even though Porsche has appreciated by around 30% since our initial purchase, we continue to believe that the share is materially undervalued.

Porsche today is not actually Porsche as one would conclude from the name: in fact, its only asset (besides a net cash position) is a 32% stake in Volkswagen (VW) due to the fact that in 2011 VW acquired the Porsche assets. Our investment case is therefore first and foremost about VW. In our view, Porsche is merely a cheaper way to buy VW.

There are a number of key points we like about VW as a business:

- Owner of some of the best car brands in the world, notably the VW brand itself, Audi and Porsche (these three brands contribute 70% of group profits).
- A focus on higher-end brands (Audi and Porsche) that are better businesses than mainstream car brands, in our view, and generate higher margins and return on capital.
- Leaders in engineering and customer satisfaction, the results of which are reflected in the fact that VW's global market share has increased from around 9.5% in 2007 to almost 13% today (see graph below). The fact is VW makes attractive, reliable cars that people want to own.
- Scale (enabling more to be spent on R&D and marketing) and platform sharing (resulting in efficiencies between the various brands).
- High emerging markets exposure (est. 45% of profits) where car penetration is still low.

There is no debating that the car industry is a poor industry (very cyclical, capital intensive, intensely competitive, etc.), but within this industry there are inevitably winners - in our view, VW is one of them. Despite its strong earnings track record and operating metrics (5-year ave. ROE of 12%), the share trades on just 8.5x 2014 earnings. In our opinion, the entire industry is being painted with the same brush (partly because of the poor history of US car companies and more recently a number of European car companies), whereas in reality not all car companies are equal. Whilst VW is very cheap in our view, Porsche in turn trades at a large discount to the value of its stake in VW (in effect on around 6.5x 2014 earnings). This is partly due to concerns about litigation from hedge funds arising from the short squeeze in VW shares in 2008. Even providing for the total litigation claim amounts (which is very unlikely to be realised in our view), Porsche would still be marginally more attractive than VW. If anything less than the full claim is realised, Porsche is far more attractive from a valuation point of view than VW, and as such we have taken all of the fund's exposure through Porsche.

Whilst the news flow and equity market performance from emerging markets continue to be poor and a number of emerging market economies are undoubtedly going through a tough period, we are able to find selected good value in individual companies. The weighted average upside (share price to fair value) in the portfolio is currently 50.4%, which is broadly in line with the average of 50.1% over the past 3.5 years (the low was 31.2% in January 2013 and the high was 87.9% in September 2011).

In early December two members of the team were in Brazil where they met with management of most Brazilian portfolio holdings and further research trips are planned for late January (Thailand and Philippines), February (India) and March (Brazil again, as 23% of the fund is now invested in Brazil).