The fund underperformed its benchmark by -0.5% p.a. over a rolling 5-year period (15.2% versus 15.7% p.a.) and outperformed by 3.3% (17.2% versus 13.9% p.a.) since inception. The fund remains one of the top-performing funds in its sector over all meaningful periods.

The third quarter of 2015 saw a sharp sell-off across all markets. The MSCI World and MSCI Emerging Market indices returned -8.3% and -17.8% in US dollars respectively. Locally, the JSE All Share returned -13.8% in dollars, but the significant depreciation of the rand, in line with other emerging market currencies, meant that the decline (in rand terms) was more muted at -2.1% for the quarter. Commodity prices continued to slide: oil fell 22.1%, platinum lost 15.8% and copper was down 10.1% in US dollars for the quarter. The decline in commodity prices weighed heavily on resource shares with the local resources index declining 17.9%, underperforming industrials and financials that returned 0.8% and -1.1% for the quarter respectively. The longer-term divergence in the performance of resources relative to industrials and financials remains stark. The resources index has declined over one, three and five years and has now underperformed cash over a 10-year period.

+The US economy continues to recover and the market is focused on the quantum and timing of interest rate hikes by the US Federal Reserve (Fed). The Federal Open Market Committee met in September, but elected to leave interest rates on hold, citing the risks posed to US growth from weakness in emerging markets and volatility in global asset markets. Following these events, as well as mixed US activity data in early October, we remain of the view that interest rates will be hiked gradually. Europe continues to fight the threat of deflation with bouts of quantitative easing. While it has managed to avoid a Greek exit, it is now having to deal with a refugee crisis. We expect Europe's recovery to be mild, with the European Union doing everything in its power to stimulate growth. The big surprise in the quarter was an unexpected move by the People's Bank of China to devalue the yuan following sharp declines in the Chinese equity market and a spate of weak economic data. This stoked concerns about the extent of weakness in the Chinese economy and the ability of policymakers to support growth. Economic policy is likely to become more stimulatory as the economic slowdown continues.

As mentioned on previous occasions, China remains the key call for resource shares given its role as a significant consumer of commodities. It is an opaque, command-driven economy that is in the process of rebalancing from being traditionally infrastructure-led to becoming more consumer-driven. As a result, one can never have complete conviction as to how the Chinese economy will unfold. We believe a lot of this uncertainty is reflected in the significant underperformance of resource shares. This presents a good opportunity for the valuation-driven, patient investor who is prepared to take a long-term view. Based on our assessment of fair value, resources are attractive enough to warrant a healthy weighting in our equity and balanced portfolios. However, given that China remains an imponderable, this is not a portfolio-defining position. Our preferred holdings remain Anglo American, Mondi, Exxaro and the platinum producers. We continue to favour platinum over gold producers and our preference remains the low-cost platinum producers Impala Platinum and Northam.

South African economic growth remains weak as falling commodity prices and sluggish growth among our trading partners undermine exports. In addition to these factors, domestic growth has been hurt by the disruptive impact of load shedding (while rolling blackouts have reduced, the electricity crisis is by no means resolved), the adverse impact of the visa debacle on tourism, poor fiscal discipline and corruption as well as wasteful spending by state-owned enterprises. These factors were acknowledged by the South African Reserve Bank (SARB), who revised its growth forecasts lower. Following the Fed's decision not to raise rates, the SARB also held rates steady at the September Monetary Policy Committee meeting. Although the SARB continued to highlight upside risk to inflation due to currency weakness and high administered prices, we anticipate a very mild interest rate hiking cycle due to the weak domestic economy. The average domestic business is extremely challenged - years of real increases in administered prices and labour costs have left local businesses simply uncompetitive relative to their global peers. It is for this reason that imports are still entering South Africa notwithstanding the significant selloff in the rand. We continue to favour the quality, global businesses that happen to be domiciled here, such as Naspers, British American Tobacco, Steinhoff, MTN and Richemont. These companies have robust business models, are diversified across numerous geographies and currencies, and remain attractive based on our assessment of their intrinsic value, especially when compared to pure domestic businesses.

We believe the JSE, as a whole, is fairly valued. However, there is a significant divergence in valuations: investors are prepared to pay high multiples for stable, defensive businesses while ignoring the higherheartbeat, more cyclical businesses such as resource and construction shares. We continue to hold reasonable positions in the food retailers Pick n Pay, Spar and Shoprite Holdings as well as selected consumer-facing businesses (Woolworths, Foschini and Clicks). These businesses enjoy pricing power, are exceptionally well-managed and trade below our assessment of fair value.

Banks returned -8.5% for the quarter, underperforming the broader financial index. The current earnings of the large commercial banks approximate our assessment of their normal earnings power. Net interest margins should benefit as interest rates are hiked. Although this will be offset by rising credit loss ratios, banks have used the current benign environment to bolster general provisions that should buffer some of this impact. Valuations remain reasonable on both a price-to-earnings and price-to-book basis. Our preferred holdings are Nedbank, Standard Bank and FirstRand. Life insurers returned -2.1% for the quarter. We prefer Old Mutual and MMI Holdings, both of which trade on attractive dividend yields and below our assessment of their intrinsic value.

In terms of asset allocation, equities remain our preferred asset class for producing inflation-beating returns. We prefer global to domestic equities on the basis of valuation and remain at the maximum 25% offshore limit in our global balanced funds. In conclusion, financial markets are likely to remain volatile. While this may be uncomfortable at times, we have consistently found that it is during such periods, when emotion trumps underlying fundamentals, that we have added the most value in our portfolios. This positioning may take time to be vindicated, but history has shown that a disciplined, un-emotive investment philosophy can deliver compelling results.

Portfolio manager
Karl Leinberger

The fund has marginally underperformed its benchmark by 0.6% p.a. over a rolling 5-year period (17.6% versus 18.2% p.a.), but has outperformed by 3.5% (18.0% versus 14.5% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods.

Markets continued to benefit from record-low interest rates and a benign outlook for inflation. Locally, the JSE All Share Index returned 5.8% for the first quarter of 2015. Financials and industrials gained 11.2% and 5.6%, respectively, while resources declined 0.2%. Global markets also had a good quarter, with the MSCI World Index returning 2.4% in US dollar terms. The rand weakened by 4.6% against the US dollar over this period.

On the macro front, the economic and geopolitical outlook remains uncertain. Although the US is on the path to recovery, the rest of the world is in varying degrees of distress. China remains the most important economy for resource demand and recent data continue to disappoint. In Europe, Mario Draghi, the European Central Bank president, delivered on his promise to do "whatever it takes" to improve the economic prospects for the region and announced a quantitative easing programme in January. During the first quarter, the euro weakened 11% against the US dollar. The weaker euro is likely to increase the competitiveness of European exporters and will hopefully provide some stimulus to a region that has been battling to deliver any form of sustainable economic growth.

The weaker macro environment, strengthening of the US dollar and increase in mine supply across key commodities have generally been negative for commodity prices. Some of the notable declines (in US dollars) for the quarter:

-Iron ore fell 28% and is now trading 75% below the peak levels achieved in 2011.
-Brent crude declined 10%, now trading 60% below its 2008 peak.
-Platinum dropped 6%, now trading 47% below its 2008 peak.

It is human behaviour to extrapolate past performance when making future investment decisions. It is therefore no surprise that the resource sector is largely unloved. Our preferred holdings remain Anglo American, Mondi, Sasol and Exxaro. We continue to favour platinum over gold producers and our preference remains the low-cost platinum producers Impala Platinum and Northam. We also have a reasonable weighting in platinum and palladium exchange-traded funds.

We maintain a healthy exposure to resources in our equity and balanced funds based on our assessment of long-term value, however we have not "bet the farm" on one idea. We believe that in fund management, portfolio construction is at least as important as the research process. It is critical to understand probability distributions around fair value, especially when the distribution around fair value is quite wide (i.e. the impact of one assumption versus another produces a materially different fair value). We aim to produce anti-fragile portfolios that will deliver through many different scenarios and include many different ideas, rather than just one, to cater for the scenarios where we may be wrong. Although this may seem like quite a simple concept, we believe it is fundamental when assessing the track record of any manager over the long term.

Domestic equities, in general, remain fairly valued. We continue to favour the quality, global stocks that happen to be domiciled in South Africa, such as MTN, British American Tobacco, Richemont, Steinhoff and Naspers. Although these shares have performed extremely well relative to the broader market, they remain attractive based on our assessment of their intrinsic value and particularly attractive relative to pure domestic businesses.

We have owned very few domestic businesses in the past, especially consumer-facing ones, on the basis that valuations were not attractive. Given their reduced margin of safety, we took some profits in The Foschini Group and Clicks Group during the quarter. We, however, continue to hold reasonable positions in both stocks which are still trading on reasonable ratings based on our assessment of their normalised earnings.

Banks returned 12.6% for the quarter, outperforming the broader financial index. Net interest margins should benefit once interest rates are eventually hiked. While this will be offset by rising credit loss ratios, banks have used the current environment to bolster general provisions, which should blunt some of the impact. The large commercial banks' current earnings approximate our assessment of normalised earnings. Valuations are reasonable and we have maintained our weighting. Life insurers, on the other hand, currently trade on premiums to their embedded value and do not offer value in our estimation.

The SA equity market is becoming more and more dislocated. The market is increasingly prepared to pay any price for good businesses with good prospects and increasingly indifferent to the low ratings/valuations for poorer quality businesses with weak short-term prospects. We believe paying too much, even for a good business, can cripple future returns; hence it is important to remain disciplined around one's assessment of longer-term valuations.

The greatest contributors to quarterly performance were our overweight positions in The Foschini Group, Northam Platinum, Pioneer Food Group and Mondi. Our overweight positions in Impala Platinum, Anglo American and Trencor, as well as our underweight position in Naspers, detracted from performance.

Over the past decade, almost all asset classes have generated significant returns and we have cautioned investors for some time to moderate their return expectations going forward. We remain concerned that exceptionally low interest rates around the globe continue to force money into riskier but potentially higher-yielding investments. The search for yield is resulting in a growing gap between the financial markets and the real economy. To quote Warren Buffett, "The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behaviour akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future, will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem though: They are dancing in a room in which the clocks have no hands." As stewards of your capital, we will seek to remain disciplined and focused on long-term valuations as we strive to continue to deliver superior longterm returns relative to our respective benchmarks.

Portfolio managers
Karl Leinberger and Duane Cable

The fund has marginally underperformed its benchmark by 0.2% p.a. over a rolling 5-year period (17.6% versus 17.8% p.a.) but has outperformed by 3.6% p.a. (17.9% versus 14.3% p.a.) since inception. The fund is one of the top performing funds in its sector over all meaningful periods.

Looking back, 2014 certainly presented some choppy waters for investors to navigate. Some of the challenges included slowing economic growth in China, the demise of African Bank, disruption caused by load shedding, the outbreak of the Ebola virus, the collapse of commodity prices, the Russia/Ukraine conflict and the continued weakening of emerging market currencies. Despite the many challenges we faced, the year turned out to be another good one for most asset classes worldwide. Markets continued to benefit from record-low interest rates and a benign outlook for inflation. Locally, the JSE All Share Index returned 10.9%, although the second half was much tougher for investors as the index declined almost 5% from the highs reached in July. Global markets also had a decent year, with the MSCI World Index returning 5.5% in US dollar terms. The rand weakened by 10.3% against the US dollar over this period.

On the global front, the economic and geopolitical outlook remains uncertain. Although the US is on the path to recovery, the rest of the world is in varying degrees of distress. China remains the most important economy for resource demand and recent data confirms it is slowing. The weaker macro environment, strengthening of the US dollar and increase in mine supply across key commodities have generally been negative for resource prices.

Locally, the decline in the oil price is positive for our inflation outlook. It eases pressure on the new SA Reserve Bank governor to hike interest rates and provides a much-needed "tax cut" for consumers. The challenges at Eskom and impact of load shedding are clearly negative for economic growth and companies' earnings are likely to be adversely impacted. The relatively stable power supply during the festive season provided a false sense of security and we remain concerned about the serious problems we face over the short term given the challenges at Eskom. To quote Charlie Munger, "If you jump out of the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem."

The All Share Index returned 1.4% for the quarter. Financials and industrials gained 10.8% and 7.0%, respectively, while resources declined 19.3%. The decline in commodity prices continues to weigh on the resource sector. Short-term profit forecasts are abysmal and companies have cut staff, reduced exploration spend and cancelled capital expansion projects in an attempt to reduce costs. As painful as it has been, the market has been very quick to price in the bad news. Many commodity prices are now below the marginal cost of production and we are starting to see the supply response needed to improve the demand/supply balance. In the long run, commodity prices are determined by the cost of production. Our assessment of normalised commodity prices is based on a detailed analysis of the cost structure of each commodity, the demand/supply outlook, incentive prices and long-term industry margins. Given the inherent risks in forecasting, we do look at various scenario analyses to "sense check" our assumptions and ensure our investment cases for individual positions are robust enough for more bearish scenarios. We maintain a healthy exposure to resources in our equity and balanced funds. Our preferred holdings remain Anglo American, Mondi, Sasol and Exxaro. We continue to favour platinum over gold producers and our preference remains the low-cost platinum producers Impala Platinum and Northam. In addition, we also have a healthy weighting in platinum and palladium exchange-traded funds. Domestic equities, in general, remain fairly valued. We continue to favour the quality, global stocks that happen to be domiciled in South Africa, such as MTN, British American Tobacco, Richemont, Steinhoff and Naspers. Although these shares have performed extremely well relative to the broader market, they remain attractive based on our assessment of their intrinsic value and particularly attractive relative to pure domestic businesses.

We have owned very few domestic businesses in the past, especially consumer-facing ones, on the basis that valuations were not attractive. However, we continue to hold our positions in The Foschini Group and Clicks Group despite recent strong performances. We believe these companies continue to trade on undemanding ratings based on our assessment of their normalised earnings. We have also used the sell-off in Woolworths following its takeover announcement of the Australian department store chain David Jones to build a sizeable position in the South African company. We think the market had underestimated the positive impact of this transaction. We believe Woolworths is a quality business with a world-class management team, trading at an undemanding rating based on our assessment of normalised earnings.

Banks returned 15.8% for the quarter, outperforming the broader financial index. Net interest margins should benefit once interest rates are eventually hiked. While this will be offset by rising credit loss ratios, banks have used the current environment to bolster general provisions, which should blunt some of the impact. The large commercial banks' current earnings approximate our assessment of normalised earnings. Valuations are reasonable and we have maintained our weighting. Life insurers, on the other hand, currently trade on premiums to their embedded value and do not offer value in our estimation. The greatest contributors to quarterly performance were our overweight position in Pioneer Foods, as well as our underweight positions in BHP Billiton and Sasol. Our overweight positions in Anglo American, Exxaro and Impala Platinum detracted from performance. Over the past decade, almost all asset classes have generated significant returns. We have cautioned investors for some time to moderate their return expectations going forward. As we start a new year, we are bombarded with predictions from numerous financial experts about what lies ahead in 2015. The investment waters certainly appear choppy, with many uncertainties and unknowns. History has taught us that our ability to forecast the immediate future is limited. If you waste much of your time worrying about questions that can't be answered, you lose focus on the few things that can be answered. "The fishermen know that the sea is dangerous and the storm terrible, but they have never found these dangers sufficient reason to remain onshore," Vincent van Gogh once remarked. As stewards of your capital we will seek to cut out the noise and to remain focused on long-term valuations. We will look to take advantage of whatever attractive opportunities present themselves in 2015 as we strive to continue to deliver superior long-term returns relative to our respective benchmarks.

Portfolio managers
Karl Leinberger and Duane Cable Client