"Panics do not destroy capital. They merely reveal the extent to which it has previously been destroyed by its betrayal into hopelessly unproductive works."

John Stuart Mills "Credit Cycles and the Origins of Commercial Panics", 1867

One of our analysts recently attended a Bank Credit Analyst presentation on the global economy and provided feedback to us which was music to our ears. The presenter, who had been on a global road show, suggested that in his entire career, he had never experienced so much pessimism expressed by investors. All around in the media, in our visits to clients and companies and chatting to other fund managers, the world's future and how bad it is, is discussed at length. Some say that this time it is worse than 2008. My conclusion is always the same: I don't know! I don't mean to belittle those who attempt to worry about the future in general, but my experience has been that worrying about the specific companies that we own is a much more profitable exercise and that when pessimism abounds, it creates wonderful buying opportunities. Clearly, if your time horizon is in the very near future, you may want to concern yourself with the current situation, but for us holding a five to ten year view, what happens in the next year is of less importance.

Unfortunately, pessimism has not hit the JSE very hard and has not created the buying opportunities we seek. On the other hand, companies in the USA, such as the technology companies, are really cheap. To put it into perspective, I have counted five to seven companies that have an excess cash of $120 billion on their balance sheets - the kind of cash Greece could certainly do with. Remember their debt is around €440 billion.

Much of the pessimism expressed by ourselves in the early part of the year has materialised, and we are now quite optimistic about the future. Our risk is getting lower as we move into the fourth year of washing out of excess capital and many markets have moved into bear market territory. I cannot say that the worst is over, but on balance, there is a lot of bad news priced in. Cash, bonds, and emerging markets are not our desired investments, whereas certain shares in the developed markets are looking very attractive. In my opinion, we may look back in the next few years and yearn for the days when we could buy companies (mainly in the USA) whose market cap was made up of almost 50% cash.

For a number of quarters we have informed investors of the virtues of investing in developed markets as opposed to developing and emerging markets. It is pleasing to see that the portfolio performed well versus the local market in US dollar terms. In an effort to learn from past mistakes, we are shaping the portfolio in such a way as to start making better use of its flexible mandate and to invest in a more focused manner. The intended result of this approach is to have fewer investments that make up a larger portion of the portfolio and to try and gain larger exposures to instruments other than equities. An example of the initiative to make use of the mandate flexibility is that we have created an 'income portfolio' within the portfolio. In essence, we have taken a number of high-yielding instruments, which cumulatively make up 6% of the portfolio, but on their own do not make up more than 1.5%. These yields range from 30% to 6% in developed market currencies.

Furthermore, we have made investments in equities with high-dividend yields, but which are unloved by the market. We are quite content to earn these dividends while the companies work towards unlocking the value on their balance sheets. Examples of these stocks include Vodafone, BA systems, Johnson & Johnson, Total and BP.

The portfolio's exposure to Japan hurt, but we believe the effects of the Tsunami are short term and the market is already starting to appreciate the effects of the rebuilding process on the economy. We have used the weakness in the market to increase our exposure to the Japanese economy.

Our expectations for returns are low for the next few months. There is simply too much uncertainty to allow markets to continue their upward progression and we are not sure how this will play out. In the meantime, the portfolio is loaded with strong, inexpensive companies, whose borrowing costs are below that of many countries. We have the cash to take advantage of any severe downturns and as we have seen in the past, any weakness in the rand will be good for the portfolio.

In a recent unit trust study undertaken by Morningstar, which assesses key elements of the unit trust investor experience across different countries, South Africa ranked second from the bottom, with New Zealand being the worst ranked.

In particular, we scored very poorly on disclosure. I must admit I was a bit mystified. In the case of the Nedgroup Investments Bravata Worldwide Flexible Fund, the facts are that we produce on a monthly basis, a fact sheet and investment manager commentary, which highlight important issues that may influence an investor's thinking. In addition, investors have access quarterly to the full holdings of the portfolio. Investors may even have access to the investment manager, which is certainly true in our case. From time to time, the management company, Nedgroup Investments will host a road show where investors and financial planners are kept informed of actions taken within the portfolios. Then there are also the Trust Deeds that supply further detailed information. In an attempt to nurture additional insight and understanding of our thinking and process, we have published for the last four years an annual letter on the portfolio. On re-reading the Morningstar review, I feel that it may be the case that a foreign company is trying to apply its own standards to our markets.

Speaking of administrative matters, we have been requested by the FSB to withdraw our investment in the Capita Financial Morant Wright Japan Fund. Their mandate allows them to gear the fund, and despite receiving an annual "Letter of Comfort" from the directors that they will not gear, we have been required to disinvest. Morant Wright has been my preferred Japanese investment manager since 1999 and has been a good asset to the portfolio. Their conservative style suited us and they have added a large amount of excess return to the Japanese component of the portfolio. We have replaced this holding with the Orbis Japan Fund. Orbis is an investment manager that we have used before and who also have a good track record.

On investment matters, the portfolio has increased liquidity and tended to focus on large multinationals. These companies have strong balance sheets and are generating significant amounts of cash. Our expectations for markets are subdued and we anticipate better buying opportunities ahead. Our equity exposure is just over 70% -the balance is in cash with a small percentage in bonds.

Should an investor scan through the portfolios of any global fund managers and compare them to the Nedgroup Investments Bravata Worldwide Flexible Fund, they would almost certainly notice two distinctions: virtually no gold exposure and some investment in Japan. Our views on gold are well documented and we won't explain here why we do not have any. However, we have always had a somewhat higher exposure to Japan than most fund managers and it is worth looking into why we continue to have a significant investment.

A recent column in the Financial Times reported that Japan's forward P/E now stands at 13.6 times. Japan's Shiller P/E Ratio (which uses 10 years of average inflation-adjusted earnings) is much cheaper than that of the US, China and just below that of Europe. When looking at other measures, the market price is just above one times book value whereas the US is two times book value. Price to Cash Flow and Price to Sales metrics are also lower when compared to the US. Japanese dividends in general are higher than that of most American companies with the exception of the larger ones. The message is clear: when compared by these metrics, Japanese companies are relatively cheap.

But Japan has always been cheap and just gets cheaper. Their declining population and the associated problems are well known. They are also one of the World's most indebted nations. We could go on about all the woes of investing in Japan, but simply put, the valuations are now tempting. Most of our investments are trading below net asset value and we are being paid in the form of dividends to hold these assets.

Back in 2006 we made the case for investing in Japan, namely domestic Japanese stocks, ie excluding exporters, and that the currency was undervalued. While our stock picking was reasonable, the return on the currency was spectacular. Today, while 10 percent of the portfolio is invested in Japanese stocks, we have no yen exposure. We have hedged the yen into various other currencies. What this means is that we have exposure to the relatively cheaper stocks but not to the currency.

Our investment thesis is that when the world rebalances, these stocks should rise as the Japanese economy is monetised. Perhaps higher inflation may occur, we don't know, but in the meantime we have exposure to some of the cheapest, safest and highest dividend paying companies in the world.