Rob Dower
Quarterly Commentary

2010 Q4 Comments from the Chief Operating Officer

It has been an interesting year. Twelve months ago, I wrote that we did not think share price valuations were justified by the fundamentals of SA listed stocks, and that investors would be wise not to expect future returns from South African investments that matched those of the preceding decade, especially not in dollar terms. Six months ago, I warned you about the potential consequences should some of the foreign portfolio inflows that have so strengthened our markets and our currency be reversed.

In the last few months the markets have let neither the weak local recovery nor the fickleness of foreign investors bother them at all. The JSE is up 18% in rands and 29% in dollars. Foreign appetite for JSE-listed shares has been such that many of their prices have risen along with a strengthening rand, despite their fundamentals in some cases being theoretically helped by a weaker currency. Although we make investment decisions based on individual stock analysis and not on macroeconomic predictions, the views we expressed in this magazine last year were founded on what we observed in our analysis of shares, and so were also reflected in your portfolios. As a result, while the absolute returns of most of our portfolios have been satisfactory, many of them have lagged their benchmarks over the last year.

It is widely perceived that there is an enormous amount of liquidity available in the world in search of growth and of yield. The potential for further developed market capital flows to drive a bubble in SA and other developing market assets is therefore not insignificant. If that were to happen we would probably continue to underperform on a relative basis. But from here, and at the risk of oversimplifying a very complex environment, the risks we worried about over the past year have become more worrying, and the potential for capital loss greater. Within their mandates, your portfolios remain invested more to protect you from losing money than to capture short-term gains from the current momentum. This is particularly so in the Stable Fund, as Ian and Mahesh set out in our first article.

On top of the global capital flows impacting SA investment markets so dramatically, there have been a number of occasions - sometimes painfully long - when Orbis and Allan Gray's stock-picking decisions have caused us to lag the market and our peers. History has shown, however, that those decisions tend to be vindicated over the long run. Unfortunately that does not make it any easier to endure tough periods. Trevor Black and Henry Allen from our offshore partner Orbis look at some of the factors behind Orbis' disappointing recent stockpicking performance and provide some historical perspective on similar periods in the past.

Rory Kutisker-Jacobson describes the investment case for Royal Bafokeng Platinum, which came to the market in the last quarter of 2010 and which we believe represents the most attractive value in the platinum sector. He tells the story of how the Bafokeng Nation's long-term thinking, sacrifice and disciplined saving over 130 years has resulted in their owning such a valuable stake of the newly listed business.

Nick Ndiritu explores the potential for capital deployment in Africa. Changes in the prudential investment guidelines for pension funds are almost sure to soon allow an extra 5% of these portfolios to be invested on the continent. Nick sets out why we think Africa outside SA is likely to provide long-term opportunities for investors and discusses how we are applying our philosophy in these markets.

Finally, a caution: this issue includes two full articles on the subject, but please remember that the short-term performance of a fund is important only in that it adds up to long-term performance. On its own it is a poor basis on which to make a switching decision.

We remain grateful for your trust and confidence and we are doing our utmost to keep earning it. I sincerely hope our caution in the investment markets for 2011 is unnecessary and I wish you well for the year ahead.

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