Rob Dower
Quarterly Commentary

2013 Q3 Comments from the Chief Operating Officer

Our first article this quarter is Sandy McGregor's economic commentary arguing for the US Federal Reserve (the Fed) to begin its long-awaited return to a more normal monetary policy. Analysis of central bank policy is important and makes for interesting debate, but it can be distracting. In fact, these are generally distracting times for investors. As I write, the major arms of the US government have been unable to agree a budget for the next year and appear to be heading towards a similar stand-off on the appropriate total level of debt for their country. If they can't agree, the US will have to cut spending dramatically or default on its obligations, either social or financial.

At the same time, the appointment of the Fed's new governor has been confirmed. The world is hanging on her lips for the first indications of when to expect US quantitative easing (printing money to buy financial assets, thus driving asset prices up and interest rates down, to encourage confidence and economic growth) to taper off.

There is plenty of news in our own country to fret about, including consumer indebtedness, the resources cycle, government economic policy, next year's general election and good and bad news about the ethics and competence of South Africa's public and private sector leaders. African development and political strife, the sustainability of Chinese economic growth, European demographics and Japanese reflation are interesting topics for debate and consume pages and pages of commentary every day.

If they were predictable, or at least had a predictable collective impact on investment returns, these issues would be very useful topics for investment analysis. Instead, for us they are really just potential distractions from the much more productive work of bottom-up stock analysis. Adhering to our investment process and philosophy, we focus on simply analysing the intrinsic value of companies and comparing our estimate of each company's value to the price of its shares. This philosophy seems to reward disciplined and rigorous analysis with long-term outperformance, despite the markets' best efforts at efficiency.

Henk Pieterse and Zwelethu Nkosi make this point in their article about our new advertising campaign. The main message of the campaign - giving in to distractions makes us human, but it isn't good for investing - is not only relevant to our investment process and philosophy, it is also a message to clients; a message to remember when you are tempted to abandon your financial plan or to switch into the most fashionable new opportunity at the wrong moment.

Hunting for opportunities

As you probably expect, this issue of Quarterly Commentary includes some details about South African and international shares that we currently find attractive. One of these is Standard Bank, recently upweighted in our clients' portfolios. Standard Bank's return on assets is currently below its historical average. Mark Dunley-Owen gives his analysis of this decline and explains why we believe it is temporary. Since the share price appears to discount a permanent reduction in profitability, a return to normal would generate above-average returns for shareholders. These are the kind of opportunities we look for based on our 'bottom-up' approach to investing.

Seema Dala briefly covers the investment case for Micron Technology in her offshore piece. While unpacking some of the reasons behind the Orbis funds' outperformance year to date, Seema reminds readers that our and Orbis' funds' overall positioning is driven by our views on individual companies, rather than global macroeconomic events and current trends. The turnaround in fortunes for the Orbis funds shows how important it is for analysts to invest with conviction. In our portfolios, yesterday's losers are often tomorrow's winners, illustrating how critical it is to have thorough research to support your long-term investment ideas.

Many investors are asking if they have missed the offshore boat, bearing in mind how well many offshore investments have done over the past few months. A decision whether or not to hold offshore investments should be based on diversification and access to a wider opportunity set, both of which look through recent performance. We understand that many of you may be keen to invest offshore but neglect to do so as you find it too daunting. Johann Grandia's piece, which explains the benefits of our offshore platform, provides a helpful overview of how to invest using foreign currency.

Back to basics

We like to use this Quarterly Commentary to share our views and insights, but we realise that sometimes clients would just like to have everyday questions answered. We have therefore introduced a new educational article. 'Investing tutorials' will cover one question or idea each quarter. This time we discuss the importance of preserving retirement savings. Tempting as it may be to cash in your retirement savings if given the opportunity, Thandi Ngwane encourages you to think twice.

Thank you for your ongoing support. Do not be distracted from your long-term financial goals.

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