Rob Dower
Quarterly Commentary

2014 Q1 Comments from the Chief Operating Officer

Adding value through stock picking, here and abroad

As you are most probably aware, asset allocation funds have the mandate to vary their exposure to asset classes, however our local Equity Fund and the Orbis Global Equity Fund are mandated to invest only in equities. Value-add in these funds comes only from the fund managers' stock-picking success.

Bearing in mind that the South African market is highly concentrated, the shares we own, as well as those we don't, have a big impact on our Equity Fund's performance. The top 10 holdings as listed on our fund factsheets give you an idea of our large holdings, but there are some small and mid-cap companies that make a significant difference to clients' returns. Although it is hard to make a case that generally small- and mid-cap shares are cheap in South Africa right now, the universe of such stocks is large enough that there are compelling investment opportunities among them available to diligent investors and analysts. Ian Liddle and analysts from his team provide an overview of some of the Fund's current small- and mid-cap holdings.

Living in South Africa, we are tempted to think that SA investments should make up the majority of our assets. It makes better sense to invest in the best opportunities in the world, and since SA makes up a small part of the world, it would be surprising if the majority of the best investment opportunities happened to be here.

The Orbis team has a much broader range of shares at its disposal. Investment analysts scour the global landscape for stocks that are trading at attractive multiples relative to their assessment of their true value, with little regard for the region or sector in which they are based. They often find opportunities when other market participants are fleeing, taking advantage of our shared long-term perspective and a willingness to see things differently.

It is unsurprising that the Orbis Global Equity Fund has a reasonable exposure to Asia, excluding Japan, which was a standout laggard in 2013. Like Allan Gray, Orbis makes investment decisions based on an assessment of the intrinsic value of individual stocks, not on overall geographies. However, with 7% of the Orbis Global Equity Fund invested in Chinese stocks, clients are asking about Orbis' view on the country's economy. Seema Dala highlights the trends that appear to be problematic, and outlines how Orbis has incorporated these into its bottom-up approach. She also discusses some of the attractive opportunities Orbis has found in developed markets, despite valuations looking stretched overall.

Global economics

Sandy McGregor draws a parallel between the outbreak of World War One in 1914 and the recent global financial crisis, arguing that the seeds for both lay in their preceding long periods of stability. Around the world, governments and policy makers attempt to engineer steady economic growth and stable price levels and exchange rates. This is fine, up to a point, but long periods of economic stability are ultimately self-defeating. Since market stability encourages increasing risk-taking, it ultimately causes instability. After a great period for global and SA stock markets, Sandy McGregor's piece offers a good reminder: long periods of stability can come to an end suddenly and in a way which is totally surprising.

Making better financial decisions

Asset allocation and fund selection are big decisions, and it's important to consider your investment objectives and the level of risk you can stomach before you commit to anything. If you are not comfortable making these decisions on your own, it is worthwhile consulting an independent financial adviser (IFA). Jeanette Marais discusses some of the merits of getting financial advice and offers a few practical points to consider when choosing an IFA.

If you want to be involved in the decision-making process, or if you wish to make your investment decisions unaided, it helps to know what to look for when picking a fund manager. With 1 477 registered unit trusts available locally, it's easy to become overwhelmed. Daniel van Andel offers a basic guide to picking a fund manager, and cautions investors against making a decision based on a single factor, such as the size of a fund.

It's also important to understand how a fund works so that you have some idea of what to expect from its performance. For example, you need to expect, and be able to stomach, short-term volatility from an equity fund. This will help you to remain invested for long enough to benefit from your fund manager's expertise, rather than 'switching' in a temporary dip. In this month's Investing Tutorial, Thandi Ngwane explains what switching is and why this should be a carefully considered investment decision.

I hope you enjoy this issue and look forward to your feedback. Thank you sincerely for your continued support.

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