The first quarter of 2020 has been one of the most volatile in recorded history as markets have had to digest both a health and a potential financial crisis. There is a real human cost, which differentiates this from previous market declines. Many experts seem to disagree on the best method of response, but what we do know is that the short-term economic consequences are going to be severe - especially given the significant leverage in the world economy, which remains above 2008 levels. This may result in forced selling of assets to raise cash, causing markets to fall in a feedback loop.

Unfortunately, there have been very few, if any, places to hide in an equity fund. Large liquid shares, such as Naspers, Richemont and British American Tobacco, have outperformed as investors seek safe havens in businesses they believe have a very high probability of surviving the current environment without financial distress. However, it is not as simple as just buying so-called safe shares: Despite being one of the largest consumer staple companies in the world, ABI has fallen by 46% when measured in dollars year to date, mainly due to its high debt levels.

Many domestic shares, especially consumer-facing businesses, are trading at very depressed levels as the market discounts the very bleak economic outlook and uncertainty associated with containing the COVID-19 pandemic. Some companies’ revenue may go to zero over the short term. We expect banks and the government to support well-run and solvent companies that run into shortterm liquidity problems: It makes sense to do so from a long-term economic point of view. As hard as it is to visualise now, if we assume a more normalised economic environment and that South Africa handles the potential health crisis competently, there is amazing value to be found for long-term investors.

The obvious disappointment has been Sasol, which has declined significantly, and whose intrinsic value is less than we believed it to be. The cost overruns at the Lake Charles project resulted in a significant net debt position, leaving Sasol vulnerable to a collapse in oil and chemical prices. The company has announced several measures to strengthen its balance sheet. We will adjust our thinking as more information becomes available. We remain holders of the share.

The Investment team spends a lot of time thinking about the risks in the portfolio given that no one knows how and when this crisis is going to end. We have, where appropriate, limited the exposure to certain sectors and individual companies. We have kept our large exposures to Naspers and British American Tobacco, despite their relative outperformance, while selectively increasing the weighting to many shares whose prices have declined significantly.

Bull markets are born in moments of extreme pessimism and it is hard to think of a moment of greater pessimism than now. The Fund owns a lot of cheap equities in any scenario where the economy recovers.

The offshore portion of the Fund has helped protect against the significantly weaker rand but has not escaped the sell-off in markets around the world. Orbis is finding many opportunities, as one would imagine, given the extent of the sell-off.

Over the quarter, the Fund repatriated rands from the offshore portion of the portfolio and increased its exposure to selected domestic shares.

The FTSE/JSE All Share Index (ALSI) increased by 12% during 2019. Over the past four years, the market has returned 6.2% per year, which is 2.1% better than inflation.

Here are some things which stood out in 2019: .

Platinum and gold shares gave huge returns. Impala, which had already doubled from its low price of R16 when the year started, went up a further four times during 2019. Sibanye-Stillwater and Northam tripled. .

Many investors had been avoiding the gold and platinum miners in favour of “high-quality” companies like Shoprite, Discovery and Mr Price. Unfortunately, 1) quality is a subjective measure and the perceived quality of a business can change rapidly, and 2) even a high-quality company can become too expensive and fail to live up to the expectations priced in by the market. Shoprite, Discovery and Mr Price were all down in 2019. .

The listing of Prosus was a disappointment, as it did not really unlock any of the Naspers holding company discount. Reinet and Remgro, two other holding companies, had more success, by respectively buying back shares and promising to unbundle FirstRand to shareholders. On the bright side, Naspers’ large bets in food delivery seem to be doing well, judging by share-price performance: Delivery Hero doubled in 2019. .

Old Mutual had a messy public falling out with its CEO, Peter Moyo. The court case is ongoing. .

Capitec continued to do well. It is now the best-performing company on the JSE over five years. The other banks underperformed the market. .

The currency strengthened slightly versus the dollar, despite continued problems at our state-owned enterprises. .

Larger shares continued to outperform smaller shares. The 40 largest JSElisted companies gave an average return of 11%. The average return for companies numbered 81 – 120 (in terms of size), was -10%. .

Aspen started the year at R134, fell all the way to R65, and ended at R119. The all-time high was R448 in 2015.

Some of the events outlined above illustrate our belief that the price you pay for an asset is more important than any other factor. It feels good to own “high-quality” companies, or shares that are busy going up. But, as mentioned, perceived quality and share performance can reverse very quickly (indeed, the two factors are highly correlated). An investor who doesn’t have a firm idea of the underlying value of a business risks being like St Paul’s spiritual infants: “Tossed back and forth by the waves, and blown here and there by every wind…” [of market sentiment!].

The Fund underperformed its benchmark by 2.3% in 2019 and by 1.5% in the final quarter of the year. The Fund’s performance over the year was helped by overweight positions in British American Tobacco and Impala, and by underweight positions in Shoprite and Prosus. It was hindered by being overweight Sasol and KAP, and by being underweight Anglo American. It was also impacted by the Orbis Global Equity Fund underperforming its benchmark by 6.6%.

In the fourth quarter, we purchased Nedbank and sold Impala Platinum. We also switched Prosus shares into Naspers shares.