For a foreign equity fund to attract more than R1bn in 20 months attests to investor faith in Allan Gray and its associate, Orbis. For good reason: just as Allan Gray (AG) has proved its ability in SA, so too has Orbis on a global scale, where its funds have consistently beaten their benchmarks and ranked high in the first quartile of their respective sectors. Allan Gray Global FoF manager Stephen Mildenhall is backing Japan heavily with a total exposure now three times Japan's MSCI world index weighting. A strong call, but something AG followers have come to expect.

Financial Mail - 09 December 2005

The fund returned 0.8% for the month, underperforming the benchmark's 2.9% by 2.1%. The volatility of global equity prices has been well below historical norms for some time now. This has been true both at the individual stock and local stockmarket levels, such that price performance of stocks has been quite uniform. As a result, equity portfolio returns have been relatively steady and the dispersion in the returns achieved by different managers low. Orbis believes the environment is changing however and the last month brought further signs of that. As long as this continues, being correctly positioned is likely to become increasingly important in determining whether the fund produces pleasing returns. Orbis does not predict which way the actions of other market participants will cause the share prices to move in the short-term, and thus remain focused on the medium- and long-term fundamentals of the companies the underlying fund is invested in, confident in the belief that prices will eventually be driven to reflect fundamental intrinsic value.

The Fund returned 4.7% in September 2005, beating the benchmark's return of 1.5% by 3.4%. The Fund's Asian holdings, representing 46% of its total assets, have performed particularly well during the three month period to September 2005. The overweight position to Asian markets is at the expense of exposure to US markets. This view is the result of Orbis' bottom-up fundamental analysis, which continues to identify more attractive investment opportunities in the eastern markets. The relative attractiveness of these shares stems from Orbis' assessment of their stronger balance sheets and higher future growth prospects, relative to their current market ratings. From a currency perspective the Fund is overweight the Japanese Yen and underweight the US Dollar.

One continues to caution investors against focusing too much, and basing investment decisions, on short-term performance or prospects. This is because the Fund is often very different from the benchmark and both the Fund's and the benchmark's near-term performance is unpredictable. The focus is not on near-term performance but on continually rebuilding the Fund with a mix of stocks that maximises long-term risk-adjusted return potential. This cautionary message is quite appropriate now with 44% of the Fund invested in stocks in Japan, Korea, and China, which in total represent 12% of the benchmark. While Orbis believes these exposures are appropriate given the investment opportunities they find in selected Asian stocks, particularly relative to western equities, one should be aware that they will likely lead to short-term performance that could otherwise be seen to be surprising, either to the upside or downside.

Drawn by the combination of lower fundamental valuations and either stronger balance sheets or higher future growth prospects, the Fund continues to grow its holdings in Asia. The Fund's total equity exposure to Asian markets now tops 42%, compared to just over 12% for the World Index. This large aggregate position has been built stock-by-stock through Orbis' bottom-up fundamental research, both in absolute terms and in comparison with opportunities in other stockmarkets. In that regard, it is interesting to note that Korea, China and Japan are three of the very few investable stockmarkets selling for less than 2 times their net asset value, with the economies of Korea and China also among the fastest growing.

The Fund remains very overweight Japanese equities and very underweight the USA. After a prolonged bear market Japanese equities are considered to offer the prospect of superior long-term returns. US equities on the other hand, while below the April 2000 peak valuations, are still generally trading well above intrinsic value.

In a reversal of April's performance, the Fund delivered strong absolute and relative performance in May with the top performers being the energy and resource positions. Japan continues to present attractive opportunities from a risk/reward perspective especially since the Japanese market has been flat over the last 15 months, despite corporate profits growing by more than 20%.

Global stockmarkets experienced a sharp, broad-based decline mid-month, seemingly in response to investors reducing their expectations for economic growth. Orbis' carefully selected stocks fared even worse as they underperformed their local markets, which themselves underperformed global equity markets overall. The most notable of the price declines came in the Fund's emerging market and Japanese holdings, despite these being Orbis' most favoured positions from a fundamental perspective.