It has been a good year for global stock markets. The FTSE World Index has returned just under 16% since the start of 2013 and is near an all-time high. The Orbis Global Equity Fund has had an even better year, delivering more than double the benchmark's return. As encouraging as this may be, it is natural for clients to wonder what it means for Orbis' ability to continue hunting down attractive stocks after such a strong period of absolute and relative returns. While Orbis has a single-minded focus on picking stocks from the bottom up, one technique Orbis analysts use to advance their reasoning and assess the broader opportunity set is a proprietary quantitative measure that they call 're-rated total rate of return' or 'RTRR'. The calculation is based on the principle that valuation multiples, growth rates and the quality of a company's fundamentals tend to revert to long-term historical averages over time. If the future ends up being similar to the past, this number can be thought of as the future annualised return that they can expect from a given stock. The higher the RTRR percentage, the better. Of course, it is often a big 'if' to assume that the future will resemble the past, which is why they obsess over fundamental, company-specific analysis. Likewise, the difference between the RTRR of a particular portfolio and the stock market benchmark can be a crude way to gauge the opportunities for stock picking that are available to Orbis, particularly when there are sizeable divergences between the stocks that Orbis analysts have selected and the market's overall RTRR. Notably, the median RTRR of stocks in the benchmark has hovered near just 5% in recent months. This is the lowest since 2007-08 and suggests only modest stock market returns from today's levels. Of course, that doesn't mean stocks can't or won't keep going up. It's not impossible to see negative RTRRs if share prices race far enough ahead of fundamentals, as was the case during the technology bubble of the late 1990s. What intrigues Orbis as stock pickers is that the median RTRR of the stocks in Orbis Global is currently about 18%. It is a noisy estimate, but it implies that there is still real scope for the Fund to deliver satisfying returns, provided of course that Orbis' fundamental assessment of Global's stock selections and the broader opportunity set proves to be correct. The key message from the data is that while Orbis can probably expect lower absolute returns from the benchmark relative to the past few years, there are still some compelling opportunities in select stocks. A good example, and one of Orbis' favourite holdings in the US, is Motorola Solutions (MSI), which is elaborated on in the Orbis Global Equity Fund's Quarterly Report.

After a prolonged period of underperformance, the Orbis Global Equity Fund's relative performance has rebounded sharply this year, outpacing a rally in global equities. While we would caution against reading too much into short-term performance, it may be helpful to understand some of the reasons behind the sudden improvement. It might be tempting to attribute the Fund's performance to its holdings in Japan, as that market has risen more than 30% year to date in yen terms. But while having a greater weighting in Japanese stocks than the benchmark has aided performance somewhat, this has been offset by a similarly high weighting in the rest of Asia, where stock markets have lagged their global peers. Overall, the contribution from capital allocation between regions - driven as always by our bottom-up research - has actually been negative for the Fund so far this year. Instead, it has been our stock-picking results within most regions that account for the bulk of the Fund's outperformance this year, as has also been the case since the Fund's inception. The contribution to relative return from stock picking has been broad-based this year and especially strong in North America and Asia ex-Japan. Taking a closer look, many of the Fund's best-performing stocks in recent months were precisely those that had detracted from performance before the rebound this year. In aggregate, the Fund's largest holdings went from making a negative contribution in 2012 to providing a strong positive one so far in 2013. This reversal is consistent with our fundamental, long-term and contrarian investment philosophy. It is not uncommon to see a stock go from being a major laggard to amongst the Fund's biggest winners in a short span, often without much change in the company's fundamentals. Some examples in the current portfolio include US semi-conductor manufacturer Micron Technology, Chinese internet company NetEase and US health insurer WellPoint. The circumstances are different in each case, but the common thread is that we were able to build the Fund's holdings at attractive valuations when these stocks were deeply out of favour - and we bought more shares when they continued to lag. More recently, the stock market has come to recognise, to varying degrees, the value that we have long seen in these shares. Of course, we can never predict or control these shifts in sentiment. In the case of global oil and gas company INPEX, the gap between our view of the company's value and the stock market's view has widened of late. In time we will know which view is correct, but we continue to believe that INPEX shares are attractively priced and have therefore added to your Fund's position. These stocks are just a few examples, but they underscore the importance of taking a long-term perspective. To that end, it is encouraging to see the performance of the Fund responding as strongly as ever to a more favourable environment for stock selection.

American International Group (AIG) is a name that needs little introduction. During the Global Financial Crisis, AIG imploded in spectacular fashion and ended up being the target of a US$180 billion capital injection by the US government as part of the largest bailout in history. While the name remains the same, the company your Fund owns today is quite different from its previous incarnation. Gone are the exotic derivative positions that served it so poorly and AIG has repaid its entire bailout loan to the US government. It has also gone back to basics. With two main divisions - a multinational property and casualty insurer and a US life insurer - AIG has at long last become a 'boring' insurance company. Still, bad memories die hard. AIG's reputation remains tarnished by the events of nearly five years ago, and this is reflected in the share price. The company's tangible net asset value (TNAV) - essentially the value of its tangible assets less the estimate of its future liabilities - now stands at US$65 per share compared with its share price of US$39. Orbis considers that to be a rare bargain for the patient investor. If an insurer's assets and liabilities are assessed correctly, and its management team can earn a reasonable return on that capital over time, then buying an insurer's net assets at a discount is as good as getting a dollar for less than 100 cents. Historically stock market investors have been willing to pay a multiple of about 1.5 to 2.5 times TNAV, on average, for US insurers, and they have typically paid more than TNAV for all but the bottom 20%. By applying a 40% discount to AIG's TNAV, the stock market is currently pricing AIG as if either its net assets are vulnerable to another shock, or the company will fail to generate an adequate return on those assets in future. Orbis' research concludes that there is no good reason for the stock to be priced so far outside the normal range. AIG's risk profile has demonstrably improved, its gearing has nearly halved relative to pre-crisis levels and its derivatives exposure has fallen by more than 90%. The burden of proof is on AIG's new management team to demonstrate that it can restore the group to a respectable level of profitability. Writing profitable insurance contracts is not rocket science, but it is all too common for insurers to lose discipline and drop their prices in pursuit of market share gains. Orbis believes AIG now has the right management team in place to restore underwriting profitability. In Bob Benmosche, the industry veteran who was hand-picked to come out of retirement to lead AIG back to health, the company has a leader whose track record demonstrates that he is up to the task. Dramatic improvements should not be expected overnight, but for the patient investor, Orbis believes that the outlook for this 'boring' insurer is actually rather exciting.

To realise long-term investment opportunities, Orbis and Allan Gray often lean against prevailing sentiment. This can result in short-term pain, and of late, this has been the case for the Orbis Global Equity Fund. But our shared contrarian approach is readily apparent by taking a closer look at the Fund's key holdings. US health insurance shares are a prime example. Orbis Global owns shares of four insurers, which trade for an average of just eight times Orbis estimates of 2013 earnings, or a little over half their long-term historical average. At these valuations, the market essentially assumes a collapse in the insurers' ability to generate cash flow in the future, an outlook Orbis views as far too bleak and extremely unlikely. Energy is another area languishing under a cloud of heightened pessimism. Orbis Global's holdings in the sector are split between oil services shares and exploration and production shares, such as INPEX, Japan's largest oil and gas company. The biggest driver of INPEX's future value is its so-called Ichthys LNG (liquefied natural gas) project off the coast of Western Australia. This project alone could more than double INPEX's earnings power by 2017, yet its shares trade at only 11 times Orbis' estimate of next year's earnings and at a 20% discount to estimated tangible net asset value (TNAV). In the technology sector, semiconductor shares have performed poorly, but Orbis believes that the memory industry is seeing a wave of consolidation that will benefit the surviving players. Micron Technology, the largest holding in Orbis Global, is playing a large role in that consolidation through its planned acquisition of bankrupt competitor Elpida. Orbis expects the Elpida deal to boost Micron's TNAV value by 15-30% - no small matter for a stock that trades at 0.9 times TNAV. Micron should also benefit from a cyclical recovery driven by rational capital spending throughout the industry. Of course, no discussion of contrarian investing these days would be complete without a mention of financial services. Orbis Global has major positions in Barclays and in three insurers. Prior to the global financial crisis, Barclays was trading at three to four times TNAV, had thin capital and liquidity, and a less solid loan book. Today, the bank is much stronger, yet one can buy Barclays at a 30% discount to TNAV. Like Barclays, all three of Orbis Global's insurance holdings have strong capital positions, yet all can be bought at significant discounts to estimated TNAV. The holdings discussed above are an eclectic collection, reflecting the opportunities the market presents. Though some of these holdings have yet to deliver pleasing returns, Orbis remains excited and optimistic about the portfolio's current positioning.