The stiff headwinds facing value-oriented managers have been apparent for some time. More recently, the broad-based decline in global stock markets since June has served as a sobering reminder that asset prices are generally elevated. In such an environment, Orbis believes it is particularly imperative to pursue the highest-conviction ideas, wherever they may be.

Unsurprisingly, given our shared contrarian investment approach, Orbis' research today concludes that emerging markets are fertile ground for long-term investors: not despite being deeply out of favour, but perhaps because of it.

Orbis believes that the common view that shares of emerging market companies are inherently more risky than their developed market peers is misguided. Emerging market shares often carry additional risks, but Orbis believes the greatest risk long-term investors face is paying more for an asset than it is worth.

The market's stampede out of developing markets and into developed ones in recent months has resulted in a wider gap in price-to-revenue multiples of developed and emerging shares today relative to history. Investors are potentially paying a dangerously large price premium for the perceived 'safety' of developed markets.

Orbis believes this is not necessary, as one does not have to sacrifice quality when investing in emerging markets. Consider two of the Fund's underlying holdings, one in China (JD.com) and one in the US (PayPal Holdings). While the Chinese and US markets have behaved very differently from each other, Orbis believes both shares are undervalued relative to their long-term prospects.

A recent spinoff from eBay, PayPal's payment network links 170 million shoppers with 10 million merchants worldwide. PayPal is starting to rival the credit card networks, which first sprang into life 50 years ago, with one big difference: it is growing much faster. Orbis is confident that, given PayPal's stellar reputation, its marketing efforts to attract new users will be successful and drive meaningful earnings growth.

JD, a leading Chinese e-commerce player, is also building out its network of users, only even faster. Customers are flocking to JD at the mind-boggling rate of 50 million new users a year - a rate which even US e-commerce giant Amazon has never achieved. The long-term trend in favour of online retailers at the expense of traditional merchants is just as clear in China as anywhere else, yet the recent turmoil in Chinese markets has allowed Orbis to purchase JD's shares at what it believes will turn out to be a very attractive price.

Of course, JD and PayPal are by no means immune to risk, and in fact both sold off sharply during this past quarter's turbulence. At Allan Gray and Orbis, we appreciate that the discipline of sticking to long-term value can often come at the price of short-term underperformance. However, it is critical at times like these, when panic can cause investors to move in lock-step, that we continue to approach each investment opportunity with the mindset of a long-term business owner, and allow ourselves to form differentiated views.

There have been no significant changes to the Fund's geographical allocations or currency exposures in the last quarter. US semi-conductor company Qualcomm has re-entered the top 10 holdings, as Orbis has taken advantage of share price weakness to incrementally increase its investment size. In addition, the Fund's exposure to eBay and Paypal was impacted by the spin-off of Paypal when Orbis accepted the offer of one PayPal share for one eBay share.

Adapted from Orbis commentary contributed by Ben Preston For the full commentary please see www.orbis.com

It is popular these days to talk about how difficult the past several years have been for active managers, particularly valuation-conscious managers such as Orbis. In a sense, however, active management is always difficult because it is a zero-sum game. For one manager to outperform, another has to underperform. But the fact that active management cannot add value 'on average' does not mean that some skilled managers cannot do so over time. It will come as no surprise to longstanding investors with Allan Gray and Orbis that we firmly believe stock picking can add value.

When debating active versus passive it is important to consider the relationship between the level of dispersion of stock returns in the market and the ability to add value through stock-picking skill. If every stock moved exactly in unison, every active manager would - by definition - achieve the market return, and, after fees, would detract value. Where there is greater variability in returns, there is at least the possibility that a skilled active manager can add value by owning the winners and avoiding the losers.

Orbis' history is a testament to this, as its flagship Orbis Global Equity Fund has been about 50% more likely to outperform during quarters of above-average dispersion than in quarters of below-average dispersion.
In the past five years, the dispersion of market returns has been well-below the historical average. This low dispersion is not explained by the fact that the fundamental business performance of the underlying companies has become more homogenous. In fact, the gap in profitability between companies with the highest and lowest profit margins appears to be widening. The long-term data suggests that return dispersion in markets is cyclical and that the current stretch has been unusually long.

The primary culprit, in Orbis' view, is the massive quantitative easing across much of the developed market, which has pushed up the prices of all assets, irrespective of their intrinsic values. The chorus sounding the death of active management has consequently grown louder, accelerating the flood of money into passive strategies in recent years which, in turn, has also caused shares to move together to an increasing extent. This combination of low dispersion, low bond yields and a high level of trending create a particularly challenging environment for value-oriented managers like Orbis.

We don't know when the radical monetary policy in the developed market will end, or when flows into passive management will slow. However, we remain confident that neither will continue forever. When they do end, Orbis believes individual company fundamentals will reclaim a prominent role. Orbis and Allan Gray remain committed to finding shares priced at a discount to their assessment of intrinsic values, in the belief that this is ultimately the best way to create value for clients over the long term.

There have been no significant changes to the portfolio's geographical allocations or currency exposures in the last quarter. US semi-conductor company Qualcomm has dropped below the top-10 holdings, whereas the position in US cable telecommunications company Charter Communications has been increased post the shares underperforming in the last quarter. Russian gas company Gazprom re-entered the top-10 thanks to positive share price performance.
Adapted from commentary contributed by Adam Karr and Matt Adams
For the full commentary please see www.orbis.com

At Orbis and Allan Gray, we aim to buy shares of companies that are priced at a significant discount to our assessment of intrinsic value. If we are correct in our analysis, we believe that share prices will come to reflect the underlying value of the businesses. What we are less sure of is the timing.

In painful periods, prices can become increasingly detached from underlying value. One trait these periods typically share is the degree to which shares are 'trending', or the tendency for shares that have outperformed to continue outperforming, and vice versa. Like the late 1990s, the last five years has been a strongly trending market, and it has been difficult for value-oriented managers like Orbis to keep pace. That's not to say that mistakes have not contributed to below-par performance in either of these periods, only that there have been other headwinds that have been less under Orbis' control.

With real interest rates negative in a number of regions and many bonds offering negative real yields, investors have struggled to generate a positive real return with safer assets. This has encouraged investors to take on more risk. Assets which have benefited are those with stable bondlike characteristics such as high-yielding equities in defensive businesses. This explains why Orbis has found fewer assets trading at discounts to intrinsic value in popular areas of the market - and why not owning those same shares has been costly to relative performance over the past five years. The encouraging flip side is that the major laggards are beginning to look particularly cheap on a relative basis.

Korean equities fall squarely into the laggard bucket. Their prices remain depressed partly because they have not benefited from the factors that have contributed to above-normal trending in global markets. Korea has not implemented quantitative easing, and with low dividends, the market offers little appeal for yield-seekers. For bargain hunters, however, Korea has a lot to offer. At current levels, Orbis' favourite Korean shares are trading comfortably below 10 times what they consider to be normal earnings. In contrast, in the US sentiment is more bullish with the market's valuation above 15 times next year's estimated earnings - which are arguably above normal levels.

Other examples of attractive laggards include The Royal Bank of Scotland (RBS). RBS has generated little interest from investors, given its leverage and lack of dividend since the end of 2007. However, a new management team is in the process of shrinking the balance sheet, which is delaying the payment of dividends and obscuring the value of the underlying franchises. As this completes, we expect RBS to emerge as a well capitalised bank with excellent profitability and a solid dividend payout ratio.

After particularly strong relative and absolute performance in 2013, the Orbis Global Equity Fund's performance was poor in 2014. As frustrating as this may be, it is important to recognise that periods of underperformance are not unprecedented at Orbis and Allan Gray - they are an inevitable part of our shared long-term, contrarian investment approach.

In investing there are some things you can control and others you can't; some of both were to blame for the weak performance in 2014. A key mistake was in allocating too much weight to shares that are highly sensitive to the price of oil. This includes both energy sector shares as well as shares in markets where oil exerts a significant influence (e.g. in Russia).
The Fund's energy positions, such as Weatherford International and Apache, were established on a bottom-up basis at a time when oil was trading above what Orbis considered to be normal levels. With hindsight, had Orbis built the Fund's exposure more slowly, it could have accumulated shares at an even greater discount to their assessment of intrinsic value as oil prices fell in the second half of the year.

Although the price of oil remains notoriously difficult to predict, Orbis' assessment of the industry's long-term fundamentals and the intrinsic value of the Fund's holdings has not changed meaningfully. Orbis continues to find the Fund's oil-related holdings attractive. Indeed, valuations in the energy sector are now approaching depressed levels following the sell-off. Our shared history has shown that such declines can provide attractive buying opportunities, and Orbis has done just that by adding to selected oil-related underperformers.
In Russia, the situation is more complex. While Orbis continues to be enthusiastic about Sberbank and Gazprom, it did not add substantially to these positions when the plummeting oil price hit Russia's economy, currency, and stock market. The shares' valuations are now extreme: Sberbank, for example, trades at less than five times normalised earnings, despite its dominant position and long-term growth prospects. But the range of outcomes has also widened. Earnings can withstand significant economic stress, but there is a small risk that a deep and protracted recession could trigger a capital raise. Orbis continues to carefully manage the Fund's overall weight in these shares.

Additional sources of weakness in 2014 were an underweight position in the US, where a bull market has continued to run, and meaningful overweight exposure to Korea, where Orbis has found shares trading at significant discounts. However, Orbis remains confident that the market will come to see the value in its Korean investments, and that these remain more attractive than the many US equities, which appear fully valued. Of course, it can be difficult to draw the line between being wrong and being 'early'. While Orbis made mistakes in 2014 in building positions too aggressively, it views many of this year's underperformers as offering even deeper discounts to intrinsic value today. Orbis remains confident that sticking to our shared philosophy will serve clients well over the long term.
Adapted from commentary contributed by Graeme Forster