The fund's 26% return in 2013 is 7.6% ahead of benchmark and represents a welcome turnaround after a disappointing year in 2012.

This strong result was driven by two main factors:

o The 50% dollar return achieved by the Contrarius Global Equity Fund, the vehicle through which the bulk of our international equity exposure is held;
o Exceptional gains shown by a number of the small cap industrial shares owned by the fund. One notable example is MixTelematics - sold at a handsome profit during the year. Other significant contributors in this category, several of which remain in the fund's top ten holdings, are Comair (+103%), Austro (+166%), Interwaste (+58%) and Control Instruments (+63%). The figures in brackets reflect the share price appreciation for the year.

Of course if we had owned Naspers which doubled in 2013, and Aspen and Richemont which each gained close to 60%, then the results would have been much better; and if we had avoided the one huge mistake, namely owning gold shares during a year in which the dollar gold price fell 28% and the JSE Gold Index by 53%, then the fund's performance would have been spectacular.

But of course the 'what ifs' are meaningless. Returns at the end of the day are all that matter. We will continue with gold exposure, but after the sharp price falls in 2013, the fund's combined weighting in gold shares and the Gold ETF has reduced to 7%, while exposure to platinum shares is similar. Incidentally, platinum shares as a group have done well for the fund. Amplats was bought relatively cheaply and is reflecting a modest profit to date, while the smaller Atlatsa investment has almost trebled in value over the past six months!

As indicated in the top ten equity holdings shown alongside, we continue to favour the following areas:

o Gold shares: deeply oversold and due for a substantial rally if the gold price rebounds this year as we expect;
o Reinet: a very cheap entry to BAT with some potential interesting upside from the steadily expanding portfolio of fund management and related businesses;
o Small cap industrials: an area that has done well, but a number of opportunities still look compelling;
o Small cap mining stocks: a sector that has generally done very poorly over the past few years and now offers some excellent value on a selective basis, eg. Transhex, Buildmax and Metmar;
o Maximum permissible offshore exposure.

International

The Fed's decision not to taper certainly took the markets by surprise. Global equities, bonds, emerging market currencies, and gold all surged on the news. The dollar, on the other hand, slumped sharply as further rises in interest rates were deferred. Investors had clearly been convinced that the punch bowl was going to be removed (in stages) despite Bernanke's repeated assertions that it was 'data dependent'.

Since May, when Bernanke floated the tapering possibility, there has been a sharp rise in bond and mortgage rates. Unsurprisingly this impacted on the housing market with home sales and mortgage applications decelerating sharply in the wake of the escalating finance costs. This highlighted the potential damage which could result from tapering, let alone a full withdrawal of the stimulus.

The euphoria did not last long and the market retreated from its mid-month all-time high as the inevitability of a government shutdown became increasingly likely. US equities nevertheless still retained enough of the early advance to close the month around 3% higher. Globally, markets were less concerned about the dysfunctional government antics in the US allowing the MSCI world index to gain an impressive 4.8%.

South Africa

The weaker rand is at last helping growth with manufacturing production (and, to a lesser extent, mining) increasing from the earlier sluggish levels. Although the forward looking PMI has been above the 50 point mark for five consecutive months to August, it slipped back into contraction in September as a result of the mining and motor industry strikes.

The consumer remains under pressure. Annual growth in retail sales was just 2.8%, well below the consensus forecast of 4,5%. Given the elevated inflation of 6.4%, the high ratio of debt to disposable incomes, and the tighter lending rules expected, a near term improvement appears unlikely.

Although the rand has been a victim of the general weakness in emerging market currencies, it has declined more than any of its emerging market peers (year-to-date). It can be argued that our heavier fall is justified given that our current account and fiscal deficits are among the largest in the emerging market universe, and that the foreign ownership of our bonds (32%) is relatively high.

These adverse characteristics now appear to be largely priced in as our current account deficit is set to improve due to the weaker rand and the improving global economy. However, this will take time and the rand will thus remain vulnerable over the near term.