MARKETREVIEW Issue 8, March 2014

Page | 1

Delivering in 2014 … and beyond

Issue 8

March 2014

MARKET REVIEW

MARKETREVIEW Issue 8, March 2014

Page | 2

Summary for executives … and those who don’t want to read detail

‘’…and every morning my moody neighbour is shouting

that he wants to buy my farm or sell his farm at a rate

that fluctuates daily depending on the mood he’s in…”

(Warren Buffett; Letter to Shareholders, 2014)

Markets are driven by moody neighbours continuously

changing their minds and focusing on the scoreboard

(price changes) rather than the field (what is

management doing with the business). If I can build on

Warren’s metaphor: The moody neighbours make their

decisions based on next week’s weather forecasts

rather than the previous 10 year’s crops.

I started writing this in Brazil where I was very

impressed with how the managements we met with

have reacted to the changed circumstances. It was

also instructive to delve into 2003 when Brazil needed

IMF help and how these businesses managed to keep

growing their shareholders capital AND pay dividends

to shareholders throughout.

But the moody neighbours are ignoring all that and

disregarding the historic and future productivity (or

yields) of those assets and are offering all the farms in

“Emerginglandia” for sale at discount prices.

Graph 1: Net% of fund managers saying they are

overweight GEM Equities

It reminds me a lot of those years when the

neighbourhood was buying farms in Technologica in

1998 and selling them in 2000 and 2001.

Warren’s farm example is all about thinking 10 years

and longer when making an investment. But when you

do think 10 years, buying the right farm is important. A

small difference in yield compounds to a large sum

over 10 years.

Whether it is farms or shares, they go through phases

where panic amongst leveraged holders set in and

everybody wants “out”. This is the time to ignore the

moody neighbours and the lousy macro to focus on the

historic productivity of the assets.

Does the selling wave of Emerging Markets by our

moody neighbours present a good investment

opportunity? A chance to buy quality long term growth

assets with superior yields?

For the Sanlam Global Best Ideas Fund Douw and his

team are finding enough disliked, mispriced value in

developed markets so they have scaled back their

direct investment in emerging markets. However, for

those who can stomach short-term volatility the Sanlam

Global Financial Fund’s team is excited about the long

term investment returns available in emerging markets.

But then, bear in mind, as Ukraine/Russia highlight this

month, emerging markets are often politically unstable

and unpredictable.

Please don’t forget our SIM Global Equity Income Fund

(a low risk fund which had an excellent 2013 and very

good start to 2014). It is 95% invested in developed

markets due to the availability of so many large

companies with long track records of consistently

growing their dividends. In addition, the shares are

trading on ±4% dividend yields.

I’ve expanded on the above themes in the rest of the

Market Review and added an addendum with more

detail using EM vs DM financial examples on the same

theme.

MARKETREVIEW Issue 8, March 2014

Page | 3

Warren Buffett’s Farm and Satisfactory Returns Fundamentals of investing…

In his most recent letter to shareholders Warren tells

the story of two investments he made around 25 years

ago that have done very well for him: a farm in

Nebraska and a property in New York. Looking back he

realises how the absence of daily price feeds meant he

never worried about them. He didn’t suffer “the moody

neighbour effect” (the constant barrage of offers to buy

his farm or the neighbour selling his). When you invest

in shares you should be thinking as if you are buying a

farm.

I’ve elaborated on this theme in this Market Review

and have attached the summary article from Fortune

Magazine as recommended reading. You can find the

entire letter to shareholders on

http://www.berkshirehathaway.com/letters/2013ltr.pdf

(or Nora will gladly mail you a copy).

Towards the end of his letter Warren concludes with

the following points “to illustrate certain fundamentals

of investing”.

You don’t need to be an expert in order to achieve

satisfactory investment returns.

Focus on the future productivity of an asset you

are considering

If you focus on the prospective price change of a

contemplated purchase, you are speculating.

There is nothing improper about that. I know,

however, that I am unable to speculate

successfully, and I am skeptical of those who claim

sustained success at doing so.

With my two small investments, I thought only of

what the properties would produce and cared not

at all about their daily valuations. Games are won

by players who focus on the playing field -- not by

those whose eyes are glued to the scoreboard.

Forming macro opinions or listening to the macro

or market predictions of others is a waste of time.

Indeed, it is dangerous because it may blur your

vision of the facts that are truly important.

My two purchases were made in 1986 and 1993.

What the economy, interest rates, or the stock

market might do in the years immediately following

-- 1987 and 1994 -- was of no importance to me in

determining the success of those investments. I

can't remember what the headlines or pundits were

saying at the time. Whatever the chatter, corn

would keep growing in Nebraska…”

Warren says that if you keep things simple (e.g. stay

within your circle of competence and not get affected

by the moody neighbours to invest/disinvest along with

them when they’re emotional) you’ll do well and

generate satisfactory returns. Indeed, he advocates

investing in an index (the S&P500) which he says will

do just that.

But, the S&P500's return over the past 14 years was

far from satisfactory, generating a compound return of

only 3.6%.

Table 1: S&P500 over 14 years.

S&P500 (incl divis)

Value invested

100

2000 -9.1% 91

2001 -11.9% 80

2002 -22.1% 62

2003 28.7% 80

2004 10.9% 89

2005 4.9% 93

2006 15.8% 108

2007 5.5% 114

2008 -37.0% 72

2009 26.5% 91

2010 15.1% 105

2011 2.1% 107

2012 16.0% 124

2013 32.0% 164

Continuing along the lines of Warren’s farming

metaphor, the S&P500’s 14 year return was poor

because:

the average American stock was quite expensive

in Jan 2000 (yields were poor), and

the average US company disappointed in terms of

growing shareholder value.

In other words: “US Farm Inc.” was not the best farm to

own.

MARKETREVIEW Issue 8, March 2014

Page | 4

Buy the right farm

Buying a Farm is good to help escape the noise, but

just not good enough. Buying the Right Farm is what

matters, and then if you can buy it when the price is

right, you’ve got a winner.

For 14 years investors ignored the wonderful yields

available in emerging markets because they focused

on short-term macro concerns.

A simple example: Many investors had Citigroup in

their portfolios simply because it was US and large and

seemingly successful. Few had Bank Rakyat Indonesia

(one of the largest banks in Indonesia). Yet, as Tables

2 and 3 show, measured over 14 years, buying a

“farm” in Indonesia versus a “farm” in the US made a

huge difference to your bank balance!

The combination of the ROE differential and the de-

rating/re-rating resulted in $1 million invested in

Citigroup shares leaving investors with $302,000 after

14 years versus $15,981,000 for your investment in

Bank Rakyat shares.

Table 2: Example: The value add of going off the

beaten track

Value of $ 1 million invested on

1 January 2000

As at 31 Dec 13 (Million)

Compound Growth Rate

Citigroup $0.302 -8.2%

Bank Rakyat Indonesia $15.981 21.9%

S&P 500 $1.636 3.6%

Footnote: BRI only listed in November 2003, hence I’ve used the multiple at time of IPO to approximate a January 2000 price. However, even if one does use the Nov 2003 IPO price as starting

point, BRI still outperforms by a very large margin.

What drove this outperformance?

Two factors

1. BRI management compounded shareholder value

at 21% (17% more than that of Citigroup – refer

Table 3). If you’re going to invest in a “farm” for the

long-term, that’s the type of yield you want.

2. But most importantly, emerging markets post the

1997 crisis were cheap whilst the US was

expensive. P/NAV of 2.0x for BRI vs 5.0x for Citi.

Not only did you invest in a very productive asset,

you bought it at a very attractive price.

(By the way, the fact that emerging market companies did

not destroy shareholders value via senseless acquisitions or

share buybacks at high prices also played a large role –

something very few analysts pick up on)

Table 3: Returns over the 14 years in US$ - two

drivers

CAGR

Shareholder

Value

(NAV + DPS)

CAGR

Investor

Return

(Share Price +

DPS)

P/NAV

Jan-00

P/NAV

Dec-13

Citigroup 4% -8% 5.40 0.94

Bank Rakyat

Indonesia 21% 22% 1.80 2.24

Our willingness to ignore the emotions of the

neighbourhood explains why the Sanlam Global

Financial Fund outperformed the S&P500 by such a

wide margin over the 14 years. We focused on the

yields of the “farms”, the farmer and the price (The

Sanlam Global Best Ideas Fund was only started in

2004, hence I’ve used the Sanlam Global Financial

Fund and financial shares as examples).

Graph 2: MSCI DM vs MSCI EM

Graph 2 shows that the BRI vs Citi example holds true

generally from 2000 to mid-2011. But a mistake we

made was that when it became apparent that the

probabilities that the US/Europe/UK would succeed in

preventing a banking and sovereign debt crisis, we

remained sceptical and concerned.

0

100

200

300

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14

MSCI Emerging Market Index

MSCI World Index (DM)

Source: Bloomberg

MARKETREVIEW Issue 8, March 2014

Page | 5

Investing for a better than satisfactory return

Whilst Berkshire Hathaway’s net asset value per share

(NAV/share) outperformed the S&P500 handsomely

(grew at a compound rate of 9.4%) the Sanlam Global

Financial Fund (started whilst I was at Coronation in

1999) generated a compound return of 13.7% (Table 4)

Table 4: Berkshire and S&P500 compared to Sanlam

Global Financial Fund over 14 years.

Berkshire

Hathaway

NAV/share

S&P500

(incl. divis)

Sanlam

Global

Financial Fund

2000 6.5% -9.1% 25.3%

2001 -6.2% -11.9% -5.7%

2002 10.0% -22.1% 1.6%

2003 21.0% 28.7% 69.5%

2004 10.5% 10.9% 30.5%

2005 6.4% 4.9% 37.6%

2006 18.4% 15.8% 21.3%

2007 11.0% 5.5% 23.8%

2008 -9.6% -37.0% -63.3%

2009 19.8% 26.5% 96.1%

2010 12.0% 15.1% 31.5%

2011 4.6% 2.1% -14.4%

2012 14.4% 16.0% 29.7%

2013 18.2% 32.0% 4.8%

Note: Performance for the Sanlam Global Financial is calculated gross of fees. All figures in USD.

Graph 3: Value of $100 investment over 14 years (compound return noted at end of series)

Source: Bloomberg

This brings us to the important point I want to make in

this Market Review: Investors who invest with us do so

because they want a “better than satisfactory

return”.

To generate this return we search for companies that

are disliked by the market at the point we make the

investment, and where our research shows that, based

on their track record and forward yield, the market is

wrong. If I can expand on Warren’s metaphor, many

investors base their decision on whether to buy a farm

on next week’s weather forecasts, we focus on what

the farm produced over the past 10 years, and

whether it is likely to produce a similar return in the

future.

Many of our successes have been investments in

smaller companies (recent winners have been Bank of

Georgia, Panin Securitas) where our experience and

data base highlighted the potential and severe

undervaluation. But our bread-and-butter recipe is

simply recognising where the market ignores Einstein’s

8th wonder of the world: The value of compounding of

a high return on capital.

13.9%

9.4%

3.6%

0

100

200

300

400

500

600

700

99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

Sanlam Global Fin Fund

Berkshire Hathaway

S&P500

MARKETREVIEW Issue 8, March 2014

Page | 6

Bank Rakyat in 2013

% Change for 12 months ending Dec 2013

Net asset value growth (in rupiah) 22%

Share Price (Indonesia rupiah) 4%

Share Price (US dollar) -17%

S&P500 (US dollar) 32%

But what about 2011-2013

Our returns over the past three years are in stark

contrast with the previous 11 years. Why?

The most damaging was that we maintained a large

investment in emerging markets.

Bank Rakyat (BRI) is a good example to explain 2013

(see insert below). Result: compared to the S&P500, in

2013, the bank looks like a miserable failure.

Table 5: Bank Rakyat Indonesia NAV growth strong, currency declined 25%

2012 2013 2014

NAV+DPS per share (in Rupiah) 3,675 4,482 5,488

Growth in NAV/share 30% 22% 25%

PRICE in Rupiah 6,950 7,250 9,325

PRICE in US$ 0.721 0.596 0.819

ROE 32.7% 29.7% 27.6%

ROA 3.7% 3.6% 3.6%

P/NAV 2.62 2.24 2.31

Table 3 shows that BRI’s compound growth in

shareholders’ value was 22% (net asset value plus

dividends paid out measured in US$) over the past 14

years.

But Table 5 shows that whilst it grew its net asset

value per share at 22% in 2013 (higher than almost

any bank in the USA), it was the 25% decline in the

rupiah that did the damage. I cannot stress this

enough: The bank generated wonderful results in 2013

and will do that again in 2014 and again thereafter.

This is highlighted by the 2014 share price movement:

Graph 4: Bank Rakyat vs Citigoup (Since Jan 2012)

Graph 5 says it all: When it seemed that both the US

and European blocks were recovering, investors

switched capital out of emerging markets causing large

declines in the currencies and markets and led to inter

alia the Indonesian rupiah to decline 25% in 2013.

Measured on a one year basis, being invested in

emerging markets looks like a mistake, looking forward

another 10 years, I’m not so sure…

Graph 5: The best contrarian tactical trade: long

EM, short Eurozone

Source: BofA Merrill Lynch Global Fund Manager Survey

40

80

120

160

200

2012 2013 2014

Citigroup (USD)

Bank Rakyat (USD)

MARKETREVIEW Issue 8, March 2014

Page | 7

Shooting yourself in the foot

What made 2013 worse for the Sanlam Global Best

Ideas Fund was that besides the large emerging

market investment, we were walking around with a

loaded revolver. Despite our best efforts to reduce the

holdings, the fund still had an investment in two small

cap Chinese shares from prior years of which the

listings were suspended.

This makes it difficult for investors to judge the team.

We say we are good at finding good farms, but then

2013 seems to indicate the opposite.

It is always difficult to explain when you’ve just made a

mistake: “This was isolated” and, “Won’t be repeated”.

That message will only have credibility in 3 years’ time.

In the meantime we’ve done a lot of soul-searching,

learnt a lot and are moving forward with a considerably

more experienced and more balanced team.

Global Warming, Changing Growth Patterns? 1. Growth over the next 10 years:

Have global growth patterns

changed? Will emerging markets

grow at a lower rate than

developed markets? There

certainly are headwinds in terms

of higher interest rates which will

force growth rates lower. But in

my opinion, on a 10 year basis,

most emerging markets will grow

GDP/capita at a higher rate than

their developed market peers. I

can write (and have written) many

chapters on this, but today Graph

6 will suffice.

2. Valuation: Table 3 does show

that Citigroup now trades at a

discount to book value and BRI at

2.2x. Prices of the “farms” have

adjusted. So yes, emerging

market companies are not the

slam dunk they were in 2000

whilst many developed market

companies are considerably

cheaper than they were in 2000.

This is where it gets difficult. Will

the investment banking drought

persist? Will developed markets

surprise with higher growth rates?

3. Risk: Berlusconi (Italy’s ex-

president) was bad, but despite

his or Holland’s (unfortunately

France’s current president) best

efforts they haven’t got the same

power to wreak damage like

some emerging market

presidents like Erdogan

(Turkey), Putin, or Mursi (Egypt).

One of the definitions of a

developed market is whether the

state administration continues

unaffected when a new political

party comes to power. Recent

events highlight the fragility of

emerging markets and why

many of them should trade at a

discount to developed markets.

Yet, when one looks at CIB

(largest bank in Egypt), it

continued to grow shareholder

value right through the crisis, so

yes, the onset of a crisis brings

about a sharp downward

adjustment in valuations, but it is

surprising how life “on the

ground” did (and does) go on,

even in Egypt (Refer Appendix

C)

Graph 6: Population: Developed Countries vs Developing Countries

MARKETREVIEW Issue 8, March 2014

Page | 8

SIM Global

In terms of delivering to clients, 2013 was the worst of

the 25 years I’ve been in investments. As mentioned

earlier, we didn’t sit still and the team had a large

number of sessions to ensure we understand the

underlying reasons of what led to the disappointing

returns.

I also spent considerable time revisiting the past 10

years and thinking about each of our winners and

losers. The recent hand over of responsibility for

Sanlam Global Best Ideas Fund to Douw helped a lot

in freeing me up, allowing the time to do this.

Most important is that we again realised the

importance of knowing our circle of competence. As

said before, Chinese small caps are outside the

perimeter!

We’ve also thought a lot about client expectations

which made us adjust the risks in the different funds.

Sanlam Global Best

Ideas Fund

The fund, at the moment, is spoilt for choice in terms of

large, well managed, developed market companies

that remain mispriced such as Illinois Tool Works,

Lockheed Martin and Medtronic. In addition these

companies derive a considerable part of their income

from emerging markets. So, at the moment there is no

need to take the unnecessary risk of forecasting short-

term currency movements. Hence the fund’s direct

exposure to emerging markets has been significantly

reduced. The top 10 (Table 6) highlights however that

we continue to search for mispriced “farms” with good

yields away from the crowd.

Table 6: Top 10: Sanlam Global Best Ideas Fund (as at 28 Feb 2014)

Company Name Country Sector % Held Dec 2014

Mkt Cap (USD mill) ROE P/NAV PE

Div Yield

Microsoft USA IT 6.0% 27% 3.8 14.1 2.6% 317,973

Samsung Electronics South Korea

IT 4.6% 22% 1.5 6.8 1.1% 205,490

Imperial Tobacco Britain Consumer

Staples 4.5% 34% 3.9 11.6 4.9% 39,320

Lockheed Martin USA Industrials 4.0% 301% 51.5 15.1 2.9% 52,168

Esprit Hong Kong

Consumer Discretionary

4.0% -3% 1.7 -52.3 0.0% 3,674

IG Group Britain Financial Services

3.7% 25% 4.2 16.6 3.7% 3,880

Medtronic Inc USA Health Care 3.6% 20% 3.1 15.7 1.8% 59,162

Hewlett Packard USA IT 3.6% 29% 2.4 8.3 1.8% 56,845

Illinois Tool Works USA Industrials 3.5% 16% 3.6 18 2.0% 35,052

Total SA France Energy 3.3% 14% 1.4 9.8 5.0% 154,443

MARKETREVIEW Issue 8, March 2014

Page | 9

Sanlam Global

Financial Fund

The Sanlam Global Financial Fund has historically done

well by finding and investing in smaller financial

companies in both emerging and developed markets

(TSKB, Bank of Georgia, World Acceptance Corp,

Lancashire).

The same is true for the Nedgroup Investments

Financial Fund we manage (refer Appendix D). A large

part of the excess return over the past 10 years were

generated from investments in smaller companies like

Coronation, PSG, Sasfin, Capitec, etc.

We never start our discussion with a predetermined

idea of what percentage we do want in smaller/larger

and or developed market or emerging market shares.

We are driven by where we find the best value after

adjusting for various risk factors. At the moment the

fund has 50%+ of its capital invested in selected

emerging markets.

A few examples of past

small cap winners

We invested in World Acceptance Corp

(WAC) when the risk of regulatory

intervention was priced in and whilst its

excellent return on capital (ROE) was

ignored. Now the company has grown, the

valuation at 3.3x net asset value is

expensive and the risk of regulatory

intervention has increased substantially.

We “found” Panin Securitas in 2011. But

the team was still unproven and the

share’s illiquidity increased the risk.

As we got to know the management better

we gradually increased our investment

after each successive visit and in fact

recently increased it again late 2013 when

the price fell. Indonesia counts only

300,000 investors out of a population of

240 million whilst the middle-class

continues to grow rapidly.

As it grows its client base the business

becomes more sustainable. We think

Panin could become the Coronation of

Indonesia. The outperformance has only

started.

Graph 7 highlights how these long-term winners go through periods

of underperformance and volatility, but the continued high return on

equity (and hence above average growth in shareholder value)

eventually gets reflected in the share prices.

Graph 7: Something better than satisfactory

Source: Bloomberg

WAC

BRK

JPM

WFC

PAN

10

100

1,000

10,000

200

0

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

World Acceptance Corp Berkshire Hathaway

JPMorgan Wells Fargo

Panin Securitas

Log scale

MARKETREVIEW Issue 8, March 2014

Page | 10

Distributor Details If you would like to be added to the list to receive

this document electronically please contact:

Nora Geldenhuys

Tel: +27 21 950 2633

Fax: +27 21 950 2526

e-mail: norag@sim.sanlam.com

OUR WEBSITE

http://www.simglobal.co.za

Conclusion

It seemed as if I was better at writing about investing in 2013

than investing itself. We were battered by two severe storms in

2013, but generally the companies we were (and are) invested

in continued to grow shareholders wealth. Our aim and DNA is

to generate better than satisfactory returns for investors.

Value Investing? I bumped into Lawrence Tedeschi at the BTG Pactual

conference in Sao Paolo at the end of February. He has been

“covering” Brazil, Mexico and South Africa for a large US

pension fund from Ohio and has been an analyst for more than

30 years covering many other sectors and countries within and

outside the US during his career. What struck me as we started

talking is that he is going through a period of self-doubt: “Value

investing doesn’t seem to work the way it used to”

So, does value investing still work? Off course it does, your horizon just has to be long enough. Both Lawrence and I

know: “It’s always good to question bad habits you might have gotten into or whether you’ve developed blind spots,

but don’t doubt value investing.”

Kokkie Kooyman

20 March 2014

DISCLAIMER Sanlam Investment Management (Pty) Ltd (“SIM”) is a licensed financial services provider and a wholly owned subsidiary of the Sanlam Life. Sanlam Investment Management Global is a division within SIM. This document is intended for information purposes only. No representation, warranty or undertaking is given and no responsibility or liability is accepted by any member of the Sanlam Group as to the accuracy of any information contained herein. No part of this documentation is to be construed as a solicitation to buy or sell any investment. The information contained herein does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act 2002. The use of or reliance on this information by you or any third party shall be entirely at your or the third party’s own risk and discretion and any liability arising from the use thereof or reliance thereon is accordingly disclaimed by the Sanlam Group. A financial advisor must be consulted as far as the unique needs of the investor are concerned and therefore any parties relying on any view, opinion or model contained herein does so at own ri sk and Sanlam disclaims all responsibility and liability for positions taken based on such reliance. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / collective investment units may go down as well as up. Commission and incentives may be paid and if so, would be included with the brokerage charges, marketable securities tax, auditor's fees, bank charges, trustee fees and RSC levies in the overall costs which will be levied against the fund. A schedule of fees and charges and maximum commissions is

available from Sanlam Investment Management (SIM) Global.

Table 7: Sanlam Global Financial Fund as

example: Net asset value of portfolio grew

16.6% in 2013

NAV/share growth

P/NAV Unit price

US$

Growth in unit price

2002 20.8% 1.08

2003 31.1% 1.50 10.0

2004 19.8% 1.58 12.2 22%

2005 28.1% 2.01 16.7 36%

2006 33.5% 1.97 20.0 20%

2007 27.8% 1.61 24.3 21%

2008 11.8% 0.75 8.8 -64%

2009 31.4% 1.12 17.1 94%

2010 19.9% 1.41 22.2 30%

2011 20.3% 0.99 18.9 -15%

2012 21.4% 1.10 24.2 30%

2013 16.6% 1.16 25.2 5%

2014* 18.4% 1.05 24.8

* As at 28 Feb 2014

MARKETREVIEW Issue 8, March 2014

Page | 11

Table 8: Berkshire Hathaway vs S&P500

NAV/share

Berkshire

Hathaway S&P500

1972 100 100

1973 105 120

1974 110 158

1975 135 134

1976 214 181

1977 283 252

1978 352 297

1979 477 349

1980 569 303

Appendix A

Is Warren Right?

Berkshire Hathaway is different:

Firstly, Berkshire Hathaway is a listed investment trust. His “fund” is

not affected by outflows. In 1974 he underperformed dramatically

but could sit it out without being affected by the unhappiness of his

investors (with dramatic effect afterwards).

Similarly in 1999 he again underperformed refusing to invest in

tech shares during the tech bubble. A large number of value

funds had to close down due to clients withdrawing their money

to invest in tech funds (recommended reading: Kirk Kazanjian:

Investing with the Masters). Again, whilst Buffett was called

senile and “having lost it” and investors were pleading with him

to invest just a small % of Berkshire’s capital in tech shares at

shareholder meetings (read chapter 54, The Snowball by Alice

Schroeder), he could ignore them. Investors could sell down

Berkshire Hathaway shares, but it didn’t affect his decisions.

Secondly, he “buys USA”

Because Berkshire’s investments outside the USA are negligible

(approximately 12%), he does not have to think a lot about currencies

and macro risks of other countries. Investing outside the USA means

one believes that the asset will generate returns exceeding that

available in the USA measured in US$. But true to form, when Warren

makes the call he focuses on the productivity of the asset and not the

macro. His investment in Iscar (Israeli Toolmaking Company) is a

good example.

The Moody Neighbour “.. if a moody fellow with a farm bordering my

property yelled out a price every day to me at which

he would either buy my farm or sell me his -- and

those prices varied widely over short periods of time

depending on his mental state -- how in the world

could I be other than benefited by his erratic

behavior? If his daily shout-out was ridiculously

low, and I had some spare cash, I would buy his

farm. If the number he yelled was absurdly high, I

could either sell to him or just go on farming.”

The Distracting Macro “Owners of stocks too often let the capricious

and irrational behavior of their fellow owners

cause them to behave irrationally as well.

Because there is so much chatter about markets,

the economy, interest rates, price behavior of

stocks, etc., some investors believe it is important

to listen to pundits -- and, worse yet, important to

consider acting upon their comments. "For many

(these) investors, liquidity is transformed from

the unqualified benefit it should be to a curse.”

MARKETREVIEW Issue 8, March 2014

Page | 12

Appendix B The Brazilian Effect

High expectations in 2007 led to a

cheery and expensive consensus.

Now everybody dislikes them and

forgets that managements have

delivered.

Table 9: Brazilian Banks

2007 2013 Growth Compound

growth

Combined NAV and DPS

Itau 7.9 20.75 162% 17%

Bradesco 6.9 20.15 193% 20%

Combined Price and DPS

Itau 33.09 37.32 12.8% 2%

Bradesco 28.34 34.52 21.8% 3%

P/NAV

Itau 4.17 2.12

Bradesco 4.13 1.98

Appendix C Egypt An interesting case study

With Turkey/Thailand being plagued by political uncertainty I analysed CIB (largest bank in Egypt) during December

and this again proved how good businesses continue to generate good results even during terrible crises. In terms of

recent cases of political turmoil, only Syria and Libya was worse. Amazingly CIB grew its net asset value per share

every year.

It’s like there was no revolution; until you look at the share price.

Table 10: CIB: Shareholders capital (NAV/share) grew every year as if there was no revolution.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

NAV/share 4.32 5.80 7.50 6.10 7.72 10.22 13.96 18.07 23.19 28.93

Growth 19% 34% 29% -19% 27% 32% 37% 29% 28% 25%

ROE 26.2% 28.8% 33.1% 34.5% 43.2% 38.3% 22.6% 23.4% 24.8% 22.0%

Share price 13.06 19.33 30.50 18.60 27.34 47.40 18.89 34.92 32.60 33.00

P/NAV 3.02 3.33 4.07 3.05 3.54 4.64 1.35 1.93 1.41 1.14

Appendix D Nedgroup Investment Financial Fund In case you needed it – more proof of our ability to pick

financial winning companies.

The Nedgroup Investments Financial Fund - for 10

years an outperformer and also won us quite a few

awards.

Graph 8: Nedgroup Investments Financial Fund vs

competitors

0

200

400

600Nedgroup Inv Financials Competitor 1

Competitor 2 Competitor 3

Competitor 4 Competitor 5