Investments

The Fund is fully invested in the following seven companies at year end (in no particular order):

Finbond: Finbond was the best performing stock in South Africa in 2013. In July 2012, Finbond became the first South African company in twelve years to be granted a new banking license, making it one of only 16 domestic banks. Finbond’s cost of funding (retail deposits) is about 9.5% while the yield on loans advanced is 35%. The bank has a very conservative culture demonstrated by industry leading rejection rates. Earnings are expected to increase significantly as new loan products and checking accounts are rolled out. The company is trading around fair value despite the stock price increase.

Conduit Capital: Conduit has announced an anticipated change in strategy to become a focused insurance group. The company sold non-core investments and used the capital to bolster its balance sheet. Conduit’s listing will be transferred to the “Insurance” sector which should result in a re- rating and a clearer understanding of the business to outside observers. Conduit has built a niche in specialized insurance lines and is undervalued relative to the quality of its insurance book. The company trades slightly above book value while peers trade at 2.5 to 4 times book.

Calgro M3: Calgro is expected to grow net income by at least 50% for fiscal 2014. The project pipeline expanded by 25% to $1.3 billion. Demand for integrated housing solutions in South Africa continues to grow and Calgro is the gold standard with superior projects and industry leading margins. The company trades at under 8 times earnings and is expected to grow net income at 30% per annum over the next several years.

Capitec Bank: Capitec is South Africa’s fastest growing retail bank. The company has over five million customers and a 20% market share of the unsecured8 lending industry. It is by far the lowest cost operator9. The stock price has been weighed down by a poor consumer credit environment and negative sentiment in the industry. Nevertheless, Capitec sustainably generates 4.5% on average assets and is the most conservatively provisioned of the banks. It represents a South African banking revolution that is available for under 12x fiscal 2014 earnings.

RBA Holdings: RBA is a new addition to the Fund. The company is a turnkey provider of affordable housing solutions. It is different from Calgro in that it only focuses on the “affordable” (low to medium income) segment. There is a 2.2 million unit shortfall of supply in this market while new construction runs from 200,000 to 400,000 units per annum. Recently introduced housing subsidies have unleashed pent up demand but due to long project lead times and legacy issues, supply is extremely constrained. RBA’s earnings from its well situated and price- competitive projects are expected to exceed the current market capitalization of the company over the next few years. However, patience will be required which fortunately the Fund has in abundance.

8 Unsecured refers to personal loans not backed by collateral, but excludes credit cards.

9 Measured by the “cost-to-income” ratio (operating expenses divided by operating earnings). It is in fact one of the lowest cost operators in the world by this measure.