Riskowitz

The above chart shows the period end value of $1,000 invested at inception of RVF against major indices. JSE is the Johannesburg All Share Index (measured in U.S. dollars) and S&P is the S&P 500 including dividends.

Investment Approach and Philosophy

The Riskowitz Value Fund’s objective is to compound Partners’ capital at a high rate over thelong-term while minimizing the risk of permanent capital loss. It does this by seeking to identify, understand and invest in a select portfolio of listed companies in South Africa. The Fund focuses on South Africa because:

The General Partner was born and raised in Johannesburg. His expertise has been clearly identified and is known to be confined to South African companies and business dynamics.

The Fund is unique in that it has a durable competitive advantage. The investment management business in South Africa is highly institutionalized, creating opportunities for more nimble and unconstrained funds3. For example, the average mutual fund has 60 positions (in a market where there are 450 listed stocks). Mutual funds are required to hold not more than 5% of their assets in any one position, severely limiting the opportunity for gains regardless of how attractive the opportunity set may be. There is a lack of price competition (due to a short supply of “smart”4 analysts) and a relatively high level of perceived risk (particularly from foreign investors). Furthermore, South African companies generally exhibit wonderful business economics5 and excellent management.

3 Upon careful inquiry there appears to be only 11 other funds in South Africa that match this description. The remainder are mutual funds, life insurers or institutions that represent the vast majority of assets on the exchange.

4 There are many “smart” analysts in South Africa; there just aren’t that many familiar with intelligent investing.

5 It is not uncustomary to find South African companies with 40% long-term returns on capital with no debt. For obvious reasons, it is usually (but not always) difficult to buy these companies at reasonable prices.

Year in Review

The Fund’s 63.2% gross return to Limited Partners was achieved despite a 23.5% depreciation in the value of the South African rand against the U.S. dollar. On a constant currency basis, the gross return would have been 101%. The three-year net return (in dollars) is 239.5%, or 50.3% annualized.

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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.

Taste Holdings: Taste is a vertically integrated, category specialist fast food and jewelry franchisor. It has a durable competitive advantage in that it owns leading brands with strong royalty-type economics and is vertically integrated. The company will roll out 75 new stores this year (taking the store count over 700). Margins in the startup manufacturing and logistic divisions (where only a fraction of food franchise outlet requirements are supplied) should normalize which would see Taste doubling earnings for fiscal 2014 from fiscal 2012. Taste is a fantastic business with ambitious management and a very long runway in an expanding addressable market: the percentage of the population in middle income groups grew from 36.9% of the population in 2001 to 59.8% of the population in 201210. Through organic growth, supply efficiencies and acquisitions, Taste has the potential to be a true long-termcompounder.

Trustco Group Holdings: Trustco is a Namibian company listed on the Johannesburg Stock Exchange. It is involved in financial services and land development in Namibia, and legal and life insurance in South Africa. It is the largest educational loan provider in Namibia. It owns a large tract of industrial land in supply-constrained Windhoek, Namibia which is worth more than the whole company. Trustco’s true earnings power is masked by investments in the South African business which will produce meaningful profits in the medium term. It has a normalized operating margin of 30% for which the Fund paid a normalized 3 times earnings.