Markets have remained extremely erratic, with enormous swings in asset prices. This was reflected once again in November, with the MSCI gaining 5.4% in dollar terms, having produced a decline of almost 16% year to date.

Since inception, Appleton local units trusts have consistently remained overweight South Africa relative to any offshore asset classes and destinations. This due to Appleton's concerns about offshore asset valuations as well as their house view that the rand was grossly undervalued relative to most developed world currencies. This view, although considered maverick by many, has been vindicated by the JSE's dollar return year to date of 40%.

As far as 2003 is concerned, the JSE at headline index level is likely to be under pressure from an earnings perspective. This will occur because the rand has been such a large driver of earnings growth this year for dual-listed companies, which account for a large proportion of the All Share index. However, for locally orientated small and medium companies, the stronger rand could assist in turnover generation, as Appleton believe consumers will benefit from at least two 100 basis point interest rate cuts next year. With the stronger rand, inflation is expected to fall precipitously. Overall, Appleton remain confident that the South African market offers safer prospects than the MSCI heavyweights."

Appleton does not believe that the current positive mood on global markets is sustainable over the medium term. Although markets were technically expected to bounce, this does not mean that the recent strength is driven by a fundamental shift in the global macro economic environment. Whilst we are not expecting a double dip presently, the Fed's latest fifty basis point cut reflects possible pitfalls on the global economic landscape.

This global rally has been lead by developed bourses. The MSCI World index moved 7.4% higher in October, whilst emerging markets gained a healthy, but lower 6.4%. Due to the JSE's defensive qualities, the quantum of gains was slightly lower than most markets, at 4.3% in dollar terms. In rands though, the JSE actually delivered a negative return of -0.6% for the month. The rand had another sterling performance for the month, appreciating by 5.3%, and was the best performing currency globally year to date.

The JSE's 27% dollar return year to date as against the negative 15% return from the Dow Jones is further vindication of Appleton's low positioning to offshore equities in the local funds. In light of the JSE's current PE of 11 as against the S&P's 35, the risks remain very high offshore, while opportunities on the local market are vast.

There are currently about ten major sectors on the JSE where the earnings yield exceeds the yield to maturity on the Government R150 bond. However, such a value proposition did very little to deter investors from undertaking exactly the same trading behaviour that has pervaded markets this year - selling equities and buying bonds.

In September, the All Bond index delivered another positive return, eking out 0.17%. The longer end of the curve was the most impressive, returning about 2%. Against this impressive performance, the equity universe looked decidedly ill in September. Excluding resources, eighteen of the twenty-eight major sectors produced negative returns for the month. Including resources, almost 60% of the sectors were negative. The All Share index returned -1.54%. Year to date, the market has lost 7%, the bond market is up 7.8% and cash has returned 8%.

The JSE has responded consistently with global developments, in that equities have been replaced by bond and cash holdings. However, our market's headline index performances have bettered the developed bourses due to the limited exposure to the TMT universe. The JSE's performance looks healthy relative to the S&P's 37% decline and the MSCI World Index, which is down 34%. In contrast, the JP Morgan Bond Index came out positive, with a return of 1%.

Whilst Appleton are convinced that local equities, especially within the industrial and financial sectors offer compelling value, they are also well aware of the breaching of vital technical support levels by major global bourses. This tends to create a psychological vacuum and the JSE will not be left unscathed by the potential selling pressure that accompanies such negative market events. Appleton's local unit trusts are extremely cash flush and buying opportunities will be sought during equity weakness.

August was a very good month for local equities, with most major indices ending in the black. In direct contrast, the local bond market experienced its first monthly decline since the beginning of April 2002.
However, volatile performance remained a feature of the JSE in August. This becomes clear if one considers that the best performing constituents of the local market during the month were gold and platinum, yet these were stand out losers for the month of July. This volatility seems to be a direct function of inconsistent economic data being released by the G7, and the concomitant psychological shifts taking place in the market. A dilemma facing South African asset managers and investors alike, is attempting to reconcile the rationale of large equity holdings locally, while foreign markets, particularly those in America, provide an ever-increasing systemic risk.
The fund manager's believe local equity exposure can be justified as follows. Firstly, since South Africa's reintroduction to the global economy, many South African companies have had to rapidly undergo a metamorphosis to become world class and globally competitive. This should ensure more stable earnings going forward. Secondly, the South African economic environment is offering a juicy mix of inflation together with strong private consumption expenditure. This is assisting the revenue line for pockets of corporate South Africa. Finally, it is the fund manager's contention that general global risk aversion and the fact that South Africa is an emerging market as well as the African label, has prevented it from receiving the attention it deserves. As a result, Appleton's funds continue to hold sizeable exposure to segments of the JSE that fulfill the fund's value-orientated requirements.

The fund was well positioned from an asset allocation perspective for the fallout that took place in global markets in July. The fund has about 40% in cash and inflation-linked bonds and the equity exposure was not orientated towards the All Share index.
However, the 13% decline in the JSE in July did not leave the fund unscathed. The portfolio declined by 3.45%. For the month, the fund was ranked 10th out of 29 competitors. Considering our history of being in the top three funds over almost all periods, July can be considered one of Appleton's worst months and was disappointing. They reiterate, however, that the fund still outperformed most respected competitors. This drop in absolute performance can be ascribed to three index stock exposures, which fell precipitously. The rest of the portfolio is geared towards high-yielding value counters and held up fantastically. This has been a core strategy for two years.
As a continuous exercise, the portfolio strategy was addressed. The fund managers remain very happy with the medium-term and long-term consistency in performance that they have delivered through the value bias adopted. Unit holders can look forward to continued consistency in performance.

There is little doubt that an enormous disconnection has occurred between current economic fundamentals in the global economy and movements on major markets. Earlier this year the fund manager's raised two questions. Firstly, has there really been a US and global economic recovery? And secondly, does this necessarily imply higher equity prices in the US?

Its easy to answer the first question in the affirmative, with the OECD leading indicator, global trade, US industrial production, consumer spending and consumer confidence all providing clear evidence of a positive economic rebound. Unfortunately, as far as question two is concerned, the fund manager's conviction has been that the extreme equity valuations in the US would demand a strong economic and earnings recovery and thus a powerful equity rally was most improbable. This belief has proven accurate, as major US equity indices have breached vital technical support levels and are currently undergoing a severe sell-off. The above mentioned disconnection can thus be seen within this context. Now that the sell-off is underway, it is important to gauge what future equity behaviour can be expected from the US and how this will impact the local market.

With equity investors currently feeling enormously bearish, the fund manager's believe that positive economic data out of the US is being ignored. However, as we move towards the last quarter of 2002, the evidence of the recovery in the economy and corporate earnings will be overwhelmingly clear. This is likely to stabilise the market's mood. In the short term, systemic risk remains high and further falls are likely. The local market will not be unscathed, but with South African equities fairly priced, weakness will be used as a buying opportunity. The fund's current large cash weighting stands the fund in good stead to take advantage of these opportunities.

The Appleton Managed Flexible Fund enjoyed another excellent month in April 2002, returning 5.21% against the sector average of 4.09%. The fund ranked 7th out of 29 funds for the month, and also has the distinction of being first since inception and in the top quartile over the 12, 6, 3 and 1 month periods. The fund manager is pleased with this performance.
One of the core themes has been the valuation discrepancy on the JSE between local-orientated stocks versus commodity counters. Local industrials are simply too cheap. In line with this, the fund is heavily geared towards industrials relative to other areas of the market. Industrials account for approximately 40% of equity exposure compared to 19% financials and 19% resources. Financials did particularly well in April 2002, delivering a staggering 15.7% return while industrials only gained 3%. However, Richemont accounts for 24.2% of the industrial sector's market cap and its excessive valuations weighed heavily on the sector during the month. Richemont lost 9% in April 2002, but the fund has no exposure to this stock.
The other valuation theme that the fund manager attempted to capitalise on was small caps, which have traded at enormous discounts to the ALSI. April 2002 saw the unwinding of this discount, with small caps gaining about 11% for the month. The PE discount was 40% at the beginning of the month, this has subsequently reduced to 15% and the discount has returned to its seven-year mean.
The fund manager continues to advocate a balanced approach to the fund, which has assisted in delivering performance until now. Hopefully this will stand the fund in good stead leading up to its third birthday.

So far 2002 has been prosperous for investors in the Appleton Managed Flexible Fund. Whilst Appleton Managed Flexible fund manager's are delighted to offer their unit holder's positive and competitive returns, it gives Appleton Managed Flexible fund manager even more pleasure to deliver these returns with low risk. Risk, in Appleton Managed Flexible fund manager, opinion is particularly evident in funds that have excessive weightings in areas of the market that are in favour, but expensive. Although the Appleton Managed Flexible fund has some exposure to resource counters, which fall within the expensive category, the return of 20% by the fund over the past year has largely arisen from unwanted and cheap areas of the market, which have re-rated.
Although in Appleton Managed Flexible fund manager's understand the markets current cyclical appetite, in Appleton Managed Flexible fund manager continue to reiterate concerns regarding valuations! This assessment is further highlighted by a leading South African strategist from JP Morgan, Franco Busetti, who has undertaken in depth research on the periods of outperformance of major sectors of the market, ie resources versus financials. Whilst intuitive, his research highlights that resources and financials are counter-cyclical. What is interesting is that the current magnitude of the divergence of performance of these sectors relative to the ALSI is particularly high. In fact, Busetti points out that the differential in excess performance of 76% from resources over financials has been exceeded on only six occasions since 1975. Furthermore, the average period of outperformance is about 23 months and this cycle has already lasted 16 months.
The fund's current asset allocation positioning is designed to fully reflect these valuation concerns.

The Appleton Managed Flexible Fund remained balanced throughout 2001. Cash made up approximately 39% at year end with the rest of the portfolio being invested in local equities. Value based industrial shares made up the largest portion of the equity portfolio with resources the second largest sector represented.