November proved to be an excellent month for equities, with the All Share Index gaining 7.26%. Bonds also performed superbly gaining 2.25% and cash returned 0.6%.

A mixture of stimulatory monetary and fiscal policies, a strong and relatively stable currency, as well as powerful external economic forces have created a platform for growth in the South African economy. This has been verified by the restated seasonally adjusted and annualised GDP numbers for 2003, which were revised up to 2.8% from 1.9%, as well as those for 2nd quarter 2004, at 4.5% from 3.9%. Third quarter2004 GDP growth came in at a whopping 5.6%. This environment has been highly conducive to companies deriving their earnings from personal consumption as consumer and business confidence has tracked higher. Retailers are particular beneficiaries, especially those offering credit with SA credit extension growing at over 10%. Whilst the economic backdrop remains very favourable, the one area of concern for inflation going forward is the rapid rise seen in money supply, which is growing at over 15% annualised. This we believe will be closely monitored by the South African Reserve Bank.

The Appleton Managed Flexible Fund’s overweight position in equities assisted it in producing a return of 6.4% in November. The fund remains invested in high dividend yielding, value orientated shares.

Year-to-date, the fund has outperformed its inflation plus 5% mandate in excess of 25%. Whilst delighted with the role that the market has played in achieving this return, we believe the quantum of out performance to be unsustainable and are of the view that the fund’s five and a half year history of producing inflation plus 8% returns is more realistic and more likely over the following 12 months.

October was an excellent month for South African investors across most asset classes. Whilst the All Share Index fell 0.6% during October, this performance did not reveal the phenomenal returns seen in certain sectors of the SA equity market. Currently, the local market is leveraging off a feel-good factor which has permeated large segments of the South African economy. Reasons for such improved sentiment include positive fiscal and monetary management, rating agency upgrades, massive infrastructural targeted spending of R135bn over the following five years and consumers balance sheets demonstrating robustness. Added to this, the tentative emergence of a middle class black consumer has been welcomed by SA incorporated.

Bonds returned 2.2% in October, cash 0.6% and real estate 0.9%. The stand-out area of performance on the equity market was industrials at 6.3%, with financials second at 2.7%. Year-to-date, resources have been the worse performing area of the JSE, with a return of -2.5% and financials best, at 30.9%.

The Appleton Managed Flexible Fund had a sound month returning 3.9%. The fund’s extremely small exposure to resources and predisposition to industrial and financial shares has proven a sound strategy. If there is any error that we have incurred over the past six months, it has been, not escalating exposure to our stock bets, which have generally proven excellent.

A great deal of good news has permeated global markets and this has positively propelled the JSE to unparalleled levels relative to its historical rating against the emerging market universe. The MSCI South African P/E ratio versus the MSCI Emerging Markets P/E has reached 1.11x against the long-term mean of 0.82x. This can be ascribed to the strong demand for commodity related products as a result of synchronised global growth, positively impacting our local mining companies. The JSE has, however, also responded to a superb domestic consumer environment leading to a re-rating in the Financial and Industrial indices. On a rolling twelve month basis, earnings will remain sound on our market, led from the front by resources, where earnings will rise by over 50%. Financials and industrials are expected to grow earnings at about 23% and 24% respectively.

In September the All Share performed superbly, gaining 5.7%. The largest gains came from banks 15%, general retailers 13.4%, life assurance 10.4% and engineering and machinery 10.6%.

The Appleton Managed Flexible Fund returned about 4% in September. We remain dedicated to generating inflation plus 5% returns over a three year rolling period. This fund returned 31.2% to investors over the past year.

Company share prices are theoretically a function of two important variables, profitability or earnings and secondly, the discount rate at which these profits or earnings are reduced to their net present value. Investors naturally need to focus on both these variables to determine at what price companies should trade. The JSE has enjoyed gains on the back of both a declining discount rate environment (interest rates) and sustained earnings out of South African companies over the past twelve months. Whilst most market participants were of the view that interest rates in South Africa had come to the end of their declining cycle and this was constantly intimated by Tito Mboweni, in August the Monetary Policy Committee (MPC) surprisingly reduced the prime rate to 11%. This resulted in the local market rising 8.75% for the month. Whilst all major sectors were lifted by the MPC’s decision, particularly large gains were seen in resources with the increased leverage from rand weakness immediately working through to sentiment. Financials were naturally less impressive gaining just over 5.5% and industrials climbed 6.0%. The market re-rated with the P/E rising from 13.5 times to 14 times, this in spite of the fact that a number of large weight companies delivered excellent earnings.

In terms of the Appleton Managed Flexible Fund, after having enjoyed a superb year, August proved to be the worst relative performance that the fund has ever had since inception. The fund returned 2.64% for the month. Expecting interest rates to stay on hold or possibly even rise, the fund’s defensive position was inconsistent with the rising market. In the latter half of the month, the Appleton Managed Flexible Fund's positioning began to pay dividends again.

The fund is mostly invested in financial and industrial shares with a bias towards large caps. We expect this fund’s solid long-term track record to be sustained going forward and believe that August was merely a short-term blip.

For July the market provided a bit of an about turn, with resource shares rising almost 5% relative to less impressive gains seen in financials of 0.8% and industrials of just over 0.3%. This is relevant as the trend year-to-date has been one of very weak performances out of commodity related stocks and other rand hedges and solid gains in domestic plays. From January, resources have fallen about 10.0%, industrials are up 8.3% and financials have gained 10.3%.

It is patently clear from the returns seen in the General Equity Sector, as specified by the ACI, that managers in South Africa are grossly underweight in resources, with the mean return from funds in that sector in July being only 0.42%. This implies that any further advances seen in resources relative to other areas of the market over coming months will most likely lead to managers being forced to increase exposure in order to prevent underperformance. Under this scenario, a squeeze can be envisioned on these shares.

The Appleton Managed Flexible Fund performed in line with the sector mean for July, returning just less than 1%. Resource exposure was increased early in the month and later sold out after a healthy rise in share prices. The fund remains exposed more heavily to the industrial and financial sectors. In terms of the fund's current dominant theme, it is the accumulation of large cap industrial shares, including those with foreign exposure on share price weakness. Many of these companies are trading on high dividend yields and low multiples and the rand is already in the earnings base.

The Appleton Managed Flexible Fund enjoyed a solid June, returning 1% during the month.

This can be compared to the ALSI, which fell 2.71%. Bonds performed well in June, producing returns of 1.12% and cash 0.58%. The rand strengthened precipitously, gaining about 4.5% against the dollar, leading to severe pressure for the miners, especially on the gold front, where the Gold Index declined 14.3% in June alone. Naturally, the two-tiered market was again in full force, and while rand hedges were under pressure, small caps, mid caps and financials blossomed.

With the rand having breached the important R6 to the dollar levels intermittently, the most relevant argument is the probability for a reversal from these levels. With this is mind, it is increasingly evident that the resource shares, which have experienced enormous deratings, are becoming attractive. The Appleton Managed Flexible Fund, having largely avoided resource exposure for over a year, is slowly building positions during resource weakness. This approach will continue to be followed. Due to this view, the relatively large overweight positions in industrials and financials will be reduced.

In March the All Share Index produced a negative return of 1.39%, assisted enormously by resource counters which lost 5.23%. Industrials and financials enjoyed a stand-out month with particularly encouraging returns emanating again from small caps. The Small Cap Index posted a 4.36% return for the month.

Against this backdrop, the Appleton Managed Flexible Fund returned 0.93%. This can largely be ascribed to the extremely low resource exposure contained within the fund at 12.8%. This can be compared to the 46% weighting of resource and basic industry counters within the All Share Index. While the market has rated resource companies highly on the back of the current resource cycle, the manager of this fund continues to believe that the lower risk area of the local market can be found on the domestic front. Although earnings, even in rands, will be fantastic for resources over the following 12 months, with some shares growing earnings over 50%, the high historic dividend yield of almost 4.5% on financials and 3.5% in general industries looks appealing against the 2.5% historical yield applicable to resources. A similar argument can be used when analysing historical P/E levels.

This fund will remain in the medium term aggressively exposed to local or rand plays on the equity front and will continue to adopt a cash rather than bond bias.

The Appleton Managed Flexible Fund had a poor month relative to its own high standards in February.

The fund delivered a return of -0.93% in February relative to the market’s return of 0.5%. This can largely be ascribed to the fund’s lack of exposure to resources and financials, which returned 0.52% and 1.12% respectively, as against the negative return from industrials of -0.04%. Whilst industrials performed poorly in February, it is important to realise that this part of the market has been by far the most dominant over a twelve month view and is where the fund has been positioned. Over one year, industrials have returned 47%, with financials 32% and resources 27%. The fund manager has not attempted to convert the portfolio away from industrial exposure believing that many stocks within this area of the market are cheap and offer healthy dividend yields.

The Appleton Managed Flexible Fund is heading for its five year anniversary and it is an opportune time to comment on performance over this period. The fund has always attempted to firstly, produce absolute positive returns and secondly, target inflation plus 5%, incorporating 2% fees. The attached table demonstrates this fund’s history of performing in line and better than these required benchmarks.

It has been an excellent month for the Appleton Managed Flexible Fund, with the fund delivering a return of 2.6%.

Our internal benchmark since launching this fund has been 1/3 bonds, 1/3 cash and 1/3 equities. Our analysis in 1999 indicated that this was a very difficult benchmark to outperform over time. Our latest work vindicates the 1999 research findings. This fund has only lately been able to outperform its benchmark, having now returned 103% since inception against the benchmark of 100%. It is interesting to observe the performance of the benchmark against the Appleton Managed Flexible Fund and the Flexible sector in general. The fund outperformed the benchmark from May 1999 to January 2001; it subsequently underperformed between January 2001 and December 2003. An attribution analysis indicates clearly that the excellent performance in bonds and the underweight position taken by the fund within this asset class was the major reason for the portfolio struggling to keep pace with the benchmark. In 2004, the fund has risen above the benchmark, as in January it returned 2.6% as against its benchmark of 1.39%. Comparing this to the sector, the sector mean returned 68% since the inception of Appleton’s fund, thus underperforming the benchmark by 32%.

Looking forward, the fund continues to be overweight equities relative to the benchmark and exposure to gilts is currently zero as we believe that this asset class is overvalued. Due to the sizeable run in the market last year, the cash position is also slowly being lifted. As far as equities are concerned, exposure remains predominantly in rand plays. Rand hedges will selectively be bought on price weakness which is likely to emanate from unpleasant earnings surprises.

The Appleton Managed Flexible Fund continues to diligently deliver on its objective of absolute returns.

The fund has gained just short of 100% since inception, but has easily outperformed both the sector mean and the ALSI 40 by over 30% respectively from launch date. It is the fund manager's belief that the fund has achieved this performance due to a clear objective of achieving absolute rather than relative returns. Since launch date, the fund has only had one negative year, which occurred between May 2002 and 2003, when the fund lost 2.4%, but this can be compared to the ALSI 40's annual loss of 27%.

While returns are ultimately what investors seek, the fund manager's believe that these are intimately connected to risk parameters or monitoring. The extreme volatility within asset classes over the past few years has meant that incorrect risk compliance has leant itself to excessive gyrations on many unit trusts in South Africa and abroad. The fund manager's approach is rigorous on risk on various fronts. Just in terms of this fund relative to the Flexible Sector, the fund tends to outperform the average fund when the market rises, having a beta on the up about 6% greater than the funds peers. Conversely, when the market falls, the fund's beta is lower than the sector, meaning that the fund outperforms in a declining market. The weekly standard deviation on this fund is 1.34% and precisely in line with the sector, yet its return over the past two years exceeds the sector average by 8%.