Once again a fantastic performance from all local asset classes drove the benchmark which our fund attempts to outperform. The winners in November were the All Share Index which returned 2.1% and bonds, gaining 2.4%. A poor performance emanated from property, down 1.63%. From a tactical asset allocation perspective, the PSG Alphen Flexible Fund is at half weight in bonds, which has proven to be the right call year-to-date, but hurt performance in the last month. We have also exited all property exposure prior to the latest poor property performance. The fund remains at weight in equities and the solid holding in resource shares and in particular gold stocks assisted performance. With the rand strength seen over the past month, the position taken offshore did not assist performance, but we remain of the opinion that this is the correct long-term position for unit holders. As such offshore exposure has been steadily increased.

The MSCI in rand terms lost 0.3% over the past month, but in dollar terms gained 3.4%. We are not in the business of predicting currencies, but it is patently clear that any rand weakness coinciding with the current excellent performances from offshore asset classes is likely to be highly beneficial to this fund. We remain comfortable with the fund’s asset class positioning and equity sector allocations.

October was not a bad month for the PSG Alphen Flexible Fund relative to its benchmark of 25% cash, 15% bonds and 60% equity. Whilst not happy with a negative return for the month, this was inevitable considering our exposure to equities at about benchmark.

This at weight positioning is a function of our view that equities, whilst not cheap relative to the past few years, are better valued than other asset classes. As far as other asset classes are concerned, we have moved from an underweight position in property to zero exposure and have defaulted this holding to cash. We have also chosen inflation-linked bond exposure rather than conventional capital instruments for the fund and have remained exposed to a balanced portfolio of assets offshore.

As far as local equity exposure is concerned, it is pleasing to inform unit holders that our fund shifted into large caps in 2005, including gold exposure and a healthy holding of Anglo American. We did this as we felt that mid caps and small caps were unlikely to outperform the larger JSE-listed companies this year.

Year to date, mid caps and small caps have returned 25.1% and 34.5% respectively, as against 34.6% for the Top 40 and 55.4% for Resources. We expect to continue to hold a balanced portfolio skewed towards large caps.

The PSG Alphen Flexible Fund reduced equity exposure during the month of September, ending the month at 55%.

September proved a favourable period. The All Share Index returned almost 10% driven by a powerful surge in commodity counters. This assisted the PSG Alphen Flexible Fund in that our second largest sector bet over the period has been resource exposure. This is quite a different situation to 2004, when we held a negligible resource holding. In terms of bond exposure, we remain cautious on the local inflation picture and have preferred to build exposure to inflation-linked bonds as against conventional debt instruments. We are also underweight property.

In all instances, the default asset class has been cash. It is our belief that this positioning is likely to assist us as future opportunities emerge in the local equity market.

The PSG Alphen Flexible Fund delivered an excellent return versus the inflation plus 5% return target for the month of August.

The current position of the fund is designed to take account of the difficult environment we are currently experiencing. What I am implying is that, although the local equity market remains the dominant theme in terms of asset class performances, risks exist which must be accounted for. Dealing with equity risk requires the accumulation of asset classes that offer at least a degree of dissimilar correlations to the local market. This has meant that the manager has included inflation linked bonds, designed to accommodate potential local inflation shocks due to the oil price spike and offshore exposure to diversify away from purely a rand position. Due to the illiquidity of inflation-linked instruments, the fund manager was forced to acquire exposure to this asset class via a collective investment scheme.

With respect to the equity exposure, the fund has an average P/E ratio, excluding the small gold exposure, of approximately 11.5 times. This can be compared to the market with a current multiple of 14.5 times. As far as asset exposure is concerned, equities account for 60% of the fund, as per the benchmark, bonds amount to 10% versus the benchmark of 15%, offshore is at 6% and cash just over 23%. The manager feels comfortable with the PSG Alphen Flexible Fund’s current positioning.

The strategic asset allocation benchmark of the PSG Alphen Flexible Fund, being 60% equities, 25% cash and 15% bonds returned 4.6% over the month of July. By far the largest return originated from the equity component of the benchmark, with the JSE delivering 7.2% in rand terms for the month under review.

The PSG Alphen Flexible Fund returned 4.7% in July, thus slightly outperforming our benchmark. Our fund was, however, positioned in equities at 10% below benchmark weighting for most of the month. This has been in line with our house view of adopting a more cautious approach to equities considering the huge upward adjustment experienced on the JSE over the past eighteen months. On equities, overweight positions exist in diversified industrials, whilst bond exposure is predominantly inflation linked.

With the fund’s relatively defensive position in equities of merely 54% in June, it is particularly heartening to inform investors that the PSG Alphen Flexible Fund still managed to return approximately 2.5% for the month, against the raging All Share Index’s 3.96% return, the fund’s benchmark of 2.31% and the Medium Equity Prudential Sector’s return of 1.81%. The PSG Alphen Flexible Fund’s performance highlights Alphen’s ability to generate high alpha despite a conservative asset allocation.

Over the past month, on the equity front we continued to add diversified industrial exposure, switched within the Resource Sector by buying Kumba and built a position in Mittal Steel. On the retail side, we lifted exposure to Woolworths and sold out of Truworths. In terms of financials, we raised exposure to insurers on price weakness and retained our banking levels. From an asset allocation perspective, the fund also bought 7% of inflation-linked bonds. It is important to note that Alphen remains cautious on bonds and for this reason, the fund is underweight its benchmark of 15% for capital instruments. We are also seeking equity exposure where dividend yields underpin equity valuations and our funds are expected to be at most, at weight equities over coming months.

Having managed the PSG Alphen Flexible Fund from its inception in 1999 on a very conservative basis, it has been decided to capitalise on this approach and register the fund as a Regulation 28 product. In so doing, this fund will now be in a position to be utilised for living annuity monies, with strict adherence to Prudential Guidelines.

With respect to the risks being taken within the fund, we have utilised various methods to reduce risk and these include the following. Firstly, utilising strategic asset allocation to target a standard deviation. The fund has as its benchmark, 60% equities, 15% bonds and 25% cash. Whilst we will at times increase our equity exposure to 75%, the fund will mostly be positioned at approximately 60% in equities. This benchmark would have historically produced a gross return of inflation plus 6% with a standard deviation of 14%. By back-testing this benchmark to 1972, what is further illuminated is that the worst performance over any twelve months would have been -17% whereas the best year would have delivered a 76% return. On average, the benchmark returned 18%. The second risk reduction methodology is the wide spread of shares with relatively low exposure to any one company. Where possible, the fund has also specifically retained a bias to high dividend yielding shares. Finally, if necessary, at Alphen we are not averse to the utilisation of derivates to remove market risk when we believe it to be appropriate.

Investors seeking a fund with a long track record of stable, but consistent returns should find this vehicle most appropriate. The portfolio represents Alphen’s house view on asset allocation as well as our house view stock picks. It should be noted that the fund’s benchmarks are conservative and in a period of strong equity markets, this fund will not enjoy as much upside as might exist in the more aggressive funds within the Asset Allocation Flexible Sector. However, in periods of market weakness, the PSG Alphen Flexible Fund should benefit from its more cautious benchmark.

Since inception, being June 1999, the PSG Alphen Flexible Fund has been managed by the same manager and the fund has returned 160%. The following should provide readers with an understanding of what methodology is utilised to manage this fund.

Firstly, we employ a quantitative strategic asset allocation model which provides us with the long-term asset allocation applicable to achieve our mandate – that being inflation plus 5%. With this in mind, the correct asset allocation is 60% equities, 15% bonds and 25% cash. This asset allocation excluding manager value addition via alpha generation would have produced CPIX out performance of 5.9% prior to costs historically with a standard deviation of 14%. Negative months occurred 34% of the time, whilst positive performance occurred 66% of the time. During the best year since 1972 this mix of assets would have generated a return of 76% and in the worst year -17%.

Secondly, we adopt a tactical asset allocation overlay onto the strategic asset allocation backdrop. What this implies is that this fund’s asset allocation is the perfect mirror of Alphen’s quarterly asset allocation calls. We under and overweight the asset weightings relative to the strategic benchmarks – it is important to note that Alphen makes marginal under and overweight calls.

Finally, this fund reflects the ‘house stock picks’ of Alphen each quarter, so investors will be exposed to the entire team’s top calls.

So far, the market in 2005 has been the virtual opposite of 2004. This year, we have seen a weaker rand, relative outperformance by resources and negative returns from previous powerhouses such as bonds, banks and retailers. This state of affairs was particularly prevalent in March, when a tick up in interest rates and bond yields in the US reverberated around the world, and the perceived implications for appetite for risky assets saw an aggressive sell-off in emerging market assets. The result was a poor performance by the broader JSE, though a 6.9% decline in the rand against the dollar during March cushioned the impact and pockets of strength were to be found within rand hedge stocks.

Looking forward we expect jitters on global markets to persist. We would not be surprised to see the rand coming under further pressure in the months ahead as some of the supportive factors unwind.

Hence our preference for a defensive equity position that includes exposure to resources and rand hedges, with a bias towards stocks that are not pricing in spectacular increases in commodity prices. These would include: Anglos and Impala.

In the prior month's commentary, we indicated that we had adopted a more cautious approach which saw cash levels being raised by 10% during March. Whilst our cautious outlook continues, we prefer equities to other asset classes on a twelve month view. We continue to avoid bonds and have minimal property exposure.

The Appleton Managed Flexible Fund had an excellent February returning just short of 3.7%.

In 2005, Alphen have actively repositioned portfolios away from an aggressive bias towards local industrial and financial counters, to a more balanced approach. By far the largest increase in exposure has been in Anglo American due to its late cycle status, reasonable valuation and underperformance relative to BHP Billiton. The Appleton Managed Flexible Fund benefited from a continued overweight position in equities during February, with the market gaining 5.5% for the period under review. We continue to be short on bonds, believing that cash offers a better alternative for the risk being taken. Investors should be aware that although we prefer equities to other asset classes over the following twelve months, we feel that the rapid momentum in the market now dictates a more cautious approach and consequently, we will be raising cash in the fund over coming weeks.

With effect from 1 March 2005, the name of ths fund has changed to PSG Alphen Flexible Fund.

It was a very difficult equity market for the first month of 2005, with 56% of the sub-indices of the JSE offering negative returns for January. Massive sector rotation resulted in a brutal onslaught on many 2004 favourites. General retailers and banks were heavily sold off. Resources were naturally the beneficiaries, gaining 4.2% in January. The net result was an All Share Index which gained 1.35%. Bonds performed well for the month, providing investors with a return of 1.45% and a remarkable 3% gain was seen at the long-end of the curve. Cash returned 0.62%. The rand weakened 5.7% for the month and was certainly the main driver of the relative equity performance for the period. Of interest was the solid performance from bonds in light of the rands volatility.

The Appleton Managed Flexible Fund provided investors with another positive return in January, albeit small. The equity portion of the fund remains well diversified and although overweight South African plays, has slowly been increasing resource exposure over the past few months.

Looking back at 2004 reveals the extent of the dual market operating in full force. Managers that were able to position their funds correctly in industrial and financial counters and believed in rand strength enjoyed an excellent year. Those that doubted the sustainability of the currency’s strength, however, suffered.

The All Share’s return of almost 24% masked the negative returns from the Resource Sector of -1%. Banks delivered a whopping 61% return for the year and retailers 69%. This dichotomy ultimately reflected the extent of macro-economic forces at play on domestic economy. For the year, local interest rates declined by 0.5% and this was on the back of the 5.5% reduction in rates seen in 2003. In tandem with the rate reductions, a positive currency adjustment of 24.3% in 2003 and 15.5% in 2004 against the dollar played a huge role in fuelling domestic demand and curtailing export revenues.

With our strong bias towards industrial and financial counters in 2004, all Alphen funds performed well relative to benchmarks and investment objectives. For 2005 we believe that a more balanced approach, where an increased weighting in resources relative to 2004 is warranted. This is based on the contraction in relative valuations between resources and the Findi, a somewhat overvalued local currency and continued strength in the world economy.