Some definite trends have emerged in our market over the past few months that are noteworthy in that they have influenced changes to the PSG Alphen Flexible Fund.

The first obvious trend that has emerged has been increased market volatility. This became most evident after some alarming negative asset price movements in July and August across global stock markets, prices subsequently quickly recovered. The fall-out was precipitated by sub-prime worries in the US, but markets rapidly recovered as Central Bankers acted in unison to cut interest rates. After containing various protective derivative positions in the fund, these were reduced in the correction as they had fulfilled their purpose.

The second ongoing trend that is observable in markets is the euphoria around commodity companies and the blind acceptance that earnings will prove resilient on an ongoing basis. In other words there exists a belief that commodity companies are no longer cyclical. We have been exposed to a range of commodity companies from the base metal stocks to precious metals and even paper companies. However, in response to what we believe to be overzealous pricing on commodities, we have been actively reducing our exposure in this space. At the time of writing this report, the PSG Alphen Flexible Fund had exited all Billiton and Anglos exposure. Our approach on commodity or cyclical related stocks is to hold only those that we perceive to be 'late cycle' stocks or special situations where a company trades at discount to our fair value - there are very few of these. We are currently positioned in Mondi as a late cycle example and Hulamin as a value underpin.

The third and final major trend that we can identify currently is that the market has a distaste for companies that are predominantly retail focused and reliant on the domestic economy. We see merit in skepticism on the sustainability of profitability from many retailers and even some financial institutions after the massive earnings base that has formed after years of almost unparalleled profits. Whilst earnings sustainability is a valued concern, we do however believe that many of these companies have been de-rated to a point where real value is emerging. We have responded to this trend by nibbling at some of the retailers and aggressively building the fund's financial exposure as well as a position in Remgro.

The PSG Alphen Flexible Fund's asset allocation has shifted somewhat as a result of the market dynamics stated above. Our derivative position has been reduced and equities have been increased to approximately benchmark levels. We have felt that bonds lack value and the fund has no exposure at present to the domestic bond market, we are however re-looking at inflation linkers as an alternative to conventional debt instruments. As far as property is concerned, we feel that most local property stocks are not compelling buys at current prices and we have instead built-up a position in Liberty International which we perceive to be somewhat undervalued and offering excellent rand hedge qualities. We have retained our offshore exposure at the maximum allowable 15% level despite rand strength. We feel that the global exposure acts as a superb shock absorber during periods of market volatility when rand weakness inevitably occurs concurrently with falling stock markets.

The past quarter once again saw strong returns on the JSE (4.3%), with sound performances across most sectors on the equity market, although performance tables in recent weeks have been dominated by heavy weight Resource counters. Annualizing the second quarter's gains begins to give the impression that the market's performance is normalizing after unsustainably high levels over the past few years, albeit that the 15% year-to-date return from the JSE remains very high. In stark contrast to equities, bonds performed poorly (-1.7%) for the three months to June, while the year-to-date return has been flat. Cash returns remain relatively attractive, with June's numbers increasing to 0.80% on the back of the recent interest rate hike. We believe that cash will be a strong competitor to other asset classes for the remainder of the calendar year.

Domestic and global bonds are being plagued by inflation fears and commensurate interest rate pressures. In South Africa, the inflation picture has deteriorated in the last few months but the market seemed very efficient in anticipating these price pressures as reflected in the bond sell off since May 2007. Breakeven inflation has increased to 5.7% over the same period and based on the short-term outlook, risks remain on the upside. Inflation is likely to peak in early 2008 and the base effect should see inflation coming down fairly quickly to around the mid point of the Reserve Bank's inflation band (4.5%). The SARB should therefore be looking through the inflation bump and considering that these price pressure catalysts, such as refining margins and food and oil prices are externally driven or exogenous of nature, we feel that the MPC should consider pausing on interest rate hikes earlier than anticipated. Bear in mind that inflation expectations is the key factor to manage and ongoing hawkish rhetoric by the SARB will keep inflation in the spotlight. In our view, post the sell-off, bonds are, for the first time, in a long while, starting to look attractive, especially when the scarcity value is taken into account. Globally, however, the 20 year bond bull market which started in the 80's seems to have broken down and risks remain elevated for this asset class. The bond problem is accentuated when you compare expected bond returns to cash, a yield rally back to about 7.5% is needed before the returns from bonds equate to the current total return offered by cash on a 12 month view. We therefore still prefer cash.

We maintain our view that equity returns should be muted for the rest of the 2007 calendar year and in the long run will normalize in line with historical returns. We are cognizant of the fact that South Africa is going through a unique phase in terms of the upward wealth mobility of labour within the LSM groups as well as an infrastructure cycle that is gaining traction, but in the long run, company profitability is the ultimate driver of share prices.

We feel it essential that focus should be placed on long-term sustainable business fundamentals and concomitant profitability levels and are adamant that we do not want to overpay for abnormal short term growth. This approach produces enduring returns in the long run. We believe that there are only a handful of companies' on the JSE where the ratings currently reflect normalized earnings growth, which makes us cautious on the outlook in the short term and explains the fund's slight underweight position in equities. Based on our optimistic longterm outlook for equities though, we would be looking for an opportunity to take the equity position back to the benchmark weighting of 55%.

Large cap developed market equities are in our opinion attractively valued relative to local equities, with little 'growth hype' factored into their prices. This is quite divergent from the emerging equity space where high prices are being paid for expected future profitability. Consequently we hold our full allowable offshore allocation of 15%, (this has grown to 16%), expecting to capture what we perceive to be an inevitable rerating of these large cap global companies. Cash has shifted from merely a default asset class to avoid risky bonds, to a compelling yield play; we are increasing exposure to 12m paper where we are fixing the highest rates possible.

We feel very comfortable with our fund's positioning considering the current environment where stock picking is becoming more important than index investing. The fund's somewhat defensive positioning should also be well suited to investors needing to capture some market upside but without full equity risk.

The excellent performance from South African asset classes which has been unrelenting for the past six months continued into March.

Albeit for a brief period when the yen carry trade looked to be unwinding last year in May and again briefly in February 2007, this quickly reversed and carry trading and global liquidity remain two current core themes internationally. The consequence of this is that global liquidity levels remain extremely elevated and mobile capital is attempting to find a home where returns should handsomely exceed the cost of funding. South Africa has been a favoured destination for these money flows with our 4% plus real interest rates and expected improvements on asset returns.

This has been due to perceptions that an emerging middle class is developing in South Africa and the prospects for enhanced consumer consumption. The government's fixed capital formation program arising out of the need to address local infrastructural capacity constraints as well as development leading up to the World Cup is also attracting much foreign interest. South African is of course not alone with respect to attracting capital and the emerging world in general, and particularly those economies where internal consumption seems to be gaining traction, are favourites for portfolio flows.

We have chosen to utilize these strong market moves in two ways. Firstly, we are maintaining certain directional trades, particularly with respect to local commodity and consumptiondriven companies. Secondly, we are holding a healthy exposure to contrarian positions within our portfolios mostly in the form of developed market offshore exposure. We perceive our contrarian call as a potential buffer when risk appetite waivers globally.

Overall, the fund is operating at approximately 10% below its 55% long-term equity benchmark. We hold no property or bonds and we are overweight cash as we perceive the current real yield of 4.5% to be excellent. As mentioned above, the PSG Alphen Flexible Fund is at the maximum allowable position offshore for a , Regulation 28 Compliant product, that being 15%. We feel very 1 comfortable with the current asset allocation of the fund and; believe that it caters for the risk/return dynamics which prevail in I the market at present.