August was horrible for investors around the world. It proved particularly harsh on those investors that panicked during the sell-off, which took place early in the month and sold out of positions, only to watch markets across geographic regions rally into the latter stages of the month.

Whilst the merits of investing in South East Asia as a low risk growth option relative to the developed markets and-in particular the US where growth is tapering off-has been chorus-like by many market participants, it is ironic that these markets were the most tormented during this sell-off. In fact, the S&P proved one of the most resilient markets in August. The Nikkei in particular, demonstrated its cyclical nature by collapsing 6% and subsequently ending the month about 2% down. We have argued for quite some time that it is possible to access global growth stories via S&P exposure at lower valuations than is the case if one invested directly in South East Asia. This does not imply that we are not invested in Asia, but we have maintained healthy positions within large Western markets, contrary to the views of some. This strategy has worked well during turbulent times.

In terms of our underlying manager performances, it was our Asia-Pacific equity manager which performed the worst during August, down over 6%. However, and not surprising considering the outstanding performances from the Cac and Dax over the past year, our European manager also experienced a heavy sell-off in August, down just over 4.7% in US dollar terms. Against this, our underlying bond managers did very well and particularly the global bond managers, which had a bias towards US Treasuries. US Treasuries enjoyed huge support during a period when a flight to quality approach dominated. Our global bond manager returned just over 1.5% in August.

We remain comfortable that markets at present do not call for aggressive asset allocation calls. This view is premised on the complete lack of visibility with respect to sub-prime's affect on the real economy globally and equally important and the potential responses that might emanate from Central Banks. Both these issues might sway markets heavily in either direction in coming months. One could make a sound argument for avoiding equities and holding only bonds and cash and equally one could justify no bond exposure and positioning aggressively towards equities and cash. Our rather neutral position thus seems currently logical and effective.

PSG Alphen Foreign Flexible Fund has enjoyed a good performance over the last 6 months with a return of 6.8% vs. the peer benchmark of 6.2%.

Whilst the US dollar has steadily weakened during this period (lost 2.5% against the British pound, 2.5% against the euro and appreciated by 3.5% relative to the Japanese yen) this fund's diversified currency, asset and regional exposures has meant that it has steadily weathered the US dollar's currency storm. In British pound terms the fund has returned 4.9%, in euros 4.6%, in Japanese yen 11.2% and US dollars 8.0%. Thus, in all major currencies, the PSG Alphen Foreign Flexible has produced positive returns.

From an asset class perspective, it should be obvious to unit holders that equities have been the largest contribution to performance. Over the last 6 months the MSCI has returned 10.5%, global bonds have returned 0.4% and cash 2.4% (all in rand terms). Three out of the 4 equity managers held within this fund have managed to outpace the MSCI over this period. Top performer, Ashburton European, produced a return of 21.1% followed by Ashubrton Asia at 12.6%. We feel very comfortable with the current manager selections and asset allocations within the fund.

From a forward looking perspective, although we would not be surprised to see some pull-back take place in global equity markets, we remain very optimistic on global large cap equities. Stocks look cheap relative to global bonds and profitability levels continue to be encouragingly high. Added to this, we also believe that many global companies can afford to restructure their balance sheets and improve their ROE's (return on equity levels). On the equity front we are at benchmark weight. However we are cautious on bonds and are currently at half-weight the fund's 35% bond benchmark level. Consequently the fund is overweight cash.

After a shaky February, global markets rebounded in March with the appetite for risk back into top gear and carry trades, private equity transactions and major corporate takeovers all talking to this theme.

The MSCI World Index, global bonds and cash produced positive returns in $ terms in March and of the eight funds held within the PSG Alphen Global Managed Flexible Fund, three produced miniscule negative returns with the balance of the funds strongly in the black. Naturally our equity exposures produced stunning returns, particularly the European and Asian exposures, but the US position lagged somewhat.

It is difficult at present to see any immediate discernable halt to the stampede which is occurring on global bourses, but there is certainly no shortage of possible hurdles which might cause investors to reconsider their abundant appetite for risk. These include firstly, Chinese growth which has again exceeded the Chinese Government's targets and should lead to the PBOC hiking interest rates further than expected and increasing reserve positions for commercial banks.

The second risk is the extent to which the dollar is collapsing relative to the euro and various South East Asian economies' currencies - this must have implications for export nations targeting the US. Thirdly, the potential for a Fed rate cut is rising in the second half of the year as economic data out of the US continues to be inconsistent but with a definite bias towards being weaker than market consensus.

Traditionally, emerging market equities perform poorly during Fed cycles of reducing interest rates. Overall, we remain at ease with our current asset allocation and are delighted with underlying manager performance. Our vigilance levels are however heightened as we are well aware of global economic risks and will be willing to change our asset allocations should the need arise.

During the month of December, the rand managed a gain of 2.7% against the US dollar. As a result, the rand returns from global markets were proportionally negatively impacted.
In dollar terms, global equities enjoyed a 1.2% return during December with the bulk of performance in the fund coming via our European and Asian exposures.

Positive returns have been the order of the day for the MSCI World Index with a total one year return of 20.7% in dollar terms. This has been a perfect continuation of the annualised 22.7% return the index has experienced since the end of March 2003. Global bonds have had a poor month with a -1.9% return, however the index has enjoyed a 5.9% total return in comparison to 2005's -6.5% return.

The global economy has experienced very strong growth coupled with low inflation over the last three to four years as a result of increased liquidity provided by central banks and an increase in globalisation.

Looking ahead, the continuation of the positive growth story may be supported by an easing monetary policy in the US and with most other countries nearing their monetary cycle peaks. In addition, valuations are not excessively stretched. In contrast to these positive factors, the risk to continued positive returns from equities include rising inflation, a possible slowing in the US housing market and contracting earnings growth.

Taking these factors into account we do not expect a calamitous fall-out in the equity and bond markets, but do expect returns to be muted in the single digit range. As a result we look to be underweight bonds, at weight equities and overweight cash.

Over the longer term we look to reduce our exposure to the US currency as a result of the headwinds this country faces in having to fund its ballooning current account deficit. The second longterm theme we will look to implement within the fund is an overweight exposure to the emerging market equities at the expense of the developed markets.