During September global markets performed particularly well as investors were buoyed by Mr Bernanke's indication of further Quantitative Easing. This was evident with the S&P 500 returning +8.8% for the month, the third highest monthly return in 10 years. Global markets (MSCI World Index) did even better, posting a +9.4% (US dollars) return. Not to be outdone, emerging markets surpassed this with a +10.9% (US dollars) return for the month.

Locally the All Share Index had an equally great month with a +8.7% return in rands. Notwithstanding September's equity markets performance, there are also indications of rising pessimism on the part of some investors.

This is evident with short sales on the S&P 500 having surged during the month, hence indicating that there is still much uncertainty in global markets.

The fund is currently neutrally weighted in terms of equities, underweight bonds and overweight cash. Performance of the fund over the past three years (as at the 30th of September 2010) has been in line with peers with a similar track record (-4.2% annualised), although with lower volatility.

Equity markets have enjoyed healthy gains since their lows in March last year. In US dollars global equities has done spectacularly well with a 51.2% return.

The latest bout of market weakness brings the MSCI Global Index to a level last seen 10½ months ago. A major contributing factor to the recent equity market weakness has been the unfolding of the European debt crisis which was triggered by the surfacing of previously unaccounted for Greek debt in November last year. This resulted in the downgrading of Greece's debt which then snowballed into the "2010 Euro Crisis" also known as the "Aegean Contagion" resulting in widening bond yield spreads and risk insurance on credit default swaps for Greece, Portugal and Spain vs. other well positioned European Union members such as Germany.

Austerity measures have been put into place to tackle the issue and authorities (although slow to respond) have banded together in terms of providing a "rescue package", however, the overriding reality is that growth will be negatively impacted. The problems in Europe have negatively impacted the euro with the currency 14.6% weaker versus the US dollar and 7.7% weaker versus sterling since the end of 2009.

The asset allocation of the portfolio has remained constant over the past month with an underweight of global equities and large underweight global bonds. With cash as the default asset class, this results in a large overweight of global cash. The portfolio's insurance policy - the global commodity holding (predominantly gold) of 6% - remains in effect.

Performance of the portfolio is somewhat subdued over the last year, due to our somewhat underweight holding in equities. More importantly, PSG Alphen Foreign Flexible Fund of Funds is ahead of its benchmark, the average of our peers over the last 2 and 3 years and since inception (31st October 2006) in the ASISA category (Foreign Asset Allocation).

Upbeat economic news flow continues to lend support to global equity markets which is evidenced by the gain in the MSCI World Index of almost 6.3% (in US dollars) during March. Emerging Markets featured even better with the MSCI Emerging Markets Index rising almost 8% (in US dollars). Economic data is clearly showing that the economic recovery is gaining momentum and further positive news is likely to continue to underpin the rally.

Despite the improving sentiment, we are concerned with the market's tolerance of short term solutions for long term macro economic problems. The willingness of the IMF and the European Union to extend €40bn of emergency financing to Greece is hiding the fact that long term solutions for Greece will be very painful. The measures that Greece needs to implement to pull itself out of the current turmoil will be dragged out and could potentially create significant political instability.

One can't help but get the impression that relatively financially sound countries like Germany and France have been caught off guard and had no choice but to bail Greece out this time round. The pressure on Greece from these countries to implement more severe austerity measures will only increase going forward. We feel that these risks are not reflected in the current rating of equities.

The same forces that supported the strong run in global equity markets over the past month also supported commodity prices, with many rebounding sharply - the copper price increased 10.7% (US dollar/ton) during March. Importantly, with global economic activity still on the mend, demand for commodities has reportedly remained firm.

The asset allocation of the portfolio has remained constant over the past month with a moderate underweight of global equities, large underweight global bonds. With cash as the default asset class, this results in a large overweight of global cash. The portfolio's insurance policy - the global commodity holding (predominantly gold) of 5% - remains in effect.

Short term performance of PSG Alphen Foreign Flexible Fund of Funds although slightly negative in rands over the last three months, has still been better than the average of our peers in the Foreign Asset Allocation category. More importantly, over the medium term (both two and three years) the fund is also ahead of the average of its peers.

Although global equities had a good year with the MSCI World Index returning 30.8% in US dollars, the real winners where the emerging markets with an index return of 74.5%. Developed markets faired far more moderately with the S&P 500 returning 23.5%, the FTSE 100 38.0%, and the Nikkei 15.8%. Some developed markets, however, did exceptionally well in comparison, with the Toronto 300 returning 51.9%, the Australian All Ordinaries 73.1% and the Oslo Composite an incredible 98.5% - all in US dollars. Gold was boosted by central bank purchases and as a hedge against currency depreciation. The precious metal rose almost 50% in US dollars from mid January to the beginning of December. However, it dropped off somewhat, ending the year 26.3% up. In general, commodity prices rose - supported by Chinese demand and confidence that the world economic recovery is sustainable. The global economy has seen a synchronized recovery since the middle of 2009, with most of the impetus from abnormally aggressive fiscal and monetary stimulus. The Q3 US corporate earnings surprised on the upside. However, this was mainly due to improved cost efficiencies through restructuring. A key indicator to follow will be US unemployment figures and more specifically if there is a shift from temporary to permanent employment. Global markets are awash with liquidity and a cyclical upswing in profits could support equity ratings in the short term, but this support should wane as the reality of rising debt levels (government and private) and as slow growth becomes a reality. The trend in government bonds was the same as in equities, with emerging market bonds greatly outperforming global bonds with 30.0% versus 1.9% respectively in US dollars. The dollar depreciated against most currencies during 2009, -9.5% vs. sterling, -2.3% vs. the euro, and -20%, -22.3% and -22.9% vs. the New Zealand dollar, South African rand and Australian dollar respectively. Only against the yen did it gain some ground appreciating by 2.8%. Sterling was the better performing major currency, appreciating 7.9%, 10.5% and 13.6% vs. the euro, US dollar and yen respectively. Over the last six months, the star equity performers in the portfolio have been Ashburton European and Investec GSF Global Strategic Equity which have both outperformed their peers as well as global equities. On the cash and bonds side, our holdings of Investec Global Bond and Investec Managed Currency were both advantageous as they both greatly outperformed their peers and their respective benchmarks (global bonds and US cash). In particular, the use of the Investec Managed Currency fund helps diversify currency risk by holding a basket of currencies. Further diversification has been added to the portfolio in the last quarter with the inclusion of Investec Global Gold and Orbis Optimal. Historically, gold has been a good diversifier as its returns are largely uncorrelated to the other asset classes. Going forward, an allocation of 5% will be held in the portfolio. Orbis Optimal is a global equity fund which makes use of stock market hedging, resulting in a low (typically less than 10%) net equity weighting. Due to this strategy, it is largely uncorrelated to its peers in the global equity category and hence offers further diversification for the portfolio.

Mark Seymour

PSG have decided to leave the PSG in front of the Alphen funds' names.

Alphen Asset Management have changed the names of all of their funds by removing PSG from the front of their fund names.