November was another very good month for South African equity markets and the fund continued its solid performance adding over 8% over the month. All in all it has been a happy time for participants in the 19 month equity bull run and over this time the fund has returned in excess of 110%.

The year-to-date has seen very different performances from the resource sector as opposed to sectors exposed to the local economy. While the strong rand has been to the detriment of exporters, local plays have been set on fire by buoyant consumers and strong demand from offshore investors. The fund has long had healthy exposure to consumer and other local stocks, which has served it well. Currently, the relative attraction of this element of the market has diminished as share prices have appreciated, although the short-term earnings outlook remains favourable, and we believe that the current positive macro environment is sustainable. Accordingly, we have adopted a more cautious and balanced approach to equity selection. From a stock selection perspective we continue to focus on shares where current share prices do not fully account for future growth in earnings and dividends. With the majority of the equity market approaching fair value, earnings growth will become a major determinant of relative performance, a typical indicator that we are experiencing a growth stage of the current investment cycle.

Given reasonable valuations, a recovery in earnings and a belief that the rand is overvalued, we expect some of the out-performers to include resource stocks hence our holding, though we remain underweight the sector and exposure is stock specific. During November we trimmed our exposure to resource stocks including: Anglogold, Gold Fields, Anglo American and Sappi. The position in Sappi had a detrimental impact in November after the company posted disappointing results and forward outlook. Positions in strong performing industrial stocks such as Naspers, Massmart and Steinhoff were reduced. New purchases included: MTN (which performed well subsequent to purchase), Astrapak and Supergroup.

October saw very different performances from local shares versus resource shares. The “other metals” sector, which comprises Anglos and Billiton, lost 11% during the month, whilst diversified industrials added 11%, general retailers 9%, telecoms 11% and food and drug retailers 12%. On the commodity front, shares were hit by a 5% strengthening in the rand, as well as a setback in commodity prices on account of a hike in interest rates by China. While it was 4% ahead of its benchmark, fund performance during the month lagged competitors due to its higher exposure to underperforming resource stocks. The extent of recent rand strength, a result of improving confidence and prospects for capital inflows, has surprised us.

With the benefit of hindsight, we cut our exposure to the local interest rate sensitive stocks, of which we have long been supporters, too early, as price appreciation has continued at an incredible rate. We continue to believe that, over the long run, a policy of taking profits when short term price targets are breached will serve clients well, as it has done in the past. We view the market as a whole as approaching fair value which means that future growth must come from profit performance. In this regard we do not see obvious value gaps from a sectoral perspective, and will especially focus our attention on stock picking. We think it is prudent to maintain a more balanced sectoral exposure as, even though robust consumer demand will result in further impressive profit growth from consumer stocks, we are well into the latter stages of a cycle of lower interest rates and in our view the rand is overvalued.

We remain bullish on the future prospects of the rand gold price, though we have sought to avoid marginal local gold shares.

During the month the following stocks were bought or added to materially: Sappi, Altron, Spur, Metlife, Investec and Mustek. We cut our positions in Impala, Sasol, JD Group, Naspers and Bidvest.

September witnessed a continuation of the strong gains of August. The market was led to the upside by the financials on account of news of the proposed purchase by Barclays of a controlling interest in Absa. Retailers also powered ahead as analysts upgraded their models for the cut in interest rates and an extension to the strong retail cycle underway. Generally, the balance of the JSE performed very well.

The fund took opportunity of the strong run to cut positions in banks and retailers as short-term price targets were breached. With hindsight, this action was premature, although we were encouraged by the fact that all of our main stock picks delivered pleasing performance.

While we expect further gains from the stock market over the next twelve months we are cautious over the short term on the back of very sharp price movements. We have maintained our resources exposure as a result of our favourable view of commodity prices and believe that the rand’s bull run is coming to an end. We have a preference for industrials over financials, and favour the diversifieds.

We are pleased to point out that the fund was the third best performing unit trust, and best performing non-specialised fund, over the year to the end of September 2004.

During July, the local stock market tracked the rand’s every move. After flirting with 5.80 to the dollar, the rand lost some ground, which gave impetus to the JSE late in the month. The fact that the All Share, led by resources, squeezed out gains, despite further weakness on global stock markets, implies a belief in the market that the rand has likely topped. As has been the case for most of the past three years, currency movements are likely to determine the largest part of local equity direction for the foreseeable future. Institutions have been long locally-focussed companies at the expense of the rand hedges for some time, and any reversal of these positions would see outperformance by the large cap dual-listed shares and mining companies.

If you look at resource company valuations with the belief that the rand can sustain these levels or strengthen, they are stretched. However, in the event of currency weakness, a low base will provide momentum to impressive earnings recovery. We are of the opinion that the rand will struggle to hold these levels. Under the circumstances we believe that it is prudent to accumulate rand hedge shares. From a valuation perspective we are keenest on some of the large cap industrial stocks that combine some upside to a weaker rand as well as attractive multiples. We maintain that JSE equities offer good value as an asset class.

During July, the local stock market tracked the rand’s every move. After flirting with 5.80 to the dollar, the rand lost some ground, which gave impetus to the JSE late in the month. The fact that the All Share, led by resources, squeezed out gains, despite further weakness on global stock markets, implies a belief in the market that the rand has likely topped. As has been the case for most of the past three years, currency movements are likely to determine the largest part of local equity direction for the foreseeable future. Institutions have been long locally-focussed companies at the expense of the rand hedges for some time, and any reversal of these positions would see outperformance by the large cap dual-listed shares and mining companies.

If you look at resource company valuations with the belief that the rand can sustain these levels or strengthen, they are stretched. However, in the event of currency weakness, a low base will provide momentum to impressive earnings recovery. We are of the opinion that the rand will struggle to hold these levels. Under the circumstances we believe that it is prudent to accumulate rand hedge shares. From a valuation perspective we are keenest on some of the large cap industrial stocks that combine some upside to a weaker rand as well as attractive multiples. We maintain that JSE equities offer good value as an asset class.

The rand continued its relentless march in June. It made significant gains against almost all currencies - nudging closer to the magical R6 to the US dollar mark - and exerted much pressure on the rand hedge portion of the JSE. Having been rand bulls in 2003 and 2004, we are now in territory where the strength feels overdone. We are not of the opinion that such a strong currency is in the long-term interest of a South African economy that is crying out for growth.

During June, the fund’s exposure to the robust local economy - which is feeding off low inflation, lower interest rates and strong demand for imports – negated the dismal performance by mining shares. The fund was flat, whilst its benchmark, the All Share Index, shed almost 3%. We continue to increase our exposure to resource shares such as Impala, Anglos, Billiton and Sasol. Our increased enthusiasm is based on good earnings recoveries, improved value and dividend yields, a solid outlook for commodity prices and an expectation that current levels are not sustainable for the rand over the medium to long term. Having said that, many sectors focussed on the local economy offer good value and we have healthy exposure to retailers, banks and diversified industrials. We are bullish on the dollar gold price which should at some stage translate to an improved rand gold price, hence increased weightings in gold companies.

Markets came under pressure towards the end of April, almost exactly a year after commencing their recovery. Globally, equities followed the sell-off in the US as Fed Chairman, Alan Greenspan, signalled the beginning of the end of cheap money. An announcement by monetary authorities in China that tightening measures would be implemented to prevent the economy from overheating provided impetus for an unwinding of long positions in commodities. As would be expected, a significant pull-back in metal prices and a dumping of cyclical stocks had a very negative impact of the JSE. The All Share Index dropped by over 5% from its April highs, led to the downside by resources. Non-cyclical services took an 8.7% hiding during the month, with telecoms bearing the brunt.

We view the recent market correction as a necessary reality check. Valuations on global equities and commodity shares were extended. We believe the pull-back has moved several areas of our market into good value territory. While local financials and industrials remain cheaper on an absolute basis, selected resource shares are starting to look more attractive given our bullish view on global economic growth and a solid earnings recovery. We expect to increase our resource weighting at the expense of recent outperforming industrials.

The first three months of 2004 have seen significant volatility for both the rand and the JSE. Wall Street had its first poor month in a year during March, enduring some long overdue profit-taking, as participants grappled with conflicting economic data. In March, a firmer rand had the JSE on the back foot, with resources sharply down. This contrasted with stellar performance by retailers and telecoms. The fund was protected by its healthy exposure to both these sectors.

Despite the exceptional returns the stock market has delivered over the past year, equities remain our preferred asset class at PSG. Our investment process continues to indicate areas of the JSE which offer good value, and we retain exposure to these stocks and sectors. In particular, we favour local large-cap industrials, many of which trade at a discount to their intrinsic value with low price-to-earnings multiples and attractive dividend yields. We prefer resource exposure through diversified miners, which are more protected against the currency and have favourable exposure to the commodity cycle. Notable transactions during the month were the purchase of Barloworld, Steinhoff and Naspers, and the sale of Truworths and MTN.

After a roaring start to the year, the stock market paused in February to contemplate the conflicting forces of a stronger rand and rampant commodity prices. Both the fund and the JSE, its benchmark, were marginally higher. Many of the heavyweights have reported and it is the big miners which are attracting the most interest. Both Billiton and Anglos are indicating very favourable prospects for the next year, with both volumes and prices showing healthy improvement, as the global recovery gets underway and China continues to absorb base metals at an amazing rate.

We have long stated that we would be looking to increase our exposure to resource shares, given our bullish view of the commodity cycle and our expectation for the rand to weaken from these levels over the medium to long term. Earnings growth will be strong off a low base and we do not consider the current multiples to be excessive under these circumstances. Accordingly, we bought Anglos, Billiton, Impala, Gold Fields and Iscor during the month. The resource holding was raised to over 30% at the expense of financials and industrials. The fund continues to favour large cap stocks.

Early January saw the rand testing 6.30 to the US dollar, then a vicious reversal had the currency trading up to 7.50 within two weeks. This excessive volatility had a significant effect on the stock market with an initial surge in the value of rand hedges, coinciding with rotation out of local interest rate sensitive stocks, which had enjoyed such strong gains in late 2003. We took the view that the sell-off in retailers and telecoms stocks, in particular, was overdone and took the opportunity to increase positions in the fund. This strategy paid off with good recovery in the prices of the likes of Edcon, Truworths, Massmart, Telkom and MTN.

The fund remains overweight locally-focussed stocks which continue to offer good value. We expect interest rates to remain at these levels for some time and do not believe this has been factored into stock market valuations. Resource shares are pricing in good news on the currency and commodity price fronts. We think rand strength is coming to an end and expect further upside in commodity prices over the months ahead. Accordingly, the fund manager will look for opportunities to add to exposure to resources.

The fund added over 8% in December to cap an excellent year. The fund returned over 40% for the twelve months, making it the fourth best performing unit trust of the entire local universe. The strong performance can be attributed to effective sector allocation and stock picking. Throughout the year we argued that equities, and in particular local plays offered exceptional value relative to other asset classes. We favoured stocks that were geared to a robust local consumer, and in general considered resource shares to be overvalued, especially after returns shrugged off an ever-strengthening rand and continued to head higher.

Peering into the crystal ball, 2004 looks a bit trickier, and once again it will come down to the rand. We suspect the currency made a low in December and will struggle to hold levels below 6.50 to the dollar with the trade balance weighing heavily against further strength. Given our bullish outlook for commodity prices, we expect to increase our commodity exposure in the near future. That said, we remain cognisant of global markets that are beginning to look stretched and would expect a correction before the recovery re-asserts itself. Furthermore, most local shares have run extremely hard and a consolidation is likely before the market continues to re-rate upwards. Accordingly, we have taken profit in a number of strong performing counters and the cash balance has been raised in anticipation of further opportunities down the line. We remain bullish on the long-term prospects of equities in this environment of relatively low interest rates, a likely recovery in global growth and a stable to weaker rand.