After the volatility in October, November saw the JSE extend its gains to 36% for the year to date. The month was characterized by robust global equity markets, strong gains by the rand and sharp moves upwards by precious metals. The latter lit a fire under the platinum and gold sectors. The fund’s overweight position in these sectors was to an extent negated by a slightly defensive position within equities and the 10% hedge on market exposure (via a sale of futures). The strength of the rand, on the back of metals prices and solid demand for the currency, bodes well for the outlook for interest rates in South Africa. Accordingly, we have toned down our cautious view on SA equities somewhat. While the returns of the last two and a half years on the JSE are unlikely to be repeated, an environment of market-friendly interest rates, surging precious metals, excellent earnings growth, serious intent by government to accelerate GDP growth and increasing foreign demand still favours equities over other asset classes. Our equity market is not cheap, but a strong argument can be made that valuations are reflective of the solid fundamentals underpinning stocks. The major risk to our stock market lies with global equity markets, and the US in particular, and careful monitoring is required.

Investors in this fund will be aware that for over a year the fund has held a healthy exposure to resources, and gold stocks in particular. This position is premised on our fundamental view that rand commodity prices, especially gold, will continue to rise, and is backed up by technical indicators.

During November we trimmed our exposure to gold and platinum stocks after their strong performance and switched some of the cash into Billiton, a more defensive play on the secular bull market in commodities. Anglo American remains the funds largest holding. Further activity included profit-taking in Murray & Roberts and Reunert. We bought Liberty Life and cut the hedge in half.

October was the most volatile month on the JSE in a long while - after an initial fall of almost 8%, the All Share recovered by almost 6%. South African shares recovered in line with global equity markets and were also boosted by strong profit numbers from local companies that reported. Our sense is that volatility on the market is on the increase, as participants weigh up strong earnings momentum against the risks that rising interest rates bring to bear.

With the JSE making all time highs at the end of September, a period of consolidation on the market was long overdue. That said, the speed of the recovery was astonishing and momentum remains strong. However, one cannot ignore the fact that we are struggling to find shares with good prospects where that isn’t reflected in the price and it feels to us that increasingly the risks lie more to the downside. Our strength over the past few years has been to identify opportunities of relative value on the stock market and take decisive action. In an environment where such opportunities are hard to come by we prefer to take profit and wait. Accordingly, during the month we reduced our equity exposure by 10% by selling futures. Over 10% of the fund is invested in gold shares, primarily Gold Fields and Anglogold, which reflects our optimistic outlook on the rand gold price and our willingness to accommodate some portfolio insurance.

September was an extraordinarily strong month on the JSE. The All Share added 10% during the month, its strongest of the year, taking year to date gains to almost 37%. The PSG Alphen Growth Fund has performed well in the circumstances. As has been the case for much of 2005, the Resource Sector outperformed the broader market over the month, enjoying returns of over 16%, paced by the gold shares, with all of the resource sub-sectors performing strongly. The fund’s ability to keep pace with its resource-heavy benchmark, the All Share, over the past month, and the year to date, can be ascribed to astute stock picking by the team at Alphen Asset Management, particularly within the resource and industrial sectors of the market. For example, during September, each of the fund’s top five active bets, namely Murray & Roberts, Gold Fields, Barloworld, Anglo American and Anglogold, returned 15% or better, with Gold Fields topping the performance table at 29% for the month!

After strong moves over the past five months, many stocks look decidedly overbought. Accordingly, the managers continue to expect consolidation on the JSE, with a small correction a likely scenario. Given our generally optimistic view of equities over the medium term, we would view meaningful dips as a buying opportunity. The fund had a 36% exposure to resources as at end September. While a pull-back in the stock prices of the commodity counters is a distinct possibility, we have elected to retain our positions in the gold shares, Anglos, Billiton, Impala and Sasol.

Apart from expecting further gains in rand commodity prices, the fund manager has taken note of impressive technical breaks from multi-year bear markets for some of these shares, which cannot be ignored. The biggest risk to commodity shares lies in a slowdown in global economic growth and we will be watching global markets carefully, and our preference is for less cyclical counters. Alphen continues to prefer to be long of later economic cycle plays on the local market at the expense of consumer-orientated shares. They are of the belief that investors will continue to be best served by a combination of strong fundamental research, opportunistic stock picking and a flexible and nimble approach to execution.

During the month the fund manager upped the fund’s position in Anglos, Billiton and Standard Bank, and bought some Mittal Steel and Mvelaphanda Group. He reduced the fund’s exposure to PPC, Barlows, Imperial, Altron and Bidvest after strong price appreciation, though Alphen continues to like the medium to long-term fundamentals of these shares.

The big question right now is: how much longer can the JSE keep moving up? While we expect the JSE to perform well (relative to inflation and other asset classes) over the next few years and share valuations look fair for the underlying fundamentals, there are a few factors that cause us to tone down our short term expectations from the stock market. The SA stock market has enjoyed spectacular gains over the past two to three years on the back of strong earnings and an upward re-rating of our equities. Without doubt the biggest risk to the JSE comes from global markets and in an environment of worryingly high oil prices, overvalued global assets, disturbing imbalances and a very low concern for risk, we think it makes sense to exercise caution as far as local equities are concerned. This means our current strategy has become more defensive and we are content to sit on higher than usual cash balances and wait for opportunities to come our way. During the month we were buyers of gold shares (Anglogold and Gold Fields), Impala, Trans Hex, Woolies and Murray and Roberts. We took profit in Billiton, Kumba, Mittal, JD Group and Business Connexion and reduced our exposure to Barloworld and Bidvest.

July was a very solid month on the JSE with just about every sector posting strong gains. Our market is enjoying a very strong run on the back of solid economic fundamentals and a healthy appetite for equities, with foreign purchases of local shares noticeably higher recently. During the month we employed some of the cash carried over from the end of June into counters like Anglos, Billiton, Woolies, Liberty, Murray & Roberts and Bytes, and the fund enjoyed healthy participation in the bullish equity market. We sold Anglogold, Gold Fields and Grindrod. The fund’s year to date performance has surpassed that of the JSE All Share; an achievement we are particularly pleased about given the strong performance by the index heavyweights this year.

From a stock picking perspective, we are finding it increasingly difficult to find shares that offer compelling value. Accordingly, we are developing a more cautious view of the market on a short term basis. We expect to be even more nimble in the near future and anticipate taking profit soon. Having said that, we continue to see much opportunity in the market over the medium term. Here, we like the diversified miners that provide the best value entry to the stronger-for- longer commodity view that we subscribe to, as well as a hedge against potential currency weakness. On the local front, we are bullish on the prospects for the construction sector given our favourable view of building spend, coupled with aggressive infrastructure, mining and big project spend in the years ahead.

Fund Positioning
In June, we took opportunity to sell down our positions in some of the top performers of the year to date including Impala, Anglo, Billiton, Sasol, Steinhoff and Richemont. As at month end, the fund's cash position had risen to around 17% after these sales. During the month we increased exposure to the likes of Kumba, Barloworld, Imperial, Bidvest and PPC.

On several measures, including our quantitative models and technical analysis, the market looks overbought and vulnerable in the short term. Hence, and after the strong performance in the first six months, we are inclined to be cautious (though open-minded) as far as the balance of the year is concerned. This had led us to be biased towards capital preservation and the beta of the fund has been reduced. Our larger than usual cash position reflects recent profit taking as well as a desire to opportunistically employ the money. Right now we have a strong preference for local economy stocks from a valuation perspective and indications of a stable to strong rand would see us increase our exposure to this part of the market. We will continue to seek out such opportunities, but are cognisant of the impact that currency movements will have on the future fortunes of the JSE. So, while we think most resource stocks have run ahead of their fundamentals, and we suspect the commodity cycle has put in a peak, further rand weakness, which cannot be ruled out, will be supportive.

As always, the PSG Alphen Growth Fund reflects active application of Alphen's best stock picking ideas. We have taken large positions in the stocks that we perceive to offer the best risk-adjusted returns, and in most cases our decisions are backed up by attractive dividends. Here our favourites include the stocks acquired during June as discussed above. We believe that the likes of Barloworld and PPC offer attractive entries to the construction sector that we like long-term on account of interest rates staying relatively low, major expenditure on infrastructure and a recovery by the mining sector. So, we took advantage of share price weakness in May. We perceive the large cap diversified industrial companies to offer amongst the best value on the market, and Imperial and Bidvest are trading close to their cheapest levels, on a relative basis, of the past five years, and are backed up by healthy forward dividend yields and good growth prospects. We have been picking up Kumba and Mittal Steel into weakness given our belief that at lower levels the fundamentals of these stocks justify higher share prices. The fund retained some exposure to the gold sector, through Anglogold and Gold Fields. Whilst gold shares look expensive by many measures, the fund manager is of the opinion that the current macro environment warrants some gold exposure, especially since we think the rand's best levels are behind it. However, after the strong performance by the gold sector this year we are inclined towards lightening our position.

About the fund
We would like to point out that the fund's long-awaited move to the General Equity Sector has taken place. We believe this sector is more representative of the fund's management style and the fund manager's willingness to seek opportunities and value in the equity market whatever form they take.

The fund size has continued its upward trend, currently lying at over R260 million, having been under R100 million a year ago. We would like to assure investors that we have no intention of allowing this fund to reach an institutional-type size that will not allow us to implement our stock picks on an active basis. Accordingly, our intention is to close the fund to new institutional investors once it reaches a level of R500 million.

The fund manager is likely to use derivates in the future as a hedging mechanism, but only where their use is expected to reduce the market exposure and hence the overall risk of the fund.

After enduring a sharp move lower in April, the JSE had a strong bounce in May. The stock market benefited from a weakening rand, on the back of euro weakness and dollar strength, with resource stocks leading the charge. The fund’s healthy resource exposure allowed it to participate in this surge resulting in an 8.2% gain during the month.

Towards the end of the month we started to take profit on resource counters. After very sharp movements by rand hedges in a short space of time, coupled with flat to negative returns by many of the local financials and industrials for the year to date, we believe that the local plays are moving back into attractive territory. Furthermore, we believe that dollar strength is likely overdone on the short term and hence would expect the rand to consolidate some of its losses. Whilst we believe that the rand has peaked and would expect it to lose some ground against most currencies over the years ahead, we remain bullish about the prospects for the local economy. This leads us to favour a more balanced portfolio that includes both rand hedges and attractively priced local shares. We are of the belief that some of the better value rand hedge counters can be found within the industrial sector. We think the environment for SA equities will remain favourable given the backdrop of strong corporate earnings, a positive outlook for interest rates remaining low, attractive ratings and healthy cash flows and dividends.

Having said that, with the rand looking vulnerable, we are inclined to adopt an open-minded approach to stock selection and expect the market to remain volatile. Accordingly, we will continue to take advantage of opportunities as they present themselves. We continue to have a preference for equities relative to other local asset classes.

We have been buyers of Mittal Steel, Barloworld, Bidvest and Firstrand. We have cut back our exposure to Anglo American, Billiton, Kumba, Sasol and Anglogold.

On 1 June 2005, the PSG Alphen Growth Fund changed sector from the Domestic Equity Growth sector to the Domestic Equity General sector. The performance history was retained.

April was a tough month for equity markets worldwide. US markets suffered on account of worse than expected economic data pointing to a soft patch and a slowdown in growth. Locally, we saw a surprise rate cut during the month that briefly fired the local market before global weakness and a stronger rand, shrugging off the rate cut, resulted in a sharp decline. The All Share lost over 5% during the month erasing the year-to-date gains.

We believe that the sell-off on local markets brought many stocks back into buying territory. Accordingly, we took the opportunity to buy the likes of Tongaat and Mittal Steel and added to our position in Anglo, Anglogold and Sasol. We continue to favour a defensive equity exposure with a balanced allocation between local stocks and rand hedges. Our rand hedge exposure is sought through resource and industrial counters that do not require a significantly weaker rand to offer value. Our belief that the rand is on the strong side and that commodity prices will remain firm, underscores our exposure to the sector, which has been increasing, though remains underweight the benchmark.

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.

The volatility we have seen on markets, coupled with various potential technical breaks in long-standing trends in currency, bonds and relative performance within equities, vindicates our previous decision to adopt a more balanced approach to equity selection and to actively seek out opportunities within the rand hedge element of the market. This has seen highly satisfactory performance by the fund for the year to date, and the fund’s return is ahead of the benchmark ALSI, which is particularly noteworthy in the circumstances of strong performance by heavyweight resource 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, Impala and Richemont. We expect consolidation within the local financials and industrials to continue, with sideways movement the likely result until strong growth in earnings and dividends come to the fore later in the year. Generally, our preferred plays within financials and industrials are counters that will benefit from above trend growth in the local investment cycle. We expect markets to remain choppy and think that careful stock picking, allied with a willingness to take advantage of opportunities presented by volatility, will stand the fund in good stead.

February was another good month, with resources leading the way for the second month in a row, led by Sasol, Billiton and Kumba, on the back of robust oil and commodity prices. The fund held the latter two stocks which aided performance. The fund added 5.3% in February against 6.1% by the benchmark (All Share Index). The fund added to its exposure in JD Group and Edcon (our preferred retailers) taking advantage of the sell-off in these stocks.

Our central belief is that after its recent gains the market is looking stretched on a short-term view. Accordingly, we continue to adopt a more defensive approach, whereby we take profit in stocks that run hard and acquire stocks that are sold down which we believe continue to offer fundamental value. With most shares on the JSE expected to report very solid earnings growth, and while interest rates are at these sorts of levels, we remain comfortable with the medium to long-term prospects for SA equities. We expect fluctuations in the currency to continue to drive sector performance, with underweight institutions becoming forced buyers of resources in the event of rand weakness, especially after making good profit in the local plays.

While we are reluctant to make short-term predictions on the rand’s movement, our contention that the currency is overvalued will result in a willingness to accumulate rand hedges as opportunities arise.

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

January was a good month for resources and rand hedges, relative to local financials and industrials. A moderate weakening of the rand saw the strong performers of 2004, the local plays, coming in for some aggressive profit-taking. This was long overdue, though it is not a reason to be concerned, as healthy earnings growth, strong dividend flows and reasonable medium-term valuations should see buyers coming back into the market once the consolidation phase and sector rotation is complete. The fund managed a positive return in January thanks to its resource exposure.

We re-affirm our preference for a balanced approach to stock-picking given our belief that the days of rand appreciation are numbered. Our stock picks are focussed on reasonably valued companies with above-average growth prospects that are not reflected in the price. We expect surprise dividend cuts to be a dominant theme on the JSE this year and we have taken this into account in our stock selection.

The fund will continue to take advantage of opportunities presented by any excessive volatility or sector rotation on the JSE.

The month of December was another positive contributor to what has been a great year on the local equity market. The year saw fantastic performances from local financial and industrial stocks, while the resource sector ended down for the 12 months. This was a case of the strong rand weighing heavily on exporters whilst providing a tremendous boost to local consumption. The fund gave up some of its strong relative performance late in the year on account of profit-taking in strong performing counters and the drag from exposure to commodity shares. It goes without saying that the performance of the rand will be a major determinant of the relative performances on the stock market in the year ahead. Given our belief that the rand is over-valued, though predicting a turning point is perilous, we continue to favour a neutral stock-picking bias, retaining some exposure to resources while limiting our allocation to local stocks to those that we believe continue to offer value in a market that has re-rated substantially.

As far as the currency is concerned, we are wary of the consensus views that both a weaker dollar and hence continued strength in the rand, are a foregone conclusion. We remain bullish on equities on a year’s view given reasonable valuation levels and strong expected profitability.

At month end, the fund’s resource exposure was 18%, which we would expect to increase as opportunities present themselves during the year. Our resource holdings are limited to Anglos, Billiton, Anglogold, Gold Fields, Implats, Sappi and Sasol. On the local front our preferred counters are JD Group, Mustek, Spur, Barloworld, Imperial and Altron.