The JSE was pretty much flat in September. It lagged foreign equity markets over the month primarily because the rand has been so strong.

PSG Alphen Growth performed in line with the market in September. It is pleasing to note that the Fund is a top-quartile performer over one year. Fund returns have been particularly strong since the market bottomed in March and outperformance of the All Share Index has been significant over this period.

Shorter term calls on equity markets have become very difficult. Markets are overbought. And, many stocks have seen their share prices moving strongly up, without any improvement in the outlook for earnings. Such moves cannot continue indefinitely. But, on the other hand, equities continue to look attractive relative to most other asset class, especially given the low yields on cash and bonds. As a result, one can expect cash to continue to flow to equities whilst global sentiment is positive.

Alphen has a strong view that equity portfolios will continue to perform reasonably well on a medium term view if you own the right shares. We are convinced that the world as we know it is undergoing some fundamental changes that need to be carefully considered before investment decisions are made. In the "new normal", the man on the street is going to borrow less, consume less and save more. The activity levels, and hence earning levels, of 2007 are going to prove to be a very inflated high point for many sectors and industries.

Many cyclical companies will take many years to get back to 2007/2008 profit levels.

All this leads us to the natural conclusion that the investment environment should lend itself to adept stock pickers. We expect significant difference in performance from various stocks and sectors. Avoiding the dogs could be more important than finding the winners.

Our portfolios are long of stocks that are trading on relatively attractive valuation levels in absolute terms. We are avoiding shares where prices have run ahead of the outlook for earnings. We have a strong preference for visible earnings streams and an even stronger bias towards high and growing dividend yields.

The result is a relatively concentrated portfolio consisting of higher conviction stock picks.

PSG Alphen Growth delivered positive returns in June and has had a good first half of 2009.

The fund has gained 34% since its March lows. This compares favorably with the All Share Index which delivered around 19% over the same period. The relative out-performance can be attributed to strong performance by our stock picks, particularly our higher conviction ideas. In early March we viewed many stocks as excessively cheap and had a strong bias to very cheap value ideas.

Many of these have performed extremely well since and we have been content to migrate the portfolio towards our long term core theme: high and growing dividend plays.

In June, this saw us increase our exposure in the likes of: JD Group and British American Tobacco as well as Foschini and Woolworths. We were sellers of companies geared to the global economy that had enjoyed very good runs, but where earnings prospects are questionable at best and valuations are now a lot less attractive, such as Barloworld, Aveng, Arcelor Mittal and Liberty International.

On the value side, we have retained our significant exposure to Steinhoff which we still consider to be significantly undervalued relative to its asset base.

We continue to have a material overweight in Naspers. We expect the company's attractive suite of emerging market media assets to deliver above-market earnings growth over the next three- to five-years and consider the share to be attractively valued.

The portfolio is under-weight Resources. We are of the view that the majority of the Resource share prices have run ahead of the fundamentals and will be capped by disappointments on the earnings front.

We are confident that Alphen will continue to deliver good relative performance over the medium term given our proven strengths in stock picking and significant relative size advantage.

Shaun le Roux

Global equities were extremely oversold in February and a rally was long overdue. Markets rallied hard in March and the ALSI gained 11%, its the second best month in five years. At one point in March the ALSI had risen by more than 20% in three weeks!

Whether the rally has legs remains to be seen. Very poor economic data and ongoing problems in the key housing, banking and auto sectors support the view that this rally in a bear market is unsustainable. But, some of the key risk indicators are showing early signs of stabilising and valuations are supportive of strong equity returns over the medium term. Furthermore, a strong argument can be made that we found ourselves in the eye of the storm on financial markets in the 4th quarter of 2008 and 1st quarter of 2009. And, we would argue that after recent interventions we are a lot closer to stabilising the fragile banking system than we were some months ago.

We have no idea whether markets have bottomed or not. It is worth remembering that very strong counter-rallies always take place within vicious bear markets. All considered, we expect markets to remain volatile. Our preference for equities over other asset classes continues to be driven by attractive valuation levels and we are of the view that long-term investors should take advantage of the current opportunity to buy low and hence lay the foundation for solid inflation-beating returns in the future.

Within equities, we have identified a number of high conviction value opportunities which form the core of our equity portfolios. These include: MTN, Steinhoff, Naspers, Standard Bank and Anglo American.

During March we trimmed Anglo, Naspers, MTN and Old Mutual in favour of Pikwik, Tiger Brands and BAT. The latter being more defensive plays that have under-performed in recent times to the extent that we were happy to add them to the portfolio.

Shaun le Roux

Market Commentary
Like many asset managers, Alphen had long warned that the level of returns from financial markets enjoyed up to the end of 2007 were unsustainable.

The excesses in the credit markets had given rise to excesses in asset prices, particularly equities and commodities, and we suggested that future expectations for corporate earnings, and hence equity returns, needed to be toned down. And yet who could have predicted just how brutal and abrupt the global slowdown that originated in the credit markets was going to be?

As financial markets de-leveraged, the collapse in share prices was staggering: the ALSI lost in excess of 40% in five short months between May and October. Many stock markets around the world found themselves more than 50% off their peaks at the end of 2008.

2008 in Review
2008 proved to be a very tough year to manage money around the globe, particularly equities.

In the first half, we found ourselves under-performing both peers and the benchmark by a significant margin because we refused to participate to any significant extent in the crowded momentum trades. The momentum money was chasing Resources, in particular, and to a lesser extent sectors such as Construction, Telecoms and Luxury Goods.

H1 2008 performance can also be attributed to our high exposure to Domestic Industrials (which had a tough first half) with above benchmark weightings in smaller cap counters. As the economy worsened, smaller caps were hit hardest, and in many cases were the victims of forced selling after unit trust and hedge fund redemptions. We stayed the course in our preference for Domestics over Resources and other much-loved Global sectors in the first half. This was based upon enormous differences in relative valuations, as well as the fact that speculators were playing an increasing role in the movements in both commodity and share prices. Our relative positioning paid off in the second half, most notably in July and August.

Unfortunately, within Resources we held positions in the cheaper smaller cap mining stocks (Sentula, Metorex and Merafe) and, while we reduced exposure in the second half of 2008, smaller cap miners have had their share prices decimated.

The rapid decline in global cyclical counters, including mining stocks, in the third quarter coincided with a recovery in the Domestics and the differences in relative share performances were astounding and almost the exact opposite of the first six months of 2008. The result was that the relative valuation gaps closed entirely. Accordingly, we started reducing our Resource under-weight and added to our large caps (Anglo, BHP Billiton and Sasol). Whilst this did not initially help performance, it has added value since the market bottomed in late November.

Portfolio Positioning
Corporate earnings are going to come under severe pressure in 2009, and it will be some time before earnings growth provides support to global equity markets. That having been said, valuations on equity markets are extremely attractive, particularly in light of the very low levels of interest rates and inflation that are prevalent and anticipated.

Investors prepared to take a longer term view should be buying.

Our base case is that equities will do better than many assume. Economic conditions are going to be tough, but are generally more than factored into valuations. What seems likely is a recovery to more realistic valuation levels as a result of subsistence in volatility, which is currently rooted in fear and uncertainty. Thereafter, we expect an extended period of large trading ranges until earnings start recovering. Wild swings on the market will remain the order of the day.

There will be money to be made from trading the ranges and there are and will continue to be pricing anomalies. The mis-pricings and overshoots will continue to give rise to stock-picking opportunities, our happy hunting ground.

From a relative valuation perspective we think that many of the Resource shares have overshot to the downside - in line with commodity prices - and that the November lows provided an excellent entry point to the better capitalized higher quality counters.

From these levels we like commodities in the long run; worldwide government policy intervention is focused on infrastructural spending and supply is likely to be heavily constrained by the global financial crisis. We do acknowledge that the global slowdown is likely to continue to weigh heavily on demand in the short run. These counters have had a good run in December into early January and we have been cutting positions, with indications that the rally is fading in early January. Our Resource exposure lies almost exclusively in the large cap diversifieds (Anglo and BHP Billiton) and Sasol, which also has a more defensive earnings stream.

After such a strong run in recent months, we view many of the Domestic counters as being expensive relative to their global counterparts. Recent share price appreciation has been in anticipation of a domestic uptick in consumer expenditure as a result of a fall in domestic interest rates. Though we agree that falling inflation and interest rates will provide some support to the embattled SA consumer, we prefer to err on the side of caution, particularly given the extreme relative valuations.

We don't see a substantial uptick in credit extension anytime soon, are wary of job shedding in the year ahead and do not see how the domestic economy escapes the global financial crisis unscathed. Hence, we remain underweight interest rate sensitive banks and consumer stocks.

Within financials and industrials we continue to prefer value. Here we are referring to companies with relatively defensive earnings streams that are unloved and hence attractively priced. Examples of stocks we own that fall into this camp include: Steinhoff, MTN and Naspers. We see extremely attractive relative value in these stocks which we are confident will be unlocked if one can exercise patience.

We view many of the traditionally defensive sectors, including food and tobacco, as being relatively expensive at current levels, hence our sales in the likes of Spar towards the end of 2008. As far as we are concerned, the horse has already bolted for the opportunity to switch into defensive counters. At current valuation levels we feel that investors should be starting to focus on investing in opportunities that will produce future capital returns as opposed to a capital preservation approach.

We have reduced our exposure to smaller cap shares in the wake of the opportunities that have risen in more liquid larger caps. We remain adamant that smaller caps will provide the best opportunities for capital growth in the longer run - they always do - but they are unlikely to out-perform while economic conditions remain difficult and uncertain.

We would describe the past two years as being largely devoid of stock picking opportunities. 2007 through mid- 2008 was all about momentum investing and the second half of 2008 was all about capital preservation. We are encouraged by the value that some of our stock picks have added recently and Merrill Lynch describe the Emerging Market universe as "a stock-pickers paradise once volatility and correlation abates".

We estimate that the Portfolio has an attractive twelve month forward Price-to-earning (PE) ratio of 6.5 and a forward dividend yield of 5.7%. Furthermore, all of our conviction buys are trading at compelling valuation levels as indicated by price-to-book, price-to-operating cashflow and price-to sales ratios.

At Alphen we feel much happier now than we were at the start of 2008, particularly with regard to stockpicking opportunities. Yes, 2009 will be another difficult year for managing equities, but historically Alphen has tended to provide significant outperformance of the benchmark off the lower valuation levels from which many companies are now trading.

Shaun le Roux