PSG Equity Builder Fund has closed and merged into PSG Equity Fund.

Global equity markets endured another very volatile month in September. Trading days were characterized by very aggressive swings as markets processed fairly depressing macro news, with the Eurozone problems remaining the primary focus.

The JSE out-performed most other global markets, mostly because of a sharp weakening in the rand, which helped cushion the blow of brutal declines in commodity prices.

The PSG Equity Fund performed well (in relative terms) during September returning -1.2% versus the -3.6% of the FTSE/JSE All Share.

Relative performance was aided by our recent decision to employ about 15% of the Fund's net asset value in buying attractively priced global-leading companies. Our global stock picks out-performed in their domestic currencies during the month and this was further enhanced when converted to rands. We continue to see significantly more value in carefully selected high quality developed market stocks than the domestic equivalents.

One of our recent additions to the fund has been Diageo. As the producer and distributor of 8 of the world's top 20 liquor brands, including Johnnie Walker, Smirnoff, Jose Cuervo, Guiness and Tanqueray, Diageo has the world's leading route to market for branded spirits. It enjoys the benefits of scale in production, distribution and marketing. Whilst two thirds of profits are generated in developed markets, it has a superior distribution platform in those markets, particularly the US, which enables continued growth and strong margins. Its growing footprint in fast-growing and aspirational emerging markets will be supportive of growth in the medium to longer term. Management has recently set ambitious targets for organic revenue and earnings per share growth and operating margin expansion. We expect earnings and dividends over the medium term to compound at rates in excess of what we estimate the share price incorporates at current levels.

June went according to script: the JSE sold off sharply during the first three weeks of the month, declining by 7%, before the obligatory end of month rally erased most of the losses. This time around, the market chose to focus on the Greek debt concerns and sentiment was further negatively impacted by indications of slowing global economic growth. For the record, the JSE All Share declined by 2% in June but managed to end the first half of the year marginally positive. The PSG Equity Fund's performance has been slightly ahead of the All Share over what has been a rollercoaster first half.

It is our view that these big swings in sentiment, and resulting ups and downs on equity markets, are to be expected given the uncertain global economic outlook and significant macro risks, not least of which emanate from the sovereign debt positions in Europe, the US and Japan. While the team at PSG Asset Management is mindful of the macro risks, our focus is on buying companies that meet our criteria for investment. We continue to expect adequate returns from the stocks in our portfolios.

Amongst our larger holdings, MTN, Sasol and Tiger Brands were positive contributors to performance during the first six months while Steinhoff, Anglo American and Anglogold detracted from performance.

During June we used share price weakness to acquire SAB Miller. The purchase was funded by a reduction in our exposure to Tiger Brands, a company we continue to like.

Ending positive for the month of March was a noteworthy achievement for the JSE.

In mid-March the All Share Index (ALSI) found itself 10% lower than mid-February with the Japanese disaster and Libyan tensions weighing heavily on risk appetite. However, the equityfriendly environment of low interest rates and robust profit growth saw global investors piling back into equity markets and stocks around the world staged an impressive recovery. The ALSI registered a 1.1% gain in the first quarter of 2011, whilst the S&P 500 enjoyed a 5% uplift. The fund has beaten the ALSI's year-to-date performance with less volatility.

MTN was the largest contributor to fund performance in March as the share rallied sharply after a very good set of results and good news on the dividend front. Our investment case is predicated on fast-growing free cash flow generation giving rise to healthy and increasing dividends. We believe that MTN has a strong moat (it is the number one player in 15 out of the 21 countries in which it operates), a management team that is well capable of taking the company to the next level and offers a margin of safety that justifies ownership of the company. Increasing dividends may just provide the right underpin. We remain overweight the stock.

During March we were buyers of Reunert after the stock was added to our buy list. It offers an attractive margin of safety after significant weakness in the share price.

The price action on equity markets in March supports our view that the environment remains equity friendly. But, we need to remember that macro risks are high. And, at some point in the next twelve months markets may have to contend with normalization of interest rate policy and withdrawal of liquidity. Hence, vigilance and careful stock picking remain essential.

The first eight months of 2010 were characterized by fairly wild swings on equity markets as investors digested concerns around the sustainability of the global economic recovery and the implications of the sizeable sovereign debt burdens, particularly in peripheral European countries. Markets rallied strongly in the last four months to end the year sharply positive across the board. The rally was underpinned by interventions in Euroland to remedy debt contagion fears and by the Fed to prevent a stalling in the economic recovery by extending their quantitative easing programme.

The JSE All Share returned 19.0% in 2010. The year saw strong out-performance by industrials of resources and financials. Quality domestic industrial stocks had a particularly good year on the back of good profit growth and robust inflows into emerging market equities.

Fund performance review
The fund had a good year, returning 20.8% against 19.0% by the benchmark (ALSI) and 18.1% by the peer average. The fund's top-quartile performance in 2010 followed on from a very strong showing in 2009, and the fund has been the best performing General Equity fund over two years to the end of 2010. Figures quoted from Morningstar Inc. Our higher conviction stock picks generally performed well during the year but most did better in the second half. Naspers, Steinhoff and EOH were strong contributors to performance.

Portfolio positioning
Our stock selection process saw us further reduce our exposure to domestic economy industrial and financial stocks in the first quarter of 2010. On a stock specific basis, it is our view that many of the valuations of these shares incorporated very aggressive growth assumptions and that the risk of future capital loss had intensified. Given further share price appreciation during the course of the year, it is our view that valuations are currently dangerously elevated for certain sectors. Accordingly, we are materially underweight retail, domestic telecoms and pharmaceuticals. We also own no Richemont or SAB Miller on valuation concerns, having sold the latter during the course of the year as our intrinsic value price targets were breached.

Our stock selection process is focused on identifying and owning shares that satisfy our investment criteria of the 3M's: moats, management and margin of safety. Several quality businesses with an attractive moat and/or a quality management team are trading above our assessment of their with growth intrinsic value, hence we don't own these companies.

Our top holdings are not as cheap as they were in 2009 and during stages of 2010, but are still trading at a discount to our assessment of intrinsic value. Steinhoff remains our largest holding. According to our analysis, the share (after price appreciation) trades just above its ex- growth valuation and materially below its intrinsic value. 2011 shapes up to be another interesting year on equity markets. The general environment remains broadly equity-friendly with money cheap and profit growth generally healthy. But, South African stocks are at best fairly valued. And, markets remain vulnerable to swings in investor confidence, and sovereign debt worries and inflation concerns in emerging markets will have to be carefully monitored. Accordingly, we remain focused on owning stocks that satisfy our criteria for investment.

Shaun le Roux