The fund remained fully invested in SA gilts to take advantage of the capital growth that will be realised with the interest rate cuts in the pipeline

The fund remained fully invested in SA gilts to take advantage of the capital growth that will be realised with the interest rate cuts in the pipeline

The fund remained fully invested in SA gilts to take advantage of the capital growth that will be realised with the interest rate cuts in the pipeline.

The PSG Opportunities Fund forms part of PSG Management Company Ltd outsourced solutions. PSG Asset Management will perform the stock picking and Dawie Nell will do the asset allocation for the fund. The views of the fund manager will not necessarily reflect the view of PSG Asset Management.

The asset allocation has been maintained at 95% SA government bonds in anticipation of a stronger rand against the major currencies. Technically the rand is set to recover to the R5.50 to R6.00 level against the US dollar in the short term. This will probably be triggered by the anticipation of some form of free floating of the yuan, as well as the yen breaking the key resistance level of 115 to the USD.

The risk of owning SA stocks - from a currency point of view - far outweighs the benefits to be gained on the bond side, where a number of interest rate cuts are expected. This is in light of the slowing of the SA economy as evident by the lower PPI and GDP figures.

During the month of July the focus of the PSG Opportunities Fund was changed to a more aggressive asset allocation model. This will in effect mean that the fund is now truly focusing on opportunities that exist in different asset classes. The fund is more focused obtaining absolute returns for investors.

The equity markets surged ahead the last quarter pricing in a widely expected US led global economic recovery. It is also a "jobless recovery" and a "cost cutting recovery" instead of a "growth recovery". One can however not discard the deflation risk in the US economy that may result from increasing unemployment and a lack of investment spend. For this reason the fund has increased its bond exposure to 95%. This position will also benefit from the down cycle in domestic interest rates.

The fund was up in June, which ended up being a poor month for local equities after a blazing performance in May. A stronger rand dragged the market down by 2% despite the continued rally by US equities. US markets appear content to take a breather at present but with all the liquidity about and signs of improving economic growth don’t be surprised to see further strength. However, valuations for US equities are looking excessive and we view this as a rally in a bear market. The fund continues to prefer equities to other asset classes. Within equities exposure is concentrated around locally focussed interest rate sensitive stocks. Resource exposure is limited to gold as we believe resource shares in general are pricing in rand weakness that we do not foresee in the short-term.

The fund was up 10.5% in May, as the JSE rallied, led by the resource shares. The decision to increase equity exposure, and to large caps in particular, allowed the fund to participate in the bounce. The key question to be asked is whether we are just seeing a rally in a bear market or whether our market has bottomed and good times lie ahead? Clearly, the rand will be the key determinant of the market's destiny, but interest rate cuts and overseas markets will play a key part.

Local shares offer good value. Bonds are pricing in much lower interest rates and we believe capital upside is limited. Accordingly, we continue to prefer equities as an asset class. We expect some pull-back from the JSE in the short-term and are concerned that resource shares require a weaker currency to justify current valuations. We remain underweight resources, and favour banks and retailers ahead of a series of interest rate cuts.

The fund gained 1% in April benefiting from exposure to the top performing banking and local industrial sectors. Resources continued to suffer on the back of sharp gains by the rand, with the sector losing over 8% during the month. The All Share Index lost some 1.7% during April.

The fund remains overweight equities at the expense of other asset classes. We are of the opinion that equities should offer the best returns over a one year period, and bonds and property are beginning to look fully priced. However, we will continue to closely monitor inflation data and action by the SARB in cutting interest rates. The currency will remain a key driver in the future returns of the various asset classes.

Towards the end of April, we started adding to the fund’s exposure to rand hedge and Top 40 stocks. The rand was looking overbought and in many cases shares began to offer very good value.

The fund lost 8% during the quarter. Being overweight equities at the expense of other asset classes, it underperformed its benchmark over this period. South African equities lost further ground during the quarter, and in March in particular, as the rand continued to strengthen and the Iraq war weighed on global equities. Some of these losses were recovered as markets rallied into early April, as sentiment improved with the US war machine starting to take control in Iraq.

Equities have had a torrid twelve months, with the JSE All Share down almost 30%. Bonds, property and cash have done well and the fund has been outperformed by peers with a fixed income bias. Considering the high equity exposure, fund performance has been good.

We are of the opinion that bonds and property are fully priced and retain a preference for equities. Local shares offer very good value, and we expect shares which offer superior earnings growth prospects to do well. Dividend yields are attractive. We remain cautious on the prospects for global economies and believe there is a reasonable chance of the rand holding on to its recent strength. Accordingly, current stock selection is focussed on industrial and financial sectors which are relatively immune to the woes of global economies and a strengthening rand. We are underweight resources, overweight local industrials and overweight banks. Preferred resource sectors are gold and platinum.

The fund lost just over 4% i n December as equity markets continued the downward trend of much of this year. While the overweight position in banks paid dividends in November, during December banks underperformed the market even though the rand continued to strengthen. Resources were buoyed by gold shares which surged during the month amid fears of war and a weakening US dollar.

The funds position is largely unchanged being underweight resources, overweight banks (underweight other financials) and overweight South African industrials. Profit was taken on gold shares during the month though the fund manager remains bullish on the prospects for gold in the medium to longer term. Exposure to cyclical services was cut after a strong performance by this sector in 2002.