The PSG Tanzanite Flexible Fund has recently subscribed for 2 million shares in a company which is to be introduced to the JSE in early December, Zeder Investments Ltd. Zeder is an investment company which has recently been established by PSG. Zeder's investment focus is in agri-related companies and all its current investments are in unlisted entities.

Together with the management of Zeder we believe there is plenty of value to be unlocked from these underlying investments. Due to a lack of liquidity the share prices of unlisted companies tend to trade at a discount to their listed counterparts, this discount should narrow considerably if these companies are brought to the market via Zeder. Further, many agricultural companies have in the past not regarded the interests of shareholders as a prime priority.

By getting involved in the management of the underlying companies, Zeder intends to address this phenomenon and in so doing unlock further value for shareholders.

Currently Zeder's four largest investments consist of KWV, Pioneer Foods, Kaap Agri and Senwes. We regard the current market prices of all these companies to be very attractive.

Following the private placement of Zeder's shares, two thirds of Zeder's equity is cash. This means that the Zeder management will have to work hard to appropriately invest the new capital. We will be following their proqress closely.

During June the JSE total return index added 3.4%, but the rand lost further ground against the hard currencies. The local currency has now lost 20.2% against the pound in just two months. With Liberty International (a UK property company) as the fund's largest investment at the end of April, our investors were literally in the pound seats with this adverse currency movement. We regard our investment in Liberty International as a good example of our two pronged approach to managing risk in the PSG Tanzanite Flexible

Fund: both stock selection and asset allocation. With regard to stock selection; we see very little risk in a well run company which enjoys some form of competitive advantage and trades at a discount to its true value. Liberty International owns 9 of the 25 most sought after malls in the UK, has rewarded shareholders with a compound annual total return of 15.4% over the last decade - and currently trades at a discount to net asset value. The second dimension to our risk management process is asset allocation: we continuously reassess the relative attractiveness of various asset classes, also wearing a global hat. Due to certain macro indicators we have been expecting a weaker rand for some time and found Liberty International an ideal vehicle to counter rand depreciation. We hope this serves as some comfort to our investors during this terribly turbulent market.

May saw the commencement of a major sell off in emerging markets; South Africa was no place to hide with the JSE Total Return Index giving up 2.7% and the rand losing 10.0% against the dollar. As a retreat from emerging markets was not entirely unexpected, we had fortunately immunised ourselves to an extent against such an adverse movement. At the beginning of May the fund was 31% invested in locally listed stocks which earn at least a portion of their earnings in first world currencies; the fund’s largest investment was Liberty International - which has no exposure to emerging markets. These stocks, therefore, served as a means to preserve a portion of our investors’ capital in hard currency terms. The fund’s cash buffer comprised of 35% of the portfolio and enabled partial wealth preservation in rand terms. Consequently our investors were not exposed to the full wrath of the market and came down far less than the JSE.
In an across the board sell off similar to the one we are currently experiencing, opportunities arise for value investors. Market players tend to sell the rand and rand hedge stocks down at the same time, giving us a fantastic opportunity to add some rand hedge stocks at very attractive prices. Recently we have been buyers of Liberty International, Northam and Sasol.

At the end of April 2003 the JSE All Share Index was on a price earnings ratio (P/E) of 8.6. This means the index value was 8.6 times the total weighted income earned by the index constituents. By the end of April 2006 the P/E of the JSE All Share Index has virtually doubled to 16.7 times, while the total weighted income of the index has increased 45%. This means market players are now prepared to pay double the price that they were willing to pay in April 2003 for profits, this is largely justifiable due to the fact that the Repo rate has declined from 13.5% to 7%. The danger though is if interest rates rise it could reverse the whole process - company profits will be under pressure and P/E ratios will decline. For value investors like ourselves this means that we have to keep reassessing the stocks in our portfolio to ensure that we only hold stocks which are trading at a discount to intrinsic value. It is for this reason that we have reduced the fund’s exposure to stocks like Firstrand, Standard Bank and more recently we swapped a large portion of the fund's holding in Implats for Northam, which is offering better value.

It is due to our relentless search for value that the average P/E of the shares held in the fund is only 11 times, offering much more room for growth than the market as a whole.

On 28 February 2006 the largest investment of the PSG Tanzanite Flexible Fund was in Liberty International PLC (Lib-int). It might come as a surprise to some of our investors that Lib-int and Liberty, the SA life assurer, are two entirely separate companies, only sharing a founder in Sir Donald Gordon. Lib-int is a UK property company with property investments of over £7 billion. Furthermore the group is the leading company in the UK regional shopping centre industry; at the end of last year Lib-int’s portfolio of regional shopping centres was valued at £5.8 billion - and it was 98.5% let! Over the last decade the company has rewarded shareholders with a compound annual return in excess of 15%, with no exceptions during 2005 when shareholders enjoyed a 19% return (these returns are in pound terms.) This is a truly remarkable performance if you bear in mind that the company operates in a country with rates of inflation and GDP growth of 1.9% and 1.7% respectively. In addition, Lib-int’s share price is currently trading at a discount to net asset value. Your investment in Liberty International therefore provides you with access not only to selected malls in one of the world’s most stable economies, but also to a rand hedge investment.

In March 2005 we noted that despite the mushrooming of the JSE’s market capitalisation by 150% since 1995, the SA GDP had remained at a constant 53% of the JSE’s total value. At the time we concluded that the JSE had “simply been tracing the expansion of the domestic economy”. To date the JSE’s market cap has added a further 54%, but this time leaving the GDP far behind. The GDP now only accounts for 37% of the JSE. Stock prices are evidently extrapolating current boom times in SA’s economy quite some years into the future. Is it time to cash in the chips? Stock prices tend to grow with the same lack of consistency as a forgotten garden hedge; certain industries in the market have run far ahead of others. As a case in point: the sum of the market cap of SA’s six biggest banks is 2.8 times the size of the total market cap of SA’s 13 largest retailers! The market cap of SA’s biggest bank (Std Bank) is 5.6 times that of SA’s largest retailer (Edcon). Compare this to the US, where Citi Group is only marginally larger (1.2 times) than Walmart. In conclusion: we cannot imagine better times for our local banks, so that is where we commenced our trimming of the garden hedge.

The December fact sheet offers the perfect opportunity to reflect on 2005 and to evaluate whether we are still true to the philosophy to which we mandated ourselves at the outset. Performance: During 2005 we increased our investors’ wealth by 31.2%, which is in excess of our benchmark which only added 9.7%. Fees: During 2005 both the annual management and the maximum initial fees were reduced, bringing our fee structure even more in line with our performance based approach. Eat our own cooking: the fund manager has further increased his investment in the fund under the same terms and conditions applicable to outside investors. Investment philosophy: a glimpse at our biggest holdings stand testimony to how strong our preference remains for well run companies with some form of competitive advantage. Consider our top five holdings: Remgro offers exposure to the world’s second largest tobacco company; Liberty International owns 9 of the top 25 shopping centres in the UK; Anglo offers exposure to the world leaders in platinum and diamonds; Imperial owns the largest network of motor dealerships in South Africa and Sasol is a global leader in gas to liquid fuel technology. We trust that you would agree that we are still holding the course and well set for the investment challenges of 2006.