One of the strategies we implement in managing the PSG Tanzanite Flexible Fund is to take a contrarian view. This normally entails offering people cash for something they really don't want. Lately most people wanted to hold onto their shares unless somebody was prepared to offer more than the market price. This phenomenon is called a bull market and offers few opportunities for contrarian investors. Let us, as we have done on a previous occasion, draw an analogy between investments and the art of buying a dog. (Some concepts are too complicated to explain with five green apples.) Recently three dogs in our hometown were diagnosed with rabies and what do you know - the entire town's dogs were up for sale. After running a rabies test we swapped four lemons for the neighbour's border collie (which we had been eyeing for a while). Our investors who follow the financial press might see a resemblance between what happened in our town and the outbreak of the sub-prime mortgage crisis. After a couple of large banks announced exposure to instruments backed by risky (sub-prime) mortgages there was a global exodus out of financial institutions. A specific Dutch insurer (ING Group), which we had been watching for a while, dropped almost 15%. We double-checked ING's exposure to sub-prime related instruments: one quarter of a percent of total assets. We were able to make the investment at a price earnings ratio of 7.9 and a dividend yield of 4.7%. To place this in perspective, the 10-year Dutch government bonds only yield 4.4%. Remember that, unlike dividends, the coupon payments on government bonds never grow. ING Group is a formidable financial institution with a large presence in growing markets like Central Europe and Asia. Furthermore, ING Direct is the world's largest direct bank, positioning it well for the global movement to Internet banking. So as strange as it may seem, sometimes you can buy rabies free dogs for the price of infected dogs - and you can even pick something decent.

In managing the PSG Tanzanite Flexible Fund we continuously consider the yields offered by various asset classes relative to each other. At the end of June 2007 the earnings yield of the ALSI was 6.4% and the after tax (at 30%) yield on 10 year government bonds and cash were 5.9% and 6.3% respectively. If we bear in mind that cash has no risk while equities are risky but offer attractive dividend growth prospects, it seems reasonable that these two asset classes have comparable yields. Bonds however offer no growth in coupons but do possess price risk, especially in a rising interest rate environment such as we are presently experiencing. We therefore do not find the 5.9% yield on 10 year government bonds attractive. The fund currently holds both cash and equities, but no bonds. Though equity as an asset class currently seems relatively attractive compared to bonds, the true bargains need to be picked very carefully. Certain pockets of the JSE have mushroomed to such an extent that they now pose significant risk to investors. The Construction Index, for example, is currently on a very demanding 24 times earnings; with earnings currently at record levels in this historically cyclical industry. On the other hand, now is a lucrative time for listing a construction company (if you have one of those in your back pocket). The PSG Tanzanite Flexible Fund, however, still has a bag full of bargains - the valuations and prospects of which we find very favourable.

The fund recently made an investment in Porsche AG - the Stuttgart based motor manufacturer. Most of our investors are probably aware that we are almost obsessed with finding companies which possess some form of competitive edge. We believe that Porsche fits the description and that both the company's technology and its brand strength insulate it against competitors. Porsche was the producer of the first turbocharged sports car in 1974; and with 23 patents in the current Porsche 911 turbo the company keeps its proprietary technology close to its chest. In addition, in our view Porsche is one of the world's ultimate luxury goods brands. Unlike watches and handbags, faking a Porsche must be next to impossible.

Porsche AG is still owned by the descendants of founding Dr Ferdinand Porsche. The family holds all the voting shares of the company, leaving only the non-voting shares to the public. But with the market equivalent value of the family's exposure at R97bn, we feel confident that our interests are aligned. In this regard, Porsche recently shrewdly acquired 30% of Volkswagen which is to the benefit of all shareholders. Relative to normalised earnings, we think the Porsche share is cheap - not that there is anything cheap about Porsche.

The calendar has flipped over and its time to account for 2006. The PSG Tanzanite Flexible Fund obtained a return of 31.1 % over the calendar year while our benchmark only added 11.0%. To illustrate that this out performance was achieved without exposing investors to undue market risk we employ a performance measure known as the Sharpe ratio. (As from November 2006 we have also included this ratio on the fund's fact sheet.) The Sharpe ratio is commonly used to quantify return per unit of risk, i.e. return divided by risk. If two funds obtain the exact same return but fund A took on much less risk than fund B, fund A would have the higher Sharpe ratio. And if funds C and D took on the same amount of risk but fund C obtained a greater return, then fund C would have the higher Sharpe ratio. In short: the higher the Sharpe ratio the better. The risk measure which is used in calculating the Sharpe ratio is the volatility of the fund's performance. Volatility is essentially the extent to which a fund's return deviates from its average return, i.e. a fund with a lower volatility is a more consistent performer than a fund with a higher volatility. Measured on a Sharpe ratio basis over the last year, the PSG Tanzanite Flexible Fund came first in its category - and second of all 347 domestic unit trusts!