We have recently been experiencing one of the largest global market collapses on record; during the trading week from 6 to 10 October the S&P500 lost 18.2%!

What we saw was classic panic sales, shares were dumped at any price. Naturally fear plays a large part in this phenomenon but there were also certain technical reasons for the extent of the overreaction. These include stop losses, margin calls not honoured and large foreign investors who have decided to sell their South African portfolio investments.

It might be intuitive to draw a connection between a company's share price and the state of its profits and/or balance sheet. Over the long-term this is mostly the case, but in the short term this is not a sound conclusion to make - and certainly not in the current market conditions. The prices of some of the shares held in the fund have halved while profits have grown in excess of 20%.

It is possible that the market is pricing in lower future profits. For the companies in the fund we continuously evaluate the strength of their balance sheets, the strength of their position in their respective markets and the prospects for their businesses. We find that the market is currently pricing in profits far below what we believe likely. We are therefore buyers, not sellers.

It is not to blow our own trumpet, but more for your peace of mind that we share the following with you: Over the 12 months to 30 Sept 2008 the JSE All Share Index (including dividends) is down 18%, the Resource 20 Index is down 26%, the Financial 15 Index is down 21%, the Industrial 30 Index is down 12% and the MSCI World Index is down 28% (in USD). The PSG Tanzanite Flexible Fund is up 1.0%.

The fund has experienced minimal withdrawals despite these volatile markets; we wish to thank our investor base for their continued faith in us.

We recently performed an exercise to empirically test the common assumption that one should postpone capital gains tax (CGT) for as long as possible. This statement is not as intuitive as it may seem, remember that the greater the benefit from postponing the tax the larger the ultimate tax liability. There are two approaches to proving the legitimacy of this statement. The one is mathematical proof (on which we have not yet given up) but then there is also the simpler approach of modelling. We assume an initial investment of R1,000, an annual growth rate of 20%, a CGT rate of 10% and a investment period of 40 years (typical pension horizon). We then projected two different scenarios: (1) Profit is harvested at the end of every year, accompanying CGT is paid and the remainder is reinvested; or, (2) the position is not touched and all CGT is paid at the end of 40 years. In the first scenario our hypothetical investor will be able to retire with R750,000; in the second she will retire far more comfortably with R1,300,000! One of the key benefits of the unit trust investment structure is that it allows all CGT to be postponed until the investor eventually exits the fund. If you had an ordinary share portfolio there would be a CGT event every time you adjust your portfolio out of a profitable position. In managing the fund we are able to regularly adjust positions without any CGT consequences - all CGT is postponed to that dreadful day you sell your units in the fund. This is a very significant advantage of a unit trust which is often overlooked.
With regards to the current market conditions: To get panicky when markets tumble is normal, the desire to withdraw your money from the market when markets tumble is also normal. To make exceptional returns you have to act abnormally. You need to invest for the long term and you need to buy when others are selling. The latter we are doing on your behalf, the former is entirely up to you.