In the classic Looney Tunes cartoon Wile E. Coyote and the Road Runner, the always hungry Coyote is forever chasing the elusive Road Runner across the desert. The Coyote is so fixated on pursuing his prize that he often has a complete disregard for the risk involved in his ventures. In many of the episodes his chase leads him over the edge of the cliff but, because this is the world of cartoon physics, the Coyote is allowed to continue running mid-air until the moment he realises that there is nothing solid below him. This is the "Wile E. Coyote moment" when suddenly gravity kicks in and the Coyote plunges into the depths.

On the stock exchange, investors are often duped into expecting forever increasing company profits and keep chasing that exhilarating price chart. This is the greedy part of the human condition that is generally credited with causing over-valuations in asset prices. Quite often there is a belief that this time is different and that the new, higher valuations of companies will be sustained as we have entered a new level of prosperity. In our world, this generates unacceptable levels of risk and we prefer to sell these businesses and patiently revert to the safety of holding cash.

Conversely, fear is the emotion responsible for creating opportunities. The market as a whole does not enjoy being exposed to uncertainty and disappointment. Anxious sellers push prices down even lower as they discard their holdings irrespective of the intrinsic value of those investments. It is during these periods when the value of available cash becomes evident as wealth is created by purchasing quality businesses at discount prices.

The manner in which your fund is positioned is a reflection of the opportunities and risks we identify through our bottom-up stock selection process. Currently we are not finding many opportunities among the domestic industrial companies; in fact we think the valuations on many of these companies have moved deep into risky territory. Investors seem to be particularly greedy in their expectations of South African consumer stocks and therefore we are steering way clear from these areas. This has weighed on our short term performance, but we are confident that it is the prudent way to manage your capital. We don't know when the Coyote moment will come for these overly zealous investors chasing our industrial stocks ever higher, but the disappointing profit warning issued by Absa during June could be the first of many events tempting them to take that catastrophic peak down.

As part of our investment philosophy we look for companies with good management. To get to know management we spend time meeting them, attending analyst presentations and reading annual reports. This is a very rewarding exercise as you meet inspirational people, many of whom you can learn a lot from. As an example we have been meeting with Asher Bohbot, the founder and CEO of EOH Holdings Limited for many years. EOH's headline earnings per share has grown sixteen fold from 12.2c in 1999 to 196.1c in 2011. This represents compounded annual growth of 26% over a period of 12years-a remarkable achievement. Listening to Asher speak about EOH, we realized that EOH has the right corporate culture. EOH is a people business and managing people is notoriously difficult, but hearing EOH's business philosophy you realize that they know what they are doing. The company ends its 31 January 2012 results announcement with the following line: "EOH has the resources, track record,know-how, ability and capability to continue to grow aggressively."A bold and confident statement, but overtime we have realised that these positive people are the ones who excel. Apart from Warren Buffett, who writes a very inspirational annual letter to shareholders, there are some other CEOs who also do a good job of it, like Jamie Dimon the Chairman and CEO of JP MorganChase. The PSG Flexible Fund bought some JP MorganChase at the end of September 2011. The value of this investment has increased by 46% over the six months to 31 March 2012. After reading Jamie Dimon's 39 page letter to shareholders we again confirmed that JP MorganChase has a great corporate culture and much better management than most of its competitors. The first couple of days of April has seen renewed global uncertainty. The PSG Flexible Fund is well positioned with good management leading the fund's underlying investments. While the headlines are negative, we see opportunity.

The fund ended the month of December near its all time high and generated growth of 10.5% for the 2011 calendar year. This was slightly below our benchmark of inflation plus six percent, but significantly ahead of the 2.6% that the JSE All-Share Index (Alsi) including dividends delivered over the same period. The out performance over the South African indexwaslargelydue to two factors.

Firstly, stockpicking. The fund's equity positioning looks very different to that of the Alsi. The largest individual contributors to growth were EOH Holdings, Berkshire Hathaway and Sasol. The fund has held all three of these companies for a number of years and they remain part of the portfolio.

The second contributor was the exposure the fund had to companies listed outside of South Africa. As we regularly mention in this commentary, we continue to find better value for our investors' capital across the waters. Fortunately, we capitalized on changes to regulations which allowed us to increase our offshore exposure.In 2011, the fund was on average 23% invested in opportunities in the US, UK and Europe.

At present 22% of the fund is invested directly offshore. When we include the domestic companies with offshore earnings, a total of 48% is invested in rand-hedged investments. Effectively, 23% of the fund is invested in South African businesses and the balance of the fund is waiting patiently for better opportunities to emerge.

The asset allocation of the fund remains the result of our bottom-up process where we identify individual companies in which to invest. This involves a strong focus on the quality of the business (its moat) and the competence of its management team. As always, we only invest when the share price offers a significant margin of safety below our estimate of the intrinsic value of the business.

We believe that our philosophy and process will continue to deliver rewarding results for our long term investors. We wish all our investors a very prosperous 2012!

The months of August and September have not been the easiest for financial markets. Significant uncertainty exists especially in Europe where talk of potential sovereign defaults abounds. The PSG Flexible Fund has, however, held up quite well during this volatile period. As at 30 September 2011, the fund is only 1.4% below its all time high if income distributions are taken into account. This compares favourably to the JSE All Share Index (including dividends), which is 8.5% below its all time high. As markets fell we found value and have increased the equity exposure in the fund from 70.1% as at 30 July 2011 to 79.3% as at 30 September 2011. The remaining 20.7% of the fund is still in cash so we have firepower if panic continues. The weighted average price-earnings ("PE") ratio of the equities held in the fund is currently 9.1 times. The last time the PE ratio of the fund was that low was in October 2008, during the previous financial crisis when Lehman filed for bankruptcy. The weighted average price to book of the equities held in the fund is currently 1.4 times. The price to book ratio refers to how many times larger the share price is compared to the net asset value of the company. A price to book of 1.4 means that every R140 invested is backed up by R100 of balance sheet assets. Many assets of a business e.g. brand name and customer relationships are, however, not necessarily reflected on the balance sheet. If you have invested in high quality shares, like the fund has, a price to book of 1.4 is attractive. As with the PE ratio, the last time the price to book ratio of the fund was this low was in October 2008. Another distinguishing feature of the PSG Flexible Fund is that in 24 out of the 37 companies in which the fund is invested, management or another strategic investor has a large shareholding. We have a preference for such companies because it means that the interests of management are aligned with those of shareholders. A manager, who is also a large shareholder, will be more inclined to take long-term value-enhancing decisions even though short-term profitability may be sacrificed. These managers will also generally avoid corporate extravagance and other wasteful expenditure. In our view, the fact that we have invested the money you have entrusted to us in companies where management think like shareholders not only reduces the risk of your investment, but also bodes well for long term capital growth.