The Valugro Active Allocation Fund celebrates its 3rd Birthday this month (having being launched on the 1 October 2007). Over this period, your Fund has consistently been one of the top performing funds in its sector and is currently ranked 2nd. In 2008 your fund won a Micropal award for the best performing fund in its sector over 1 year.

Your Fund has returned 33.58% since inception beating the JSE ALSI (11.34%), Dow Jones Industrial Index in rands (-19.27%) and its investable benchmark (9.76%). Unfortunately your Fund underperformed its mandated benchmark of CPIX + 3% over the 3 years (42.53%).

This month is also the end of the 3rd quarter of 2009. Over this period your Fund returned 9.24% whilst CPI + 4% averaged 2.55% (and the ALSI gained 13.23%). The best performing sector over the period was the Industrial Sector (+21.07); whilst the Telecommunications Sector performed the worst (+3.73%). The Telecoms Sector underperformed the overall market due to the MTN-Bharti possible tie-up finally coming to a conclusion on the 29th of September, with the deal being called off due to political and regulatory hurdles. MTN was up on 5.6% the day the deal was called off illustrating general discontent with the proposed tie-up. We sold all your Fund's MTN holdings on that day. While MTN continues to generate superb cash flows there appears little opportunity for management to use them to acquire major growth-enhancing businesses and management continues to apply a high dividend cover.

We also continued to see US dollar weakness over the past 3 months, with the EUR (+4.30%), Yen (+7.80%) and ZAR (+2.7%) all appreciating against the greenback. As we have mentioned in previous commentaries, this unfortunately had a negative impact on the US equities component of your Fund. Virtually all our US equities are global companies however, so over the next 6 months their global sales and profits should increase their future total dollar earnings nicely.

After an exceptionally gloomy 9 months from June 2008 to March 2009, the last quarter's global equity market rally has been a welcome relief. In ValuGro's April houseview we said we thought that equity markets may well have bottomed. We feel even more strongly about our view now. Indices such as the Dow and S&P 500 have rallied 29% and 36% respectively from their lows of the 9th of March. The ALSI has returned 21% over this period. The rand has appreciated 27% to the dollar since the 9th of March, however, thus making the JSE ALSI a great investment for the global investor.

Whilst share prices have responded positively to (very) tentative signs of an improving economic outlook and sentiment, ultimately the share price of a company will follow its earnings. Cyclical stocks including energy and commodity stocks have lead the recent global equity rally, as have previously "hammered" US banks. But we don't expect these stocks to report strong earnings over the next 6 months, 1 year, or even 2 years. That opens up the possibility that every time global equity investors get negative economic or financial news they could panic (like they have done during the last year) and quickly "dump" the stocks of "profit underperformers". We thus think many of the recent "big mover" stocks are high risk.

Instead of investing in high risk market sectors over the 2nd quarter of 2009, we instead invested your fund into companies such as Pick 'n Pay, Coca-Cola, Johnson & Johnson and Heinz. All these have fairly stable profit growth prospects and good dividend yields over the next 2 years, unlike the above "go-go" sectors.

Unfortunately the recently strong rand has somewhat nullified the returns of our offshore stocks in the short-term. Based on SA's latest current account deficit and GDP figures we don't expect the rand to stay strong, however.

The first quarter of 2009 epitomized the volatility to which both local and international investors became accustomed to in 2008. The past quarter saw the Dow Jones Industrial Index down 12.34% in Rand terms whilst the JSE ALSI Index managed to outperform in Rands, the JSE ALSI being down 5.32% (in Rand terms) for the quarter. With your Fund still predominantly in SA stocks this helped relative category fund performance.

While market participants over the past month signalled they felt that the fiscal and monetary stimulus packages implemented in the US may be very helpful, however, only time will tell. An indication that international investors are beginning to tolerate some more risk can be seen in the Rand's recent positive performance against the US Dollar as well as the recent relative strength of the currencies of other emerging countries. Although the Rand depreciated 1.1% to the USD over the past quarter, it gained 8.6% in the last month.

During the 1st quarter, Valugro continued to look for both local and international stocks with a strong franchise value, sustainable earnings and attractive dividend yields. Your fund was down 4.85% for the quarter, and managed to outperform its investable benchmark as referred to in the February 2009 commentary. Over time the repetition of this outperformance should result in outperformance of the fund's benchmark too (CPIX + 4%). This was despite an increase in US Dollar cash holding and a substantial increase in US equity. Companies such as Coca-Cola, Johnson & Johnson and Procter & Gamble have all been identified as companies which meet the criteria mentioned above, and have been bought for your fund.
Looking ahead, Valugro will continue to apply a long term approach with regards to its investment processes given the volatility in the current market.

2008 will definitely go down in history as one of the most severe global stock market decline years. Numerous market commentators have drawn parallels with the 1929 equity market collapse and the ensuing Great Depression. South Africa at first glance appears to have been sheltered to some degree in that SA's JSE benchmark All Share Index fell "only" 27% versus the US Dow Jones collapse of 33% and the much larger percentage declines experienced by emerging markets such as China, India or Russia. Unfortunately the rand weakened significantly more than most global currencies in 2008 (nearly 40% down from R 6.80 to the USD in January 2008, to over R 9.50 at year end). Due to this the JSE returns when expressed in USD terms were actually among the worst in the globe in 2008.Your fund declined 19% over the 2008 calendar year, outperforming the JSE All Share Index fall of 27%significantly, but falling well short in this part of our longer journey of attempting to outperform South Africa's inflation rate by 4% on a rolling 3 year basis. We have completed the first 26 months of the first 3 year period of the fund's existence at this stage and the average annual comparison over that total period is 9.82% for your fund vs 11.99% for the benchmark. We have some work to do over the next 10 months.Obviously our ride in attempting to outperform inflation by at least 4% over periods 3 years in length or longer has been bumpy along the way, but we always expected that. Sitting in cash would certainly have delivered smoother returns over the last 26 months, but those cash returns (even before taking income tax into account) would have been lower than the 9.82% average annual return we have delivered. Warren Buffett has been quoted as saying he prefers a "lumpy 15% return to a smooth 12% return". Those are our sentiments precisely when it comes to this fund. Being an equity-focused fund it will always display volatility. But over time we hope the returns will more than compensate for the "lumpy ride".