Local financial markets experienced quite vicious swings during September, which illustrates the uncertainty that currently prevails around the outlook for risky assets. Equities and bonds, nonetheless, managed to print decent total performances of 1.15% and 1.41% respectively for the month. Listed property struggled during the month, and the income yield had to compensate for the capital loss of 0.5% to generate a total return of 0.3%.

The performance from the bond market came as quite a surprise, given the 7% currency depreciation and the bearish rhetoric by Mr. Mboweni during the month. These bearish factors were offset by a strong 13 basis points and 9 basis points rally in US and German long bonds respectively. We have recently sold out of bonds due to the deteriorating outlook for local interest rates. US growth is clearly pointing towards a slowdown and is likely to put downward pressure on inflation in the next few months as well. On this basis we remain optimistic that the US tightening cycle is behind us, which is supportive of offshore bonds. The uncertainty of SA interest rates and the currency outlook in the next two quarters is likely to outweigh the potential positive spin-off of offshore bonds on the local market.

We have kept the equity exposure around 12%, sitting at almost half the equity benchmark weighting. The estimated 12-month forward dividend yield of the equity portion is approximately 4.7%, which is a manifestation of our strategy to enhance unit holders' after-tax income yield.

We are also actively looking for opportunities in companies with exposure to the SA manufacturing sector that is showing new signs of life on the back of the currency weakness, which explains our purchase of AECI during the month.

Listed property is starting to look more interesting with upgrades coming through in 12- and 24-month distribution growth. The estimated 12-month forward yield is sitting between 9% and 10%, which is starting to look attractive relative to bond yields and equity dividend yields. Further interest rate hikes could cause further capital depreciation, but the long-term fundamentals of the industry justify accumulating this asset class into weakness.

June started off on a bad footing with the equity market losing almost 10% halfway into the month. Bottom fishing spilled over into high conviction buying from cash flush investors, causing the All Share Index to regain 90% of the total value lost since the peak. The JSE ended up 3.4% for the month. The All Bond Index lost 3.6% in June as interest rate fears took their toll. Listed property was the worst performer for the month, with the index losing 14%.

Information flow is currently very noisy and is dominated by inflationary fears and slowing economic growth. Offshore, the Fed rhetoric continues to be analysed to the ninth degree, with a clear sense of desperation by the market for any respite in monetary conditions. Global liquidity conditions will however continue to tighten as Japan and Europe continue to raise rates in line with the US. Some emerging economies have also adjusted liquidity through rising interest rates, which increased risk aversion towards the middle of June. This lowering risk appetite saw an exit of capital from risky markets and assets, which contributed to the sell-off in South Africa's financial markets as well.

The PSG Alphen Optimal Income Fund had a flat performance during the month, which is satisfactory in the volatile markets we are currently experiencing. The miniscule exposure in property and the absence of bonds in the portfolio added reasonable value, which was somewhat eroded by being underweight equities. This positioning though, helped reduce the overall volatility of the fund. During June the equity exposure was raised to 14%, with our intended process of slowly building up to the 20% benchmark weighting. Rising interest rates have historically led to an outperformance of cash relative to bonds and we expect it to be the same this time. So, whilst our overweight cash versus bonds call is in place, we will use bond weakness to increase our bond weighting. Bond exposure is currently sitting at zero. Listed property has also sold off aggressively and value is creeping into certain areas; this too we could build up.

We expect choppy times ahead as the market will struggle to deal with rising interest rates and the J-curve impact from a weakening currency and the reprising of South African exports. The biggest risk in South Africa remains the negative impact from rising interest rates, as well as the impact that rising fuel prices will have on final demand and on overall GDP growth.

The wheel has turned quickly, even quicker than we anticipated. We have seen once again that there is little place to hide when sentiment turns negative. South African listed property lost 5.1% during the month, followed by a 2.7% drop in equities, while the All Bond Index lost 1.12%. The fund has lost 0.75% during May, compared to the benchmark asset allocation return of -1.0%.

Looking back over the last month, there is no specific event that triggered the sell-off. The focus of the market was initially on global growth, which triggered the demand for financial assets. Financial markets remained ignorant to the impact rising interest rates would have on global growth, but this became more prevalent during the last month or two as disappointed macro data emerged. Needless to say, this change in focus has caused a shift in sentiment towards emerging markets and other risky assets, which also followed through to South African financial markets. The sell-off in emerging market currencies, including the rand, is a natural result of this flight to safety.

The fund remains aggressively underweight equities which has supported the returns over the last few weeks and would enable us to make use of very attractive buying opportunities that are emerging. Dividend yields in some parts of the market are reaching 5% levels, which is a dripping roast compared to money market yields. The sustainability of dividend policies within a tightening interest rate environment is the important factor to gauge.

Bonds sold off on the back of both a deteriorating interest rate outlook locally as well as the currency depreciation. For the first time in quite a while bonds are however approaching more attractive levels and we would be looking for an entry point here as well. Listed property has also experienced an aggressive sell-off, mainly on the back of rising bond yields. Although some companies are starting to offer value, we remained concerned about the valuation of the sector in general. Cash therefore remains the preferred asset class in the short-term.

Although markets do not look pretty at the moment, we would like to remind investors not to make irrational decisions regarding their own asset allocation. Although valuations in various parts of the market are starting to look very attractive, sentiment can dominate cheap valuations for quite some time. In the long run though, valuations and not sentiment, determine the direction of asset prices.

Looking back at April, equities were the place where investors received the superior returns, with the All Share Index gaining 4.23%. Real Estate underperformed all other asset classes during the month with a return of 0.56%. The All Bond Index delivered a total return of 1.16%, outperforming cash, which returned 0.59%.

When the fund was launched, 11% of the capital was employed in the equity market. This exposure has since been raised to 13% and should converge gradually towards the benchmark weighting of 20%. The equity exposure will continue to be dominated by high yielding companies. Resource exposure as a percentage of the equity weighting is currently 19%, while Industrials and Financials contribute 53% and 28% respectively. The average dividend yield of the equities portion (excluding preference shares) is currently 4%. 20% of the fund is invested in preference shares, which should help to enhance the after-tax yield of the fund.

The fund has no exposure to the bonds, which contributes 7.5% to the benchmark. We have been surprised by the out-performance of SA bonds relative to their US peers, with the ten year yield on the latter having risen from 4.3% at the beginning of the year to 5.14%. The South African Reserve Bank is desperately trying to talk down inflation expectations, given the oil price risk and consumer debt levels. Until we see any action from Mr Mboweni, bonds are unlikely to experience any major sell-off. However, in an environment where the risk for interest rates lies to the upside, we feel uncomfortable buying bonds yielding 7.5%, if you can invest in cash instruments yielding around 7%.

The fund continues to focus on maximizing the total return, while looking to generate competitive after-tax yields.