The rand has continued to strengthen, which should relieve some of the inflationary pressures in the domestic economy and it is likely that domestic interest rates can fall significantly next year. This is positive news for the domestic economy. The fund manager's continue to find domestic industrial shares attractively priced on depressed earnings. The strong rand has exerted further pressure on resource stock prices, where they are increasingly finding compelling valuations. The overall market is now considered to offer compelling long-term value.

During October the rand continued to strengthen, which should relieve some of the inflationary pressures in the domestic economy. With government easing the 2003 inflation target it is likely that we have seen the last interest rate increase. This is positive news for the domestic economy. The fund managers continue to find domestic industrial shares attractively priced on depressed earnings. The strong rand has exerted further pressure on resource stock prices, where the fund managers are increasingly finding compelling valuations. The overall market is now considered to offer compelling long-term value.

During September the South African market continued to consolidate after its sharp sell off in recent months. The market now appears attractively valued and the fund manager's have increased the funds exposure to shares. Domestic industrials shares continue to offer a very attractive investment opportunity, trading on cheap ratings on depressed levels of earnings. The excellent profit announcements we have seen in the last month from these companies, especially the retailers, vindicate Allan Gray's view that they have entered a period of earnings recovery that should continue for some time. The resource shares, especially the Anglo's group, are now also more fairly valued. The fund also increased its exposure to these types of shares.

During August the South African market consolidated after its sharp sell off of the previous couple of months. The market now appears attractively valued and we have increased the funds exposure to shares. Domestic industrials shares continue to offer a very attractive investment opportunity, trading on cheap ratings on depressed levels of earnings. The excellent profit announcements we have seen in the last month from these companies, especially the retailers, vindicate the fund manager's view that they have entered a period of earnings recovery that should continue for some time. The resource shares, especially the Anglo's group, are now also more fairly valued. The fund also increased its exposure to these types of shares.

Equity markets around the world continue to sell off with this trend intensifying during July. Due to more reasonable valuations the SA stockmarket initially proved more robust. That was until the leaked document around the mining charter caused a sharp sell off in mining shares. As Allan Gray have pointed out in previous commentary they found the offshore listed resource stocks expensively priced. Allan Gray's under exposure to these shares, the funds more fundamentally based share selection and neutral share exposure, limited the drawdown in the funds value. Allan Gray exploited the sharp sell off in some shares, where they now found attractive values and increased exposure to these counters. Allan Gray continues to find most western markets over valued despite their recent sell off. The SA stock market, on the other hand, now offers very attractive valuations.

The domestic economic picture continues to improve. The rand is consolidating and inflation is approaching peak levels. We have probably seen the last interest rate increase. The weak rand has stimulated exports and the trade surplus is expanding. The outlook for the domestic economy is good. The same cannot be said for the major economies of the world. The US economic recovery is haphazard despite aggressive monetary stimulus (low interest rates). The fund manager's however find that the ratings on shares do not reflect this situation with domestic shares generally cheaply rated while the offshore listeds discount a robust world economy. ). The fund manager's continue to regard valuation levels on developed country stockmarkets, ex Japan, as excessive. The fund is therefore overweight in domestic industrials and underweight in the offshore listeds, which are mainly resource stocks. Asset allocation remains neutral.

Both the relative and absolute performance of the fund accelerated during May 2002. The rand continued its recovery and investors have started to question their extremely negative sentiment towards the domestic economy. This negative sentiment is expressed by low ratings on low levels of earnings in domestic consumer and industrial shares. The fund managers continue to find these counters attractively valued, especially relative to resource counters, where the fund managers find the large internationally listed counters particularly unattractive. Recent company results and economic data, eg, retail sales, suggest a reasonably robust domestic trading environment. The fund managers concern over valuation levels of international stockmarkets continues to be reflected in a neutral domestic asset allocation stance.

After a weak 4th quarter in 2001 the fund yielded above average returns for the 1st quarter and April 2002. The Rand's recovery from very oversold levels aided domestic shares at the expense of Rand hedges. Whilst Allan Gray acknowledge that the initial impact of the weak Rand on the local economy might be negative due to higher inflation and interest rates, over the more medium-term it is expected to be very stimulatory. With domestic industrial shares also at very attractive valuations, the fund has a high exposure to these types of shares, and is underweight in resource stocks, where Allan Gray find very little value. Allan Gray's concern over valuation levels of international stockmarkets is reflected in a neutral domestic asset allocation stance.