Improving prospects for world economic growth are having a beneficial impact on equity prices around the globe. Sharp declines in domestic interest rates are further supporting domestic equity prices. Domestic equities have now appreciated by 33% since their April lows and the average PE ratio has improved to 12, slightly ahead of the long-term average. With approximately 65% of the fund exposed to local equities, the fund benefited from this appreciation in prices. The fund manager's continue to favour domestic equities, given that the yield on long dated government bonds and cash, and the competing asset classes, has reduced to 9% and 8% respectively. The fund manager's continue to find numerous shares that offer more competitive long-term returns.

The recovery in the local stockmarket continued with the FTSE/JSE ALSI up 25% from its April 2003 lows. The Allan Gray Balanced Fund benefited from this move due to its relatively large exposure to domestic shares. After this recovery the fund manager's view the domestic stocks to be fairly valued, with their 11 PE ratio in line with the long-term historical average on normal levels of earnings. The fund manager's long-term return expectations for shares are now in line with historical norms of around 7% real. This still compares favourably to bonds with a real return expectation of 4.0% as depicted by the inflation linked bonds. Company earnings are likely to continue to disappoint due to the impact of the strong rand. However further interest rate cuts should be beneficial for shares and the fund continues to have a relatively high share exposure.

The recovery in the local stockmarket continued with the FTSE/JSE ALSI up 25% from its April 2003 lows. The Allan Gray Balanced Fund benefited from this move due to its relatively large exposure to domestic shares. After this recovery Allan Gray view the domestic stocks to be fairly valued, with their 11 PE ratio in line with the long-term historical average on normal levels of earnings. The long-term return expectations for shares are now in line with historical norms of ±7% real. This still compares favourably to bonds with a real return expectation of 4.0% as depicted by the inflation linked bonds. Company earnings are likely to continue to disappoint due to the impact of the strong rand. However further interest rate cuts should be beneficial for share and the fund manager's continue to have a relatively high share exposure.

Despite a strong recovery in domestic shares from their April lows, prospective long-term returns continue to be not only attractive in their own right, but remain decidedly more attractive than returns offered by bonds. Substantial further declines in domestic interest rates should also be supportive of share prices, while bonds now seem to discount these declines. While the superior value of shares over the longer term is clear, the short-term is a little uncertain due to the negative impact that persistently high interest rates and a strong currency are likely to have on company earnings. The fund manager's do however continue to favour a relatively high exposure to domestic shares. The fund manager's will also endeavour to increase the offshore component of the portfolio if and when regulations allow them to do so.

While world stockmarkets continued their recovery in June, the domestic stockmarket came under pressure form the stronger rand. Domestic bonds appreciated further on the back of the interest rate cuts and inflation numbers continue to surprise on the low side. Prospective long-term returns for an investment in domestic shares are not only attractive in their own right, but are now decidedly more attractive than returns offered by bonds. Substantial potential declines in domestic interest rates should also be supportive of share prices, while bonds now seem to discount these declines. While the superior value of shares over the longer term is clear, the short-term is a little uncertain due to the negative impact that persistently high interest rates and a strong currency are likely to have on company earnings. Allan Gray do however continue to favour a relatively high exposure to domestic shares. The fund manager's will also endeavour to increase the offshore component of the portfolio if and when regulations allow them to do so.

During May the domestic stock market, in line with international markets, recovered from very over sold levels. The fund benefited from this. With the revision of the inflation numbers, domestic bonds also appreciated strongly. Despite these rallies, prospective long term returns for an investment in domestic shares are not only attractive in their own right, but are also decidedly more attractive than returns offered by bonds. Substantial potential declines in domestic interest rates should also be supportive of share prices, while bonds seem to discount these declines. The fund manager's are therefore continuing to favour relatively high exposure to domestic shares.

Stockmarkets around the world continued to decline. The South African stockmarket did not escape. With approximately 66% of the fund invested in equities, it has declined 8.19% year to date. The prospective long-term returns offered by SA shares are increasing in their attractiveness. On both an absolute basis and relative to domestic bonds, the fund manager's find numerous shares that offer very exciting value. While current year earnings for the market are likely to be subdued because of the strong rand and persistent high interest rates, the longer term growth prospects are excellent with domestic interest rates having significant downside potential. The fund manager's are therefore increasing the fund's exposure to domestic shares.

Stockmarkets around the world continued to decline during the first quarter of 2003. The South African stockmarket did not escape. With approximately 65% of the fund invested in equities, it declined 8.8% during the quarter. The prospective long-term returns offered by SA shares are increasing in their attractiveness. On both an absolute basis and relative to domestic bonds, the fund manager's find numerous shares that offer very exciting value. While current year earnings for the market are likely to be subdued because of the strong rand and persistent high interest rates, the longer-term growth prospects are excellent with domestic interest rates having significant downside potential. The fund manager's are therefore increasing the fund's exposure to domestic shares.

The sell off in equity markets around the world continued in February. The JSE did not escape the carnage and on the back of a strong rand declined 4.5% in February, bringing the year to date losses to 9.4%. With ±65% of the fund exposed to equities, the Allan Gray Balanced Fund declined 3.0% in February resulting in a year to date loss of 4.4%. Although the funds shares declined less than the market, absolute losses are never a pleasing result. In this respect the fund manager's should re-iterate that the fund has longer-term investment horizon, and that short-term losses should be expected from time to time. From a longer-term perspective the fund manager's are now even more convinced of the attractiveness of the shares in the fund and of acceptable future returns.

The widely expected stockmarket strength over December/ January ( the January effect) failed to materialise and most stockmarkets declined over this period. The SA market was down 5% in January. Adjusting for the fund's relatively large distribution in January, the Allan Gray Balanced Fund was only down 2%. This illustrates the downside protection an investor gets from the fund's asset class diversification and the fund's shares' underlying fundamental value. Although the short-term gyrations of the stockmarket will impact on the fund's shares, the fund manager's believe the fund's assets offer sound fundamental value and are likely to produce acceptable returns over the longer term.

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 during 2003. 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.