The domestic economic environment provides us with a favourable departure point. Government and private finances are in good order, confidence is returning, interest rates are in a declining trend, and the rand has been stable and strong (possibly too strong). Overall, this creates a very good platform for equity and bond markets. However, the major risk remains the action of global markets and, as a result, the fund is at the midpoint of the fund manager's long-term asset allocation tolerance rather than at maximum exposure.

Over the period, the bond market has been volatile, but SA bond yields have continued to benefit from a cyclically lower domestic inflation outlook and healthy fiscus. Yields are closer to normal now, and the fund manager's are wary of the effects of reflation on global bond yields. The funds bond exposure (and its duration) is presently a little below what the fund manager's would consider the longer term average.

The fund manager's continue to seek shares that offer company-specific rerating and growth wherever possible -a policy which has stood the fund in good stead throughout the year. In this last quarter, the fund benefited from holding Impala Platinum, Kersaf, AECI and African Bank (amongst others). The fund also did well to avoid significant exposure to the likes of Sappi, Old Mutual, Liberty and Liberty International. The fund manager's still see significant upside in shares like Venfin, Remgro and SAB Miller although, as yet, these stocks have not contributed greatly to overall performance.

The fund is underweight gold shares where the effect of the strong rand has been largely ignored. The fund manager's see gold benefiting from a weaker dollar and general currency volatility, but are not bullish on the medium-term demand and supply fundamentals for the metal. At current prices, gold fabrication demand is exceeded by mine supply and scrap sales, and the move in the price is now beholden to less forecastable factors such as producer hedging behaviour, central bank sales, bar hoarding and investment demand. In conjunction with earnings and dividend pressure induced by the strong rand, the fund manager's feel the balance is stacked against good returns from SA gold shares at this point. Short of a total collapse of the global monetary system, the fund manager's see better value elsewhere in commodity shares, especially Impala Platinum.

In general, the pricing and outlook for quality South African blue-chips (major banks like Standard Bank and Absa, and industrials like Bidvest, AVI and Tiger Brands) remains compelling. Forward dividend yields on a host of shares offer returns competitive with after-tax cash yields, and the fund manager's will continue to focus on this certainty in the face of global volatility.

Sentiment in global financial markets buoyed over the quarter on the successful conclusion to the Iraqi war, better than expected corporate earnings in the US and the containment of SARS. As a result, the local equity market staged a significant recovery with the All Share index gaining 9.7%. Leading the turnaround were financial shares which rose by 17.6%, followed by industrials with a return of 14,3%. At the other end of the scale were resources with a return of 2.6%. The bond market continued its strong run on the back of the downward revision in inflation numbers, with a return of 6.7% from the All Bond index.

Within the financial sector, banks were the greatest beneficiaries of the improved outlook for interest rates and CPIX, producing a very healthy 18.7% for the quarter, and 6.4% year to date. The greatest returns within the industrial sector were from shares exposed mainly to the SA economy and therefore not dependent upon a weaker currency for earnings. Retail stocks performed exceptionally well, with Foschini returning 24,6%. The telecommunications sector rose 37.1% as Telkom issued maiden results well ahead of expectations, and MTN posted a good set of results boosted by strong earnings from Nigeria.

For the quarter the Balanced Plus Fund returned 10,2%, driven by equity and bond returns that were ahead of their respective market benchmarks. Contributing to performance was a further reduction in resources holdings (Anglo American and Billiton) and an increase in the weighting of banks (Absa). Furthermore, the large increase in bond exposure taken in the first quarter was vindicated as yields moved to the 9% level.

The fund managers remain optimistic regarding the prospects for the local equity market, although the next quarter does present some headwinds in the form of a tougher domestic economic environment and expected consolidation phase in global equity markets.

The valuations of financial shares remain attractive with the fund manager's favoured picks being Standard Bank (diversified earnings), Absa (low comparative valuation), Sanlam and New Africa Capital (significant discount to embedded value). Within the industrial sector we see value in Rembrandt (positive developments in tobacco litigation), SABMiller (attractive valuation relative to its peers/market overly sceptical on US operations), Barloworld (strong growth in earnings in 2004), Venfin (trading at 30% discount to net asset value and providing access to Vodacom which is very undervalued) as well as Tiger Brands (continued focus on profitability of its operations and growth from Spar).

While the rand is expected to depress short-term results for resources, we remain positive on the long-term prospects for platinum shares given a positive demand outlook for the metal driven by its use in jewellery and auto-catalytic converters. Despite the profit warning issued by Sasol we believe that, on a longer term, view the stock is attractively priced (possible recovery in chemical margins and potential in gas to liquid projects).

Domestic economic fundamentals should remain supportive of the bond market for the remainder of the year. Although at current levels yields are already discounting a fair amount of this optimism. When balanced against the risks of possible vulnerability in international debt markets, as well as domestic supply concerns, bond yields are starting to approach levels where they appear stretched on a fair value basis.

The past quarter was characterised by volatile and weak equity markets, both globally and locally. The advent of the war in Iraq combined with weaker than anticipated global economic news subdued already fragile financial markets across the globe. For the year to date, similar to 2002, the best local performing asset class was the bond market (up 5%), followed by cash (up 3%), while equities were down 16%. Within the local environment, the economic trend, while anticipated to slow, remains resilient.

The fund manager's maintain that while an economic recovery may become evident towards the end of 2003 and into 2004, the scope for disappointment is high. Equity markets, although lower this year, still reflect ratings that are too finely priced. Earnings growth expectations do not justify such price levels. Should the war end swiftly, the case for a relief rally may be possible, but we do not believe that it will be sustainable in the longer term. For a strong sustainable rally, a significant improvement in growth prospects is required.

Within the local economy, the focus remains on the currency, inflation and interest rates. The outlook for the currency in the shorter term remains positive, but the fund manager's do anticipate some weakness by year-end. Inflation is anticipated to decline significantly this year, leaving the scope for interest rates to decline in the second half of the year. The fund manager's anticipate at least two percentage point cuts by the end of the year.

Against this environment, the funds equity performance was satisfactory in relative terms. Stronger performance from the banking sector, telecommunication stocks and select industrial shares such as Bidvest and SAB contributed favourably. However, a higher exposure to platinum shares, impacted by both the Money Bill and a strike action at Impala, detracted from overall performance. An increase in duration and exposure to the bond market proved to be the correct decision.

In an environment of lower inflation and interest rates, reasonable economic growth and compelling valuations, the fund manager's remain convinced that the SA equity market is undervalued and poised to rerate as soon as the global environment becomes more benign. Interest rate cuts, healthy Government finances and strong consumer balance sheets all bode well for a solid economic outlook and provide confidence for better local equity market returns. The bond market should also benefit from the positive newsflow in the short-term and is currently preferred ahead of cash. Stock selection will remain the fund manager's core focus to provide superior performance over time.

The key features of the past quarter were the strong rand (the antithesis of the same period last year) and poor global equity markets, resulting in a weaker local equity market. For both the quarter and the year ended December 2002, the best local performing asset class was the bond market which was up 16% for the year, followed by cash which was up 12%, while equities were down 8% . Within the local environment, the resilience of the economy continued throughout the year, resulting in numerous earnings expectations being surpassed.

Within the international arena, 2003 has started on a positive note, with expectations of better growth prospects in the second half of the year. While the fund manager's expect the US economy to grow this year, the extent of the recovery will disappoint. The fund manager's remain of the view that equity market ratings are high thus, despite significant weakness over the past year, the fund manager's believe that there is still more to come.

Within the local economy the focus remains on the currency and interest rates. The outlook for the currency in the shorter-term remains positive, but we do anticipate some weakness by year-end. Inflation is anticipated to decline significantly this year, leaving scope for interest rates to decline in the second half.

Clearly the fund did not escape the impact of the firmer currency on the rand hedge stocks, however, stronger performance from select gold, industrial and financial shares contributed favourably to performance. While the fund's bond exposure was relatively low, through certain trading opportunities the fund outperformed the All Bond index.

In an environment of lower inflation, interest rates, reasonable economic growth and compelling valuations, the fund manager's believe that the preferred asset class for 2003 is the local equity market. The bond market should also benefit from the positive news flow and is currently preferred ahead of cash. Stock selection will remain the fund manager's core focus to provide superior performance over time.