The bond market rallied strongly during September, led by the shorter-dated maturities. The decline in yields was driven by the surprise interest rate cut, the strengthening rand and to a lesser extent a recovery in global bond markets. The fund was reasonably well positioned, but in retrospect, duration was reduced too quickly during the month.

Looking ahead, the market is likely to continue to trade well as long as the rand remains firm. This situation may persist for some time, given that to some extent it reflects a trend weakening in the US dollar. That said, we believe that bonds may be vulnerable to a reversal next year, given the relatively optimistic expectations built into current yield levels. As a result, we expect to reduce duration further into strength.

Investec launched a new B class (retail) on this fund on 1 October 2003.

The bond market continued to rally strongly during June. The rally was encouraged by a larger than expected interest rate cut at the June MPC meeting, following the decision by Statistics South Africa to revise inflation down. The fund was well positioned for the fall in yields, with a moderately long duration stance.

The outlook for bonds remains reasonably constructive. Inflation should continue to fall quickly this year, which in turn will enable the Reserve Bank to lower interest rates further. This should allow the bond market to continue to outperform the money market over the next few months.

The bond market continued to rally during the first quarter of 2003. The fund was well positioned for such an outcome, with exposure concentrated in the strongly performing middle of the yield curve, and a moderately overweight duration versus the benchmark.

Looking ahead, the environment remains broadly bond-friendly with both inflation and ultimately interest rates likely to fall by more than the market currently anticipates.

Our positive inflation outlook sees CPIX coming down towards 5% by late 2003, driven by very soft food inflation and the pass-through of the strong rand to goods prices in general. A June rate cut now seems almost certain, and we expect the SA Reserve Bank to reduce the Repo Rate by 300 basis points by year-end. This should enable bonds to continue to outperform cash over the coming months.

Bonds rallied very sharply during the final quarter of 2002. The rally was helped by the significant appreciation in the rand, which encouraged the market to expect a rapid decline in inflation during 2003. The fund was well positioned to benefit from such an outcome.

The fundamentals are likely to remain supportive for further bond strength despite the low level of yields relative to money market interest rates. CPIX is likely to fall towards 5.5% by December 2003, which will allow the Reserve Bank scope to cut interest rates by perhaps 300bps. In addition, February 2003's coupon flows and index rebalancing should ensure good demand for bonds during the first quarter.

As a result, we are moderately positive about the market and will look to take advantage of any market weakness to increase duration.

We remain underweight the very short and long ends of the yield curve which appear expensive.