The money market curve continued its rally during the month, led by the shorter end of the curve. The 12-month NCD rallied 0.9% during the quarter to yield 8.75% and the 3-month NCD rallied 1.35% to yield 9.05%. Similarly, the bond market rallied with the short dated R150 rallying 0.98% to yield 8.43% and the benchmark R153 rallying 0.43% to yield 9.11%. The rally was driven by the 1% interest rate cut in September. The South African Reserve Bank caught the market by surprise by calling an extra meeting in September, one month before the scheduled October MPC meeting, effectively cutting interest rates sooner than expected. The fund remained long the cash benchmark throughout the month, and as a result, benefited from the rally. Bond duration was reduced during the month.

Going forward, we believe that inflation and interest rates will continue to fall, but will bottom towards the end of the year. On both the bond and money market curves, we expect some further short-term strength as the market becomes over optimistic on interest rates. We will lighten duration into this strength. Strategically, we remain more cautious as we expect yields to begin to rise next year.

The money market curve rallied sharply during the second quarter, led mainly by the long end of the curve. The 12-month NCD rallied 2.9% during the quarter to yield 9.9%, and the 3-month NCD rallied 1.85% to yield 11.4%. The rally was driven by the correction of the CPIX data, which enabled the SARB to cut interest rates by 1.5% at the June MPC meeting. The cut in official interest rates was larger than the market had anticipated, but in-line with our expectations. As a result, the fund was long duration and extremely well positioned ahead of the rally.

The fund also benefited from its increased bond exposure to short and medium dated bonds. The benchmark R153 rallied 1.10% and the R150 rallied 2.09% over the quarter.

Although we believe that inflation and official interest rates will continue to fall sharply, we feel that the market has become overly optimistic on interest rates in the short term. We used this optimism to shorten our cash duration slightly, and significantly reduced our bond exposure at the end of June. Going forward, we will remain long the cash benchmark into year end as interest rates and inflation continue their downward trend, but will adopt a more cautious stance on the bond market.

The money market curve remained remarkably stable during the first quarter with yields edging down 0.10% during the period. The year started optimistically, with the market largely discounting the first rate cut in March.

Despite the spate of positive inflation and monetary data over the past three months, the SA Reserve Bank adopted a cautious stance and kept rates on hold in March. The positive tone of the committee's statement has reaffirmed our conviction that the first official interest rate cut will occur in June. The market has thus moved in line with our forecasts throughout the quarter, as market expectations of the first rate cut were pushed back to June.

Over the quarter, only the medium dated area of the bond curve rallied, while the long and short ends remained stable. The bond exposure on the portfolio was increased by approximately 4.5% during the quarter, largely through an increase in the weighting of the medium dated R153 bond.

The fund was well positioned with the duration of the fund substantially extended during the period.

Going forward, we remain positive that inflation will fall sharply, enabling the SA Reserve Bank to cut aggressively in the latter half of this year, and for money market yields to rally. This view is underpinned by the performance of the rand, which has remained remarkably strong.

We are now long the benchmark and will continue to lengthen the duration of the fund ahead of the expected June rate cut. We still expect bonds to outperform cash over a six-month time horizon, and will increase the bond weighting into any weakness.

In contrast to the first three-quarters of the year, money market yields rallied strongly during the last quarter of 2002. The longer end of the money market yield curve led the rally with the 12-month NCD rallying over a full percentage point for the quarter. Likewise, the bond market ended the year on a strong note. The sharp rally in bonds was led by the R150 government bond, which rallied 1.41% during the final quarter. The fund was relatively well positioned for the rally as we extended the duration of the fund, and added to the bond weighting during the period.

Currently, we believe that the market is fairly optimistic. Investors, forecasting that we have reached the peak in inflation and interest rate cycles, are starting to price in the SARB cutting the repo rate as soon as March 2003. The rand has played a large part in the positive sentiment. It has gained all that it lost in last December's currency crisis and was the best performing currency vs. the dollar in 2002.

Although, the strong rand will give the SARB more room to cut interest rates, we believe that they will err on the side of caution, with the first cut probably only occurring in June 2003.