Following a particularly severe sell off in July and August, bonds rebounded strongly in September. By way of illustration, 10-year maturity US Treasury bonds rose from 3.5% to 4.6% before falling back to 4.2%. Other government bond markets followed a similar pattern with the exception of Japan where the bond market remained under pressure as deflationary pressures eased. Higher yielding corporate and sovereign bonds continued to perform as investor risk aversion reduced further. The Merrill Lynch Global High Yield Index rose by 2.9% in US dollar terms and the JP Morgan EMBI + Index rose by 2.4% compared with a decline of 1% registered by the JP Morgan US Government Bond Index. Earlier US dollar strength ebbed as a sharp advance in the Yen post the Dubai G7 Meeting caused more generalised selling.

Portfolio positioning was little changed over the quarter. Despite the bond market rally in August we continued to believe that government and investment grade corporate bond yields have entered a cyclical bear market that is reflected in a very defensive interest rate posture. Credit exposure remained at approximately 15% with an increased emphasis towards the better value corporate high yield sector. Currency exposure remained US dollar biased, although this stance shifted post G7 with a reintroduction of an Australian Dollar Money Market exposure.

Looking ahead, it remains our view that the August rebound in bond markets was a technical rally against a negative medium term run trend. Inflation may well remain subdued, but increasing risk appetite amongst investors and rising fiscal imbalances are likely to cause real rates to move into cheap territory at which point value would have been restored. The sharp weakening of the US dollar is consistent with a continuing US dollar bear market, and we will actively seek opportunities to reduce exposure further. Credit markets should benefit from increasing investor risk appetite, improving credit ratings and declining default rates in the context of high yield corporate debt.

The decline in bond market yields over the quarter was particularly unusual in that it accompanied a sharp rise in equity markets. US 10-year Treasury bond yields fell by 32 basis points to end the quarter at 3.5%, while Euro 10-year Government bond yields fell by approximately 26 basis points. The decline over the quarter marked a potentially significant turning point in the first half of June, which saw US Treasury bond yields make a new cyclical low before rising sharply. This reversal has continued into the current month, which has left 10-year US bond yields higher than they were at the start of the year.

The US dollar weakened against the Euro by 5.2% over the quarter, however, a strong advance in April and May was followed by a reversal in June, which saw the Euro pull back from a US dollar/Euro rate of close to 1.20%.

While we did not anticipate the burst of bond market strength in May, we used the strength to further reduce government bond exposure and overall duration in line with our current defensive stance with regard to long-term interest rates. Higher yielding bond exposure was increased over the quarter given our belief that corporate and emerging bond market spreads have significant scope to fall as default rates fall sharply. Non US dollar currency exposure was significantly reduced so as to take profits and position the fund for a corrective US dollar rebound.

While we expect short-term interest rates to remain at 'emergency' levels in the United States until the recovery is firmly established, we continue to believe that longer dated bonds are likely to suffer as evidence of an emerging reacceleration in growth builds in the United States.

At the moment, given the fund's total return focus, we are content to remain very liquid in expectation of good opportunities to rebuild fixed interest exposure later in the year. In the meantime, the corporate high yield bond area should continue to offer attractive returns as stronger prospective growth and low interest rates continue to reduce investor risk aversion. In the near term we anticipate a further recovery of the US dollar from an extremely oversold position, which will present better opportunities to set up short positions in line with a strategically negative view of that currency.

As with equity markets, bond markets remained volatile over the first quarter. Yields plunged in late February and early March, touching the October 2002 lows before rising sharply thereafter at the onset of the conflict in Iraq. Overall US ten-year Treasury bond yields were unchanged over the quarter at 3.8% generating a return of 1.0%. Euro government bond yields were lower over the quarter with ten-year Euro government bond yields falling by 16 basis points to 1.04%. Continental European economic releases were almost uniformly gloomy prompting the European Central Bank to cut official rates by 25 basis points in March. Higher yielding bonds continued to stabilise decoupling from weak equity markets and generally outperformed government bonds of equivalent maturities. The US$ generally weakened over the quarter falling by 9.0% against the rand, by 6.8% against the Australian Dollar and by 4.0% in Euro terms.

We remain concerned that risk premia on Government bonds in the major markets are low, and that a relatively cautious stance remains appropriate given the fund's total return orientation. Corporate high yield bonds have continued to perform - despite equity market weakness - and this decoupling encourages us in our view that the sector is cheap and offers good potential. A relatively short war could result in a further retracement in government bond yields. However, the world economy remains brittle and too dependant on sustained US consumer spending on the one hand and disinflationary pressures remain intense in many economies on the other. In short, material set backs in bond markets probably represent opportunities to re-engage.

Finally, the US Dollar had clearly become oversold and a further correction is possible in the near term. Strategically, we remain US Dollar negative but believe that there will be better opportunities to increase the Fund's non-Dollar exposure.

The 4 th quarter witnessed considerable bond market volatility. Bond yields generally rose sharply in October and November as equity markets rallied, but fell back in December as growth and equity market concerns resurfaced. The US Federal Reserve Board cut the Federal Fund's rate by 0.5% in November to 1.25%. This move was followed by the European Central Bank with a cut of similar magnitude, which took Europe's key refinancing rate to 2.75%. Ten year US Treasury bond yields fell to 5.16%, a decline of 14 basis points on the quarter. 30 year US Treasury bond yields actually rose by 11 basis points reflecting a steepening of the yield curve. Ten and thirty year government bond yields fell by 7 and 11 basis points to 4.2% and 4.8% respectively. Currency developments were somewhat overshadowed by the sharp appreciation of the rand against all major currencies. It rose by approximately 22% against the dollar over the quarter and by close to 40% over the calendar year as a whole.

Over the quarter, the euro appreciated by 6.2% against the dollar, most of which occurred in December. Higher yielding corporate bonds lagged the equity market rebound in October but performed strongly in November and again delivered positive performance in December despite the set back in the equity market.

The fund's exposure to government bonds was reduced during the quarter, given our view that yields offered relatively little protection against a strengthening of global growth from the depressed consensus levels

Conversely, exposure to the high yield corporate sector was increased given the value offered by the sector. In December, the fund's dollar exposure was reduced in favour of both euros and Australian dollars. The Australian dollar is a cheap currency offering reasonable and potentially rising short-term interest rates, with an embedded option on world currency. As with other asset classes, the outlook for 2003 from a currency and bond perspective is particularly cloudy. We continue to expect that growth will remain positive, but weak by comparison to past recoveries and inflation lows. With the possible exception of Europe, short-term interest rates are probably at, or close to their low points. This suggests that bonds are likely to range trade unless there is a further bout of chronic equity market weakness. Corporate bonds, particularly at the lower end of the credit spectrum, are likely to perform well after a particularly dismal 2002 which marked the fifth year of the latter's bear market cycle. We are likely to add to the fund's exposure as wereceive more confirmation of this trend.

From a currency perspective, we believe that there is more scope for the dollar to fall against other world currencies. There are likely to be periods of sharp recovery given the less than compelling positives for alternatives, such as the euro, and the likelihood that the US economy once again is likely to lead any durable reacceleration of economic growth. All in all there will be adequate opportunities for the funds to generate attractive total returns measured in US dollars, with moderate risk levels from a flexible investment approach.