The bond market had a very benign quarter and as some inflation returned (due to higher oil prices) we saw bonds underperforming cash. The price action during the quarter was not as quiet as the performance suggests. The bond market started on an aggressive note as Rand strength returned and we saw the exchange rate trade down to R6.25/ US Dollar, which pulled the bond yields down to historic lows (high in price) as the market started expecting a further interest rate cut. This positive sentiment for interest rates was short lived as the oil price spiked to above $70.00 a barrel and brought inflation fears back to the bond market, resulting in higher yields across the yield curve.

The global environment continued to put upward pressure on yields as the Federal Reserve continued to hike rates. Hurricane Katrina caused oil prices to spike and as a result there were fears that global growth would be adversely affected which resulted in a brief rally in bond yields. The bigger concern, however, is that inflation will continue to rise and thus global yields have risen in the latter part of the quarter.

The Rand has remained very stable over the quarter, despite all the uncertainties, which has taken some of the pressure off the higher oil price. Other commodities (especially Gold) continued to rally, supplying underlying support for our currency. We see the Rand continuing to trade around current levels for the remainder of 2005.

Bonds should continue to have a weaker bias as global inflation fears cause central bankers to consider interest rate hikes. We don't expect any hikes in SA this year, but we do expect the MPC to express their concern over rising inflation and very high credit growth in the economy. There remains a chance that the MPC will hike rates in the 1 st quarter of 2005. We will be closely monitoring the inflation numbers over the next few months as this will be the key to the direction of interest rates. The bond market has started pricing in some of the inherent risks, but we feel there are still more upside (in yield) risks to the market. We are thus maintaining our underweight duration position in the funds.

Despite evidence of somewhat stronger US growth and a more hawkish Federal Reserve Board stance with regard to short term interest rates, long term interest rates fell over the month. 10 year US Treasury Bond yields fell from 4.22% to 4.13%. Of greater significance was the US Dollar's rally which saw it rise by 4.1% against the Euro and by 5.4% against the Rand.

The fund remains defensively positioned in terms of duration and is fully exposed to the US Dollar.

The US Dollar rally which commenced at the beginning of the year has continued into February. Initially, it could be explained as a correction of a technically oversold position but there are now some straws in the wind that point to a further corrective move. Firstly, the Federal Reserve Board appears to be determined to get on with the business of normalising US short term interest rates in order to prevent an unhealthy build up of speculative pressures encouraged by negligible real interest rates. Low real interest rates have provided a strong disincentive to hold US Dollars. Secondly, there are some signs that the US current account deficit, although wide, is no longer deteriorating further. Growth elsewhere in the world is picking up and the depreciation of the US Dollar that has occurred since February 2002 can be expected to feed through with a lag. Thirdly, and most importantly the Bush administration has identified US budget deficit reduction as a key issue for his second term. While it remains to be seen whether he will be able to overcome the various political hurdles to achieve a meaningful reduction, at least the balance of probability has shifted. Despite the popular belief to the contrary, the behaviour of the US fiscal deficit has traditionally been a better indicator of the behaviour of the US Dollar than the current account deficit. Finally, even after its recent rally, the US Dollar remains oversold. Consequently we believe that the US Dollar correction has further to run the extent of which will be determined by the degree of improvement at a fundamental level.

Despite evidence of somewhat stronger US growth and a more hawkish Bonds rallied strongly in April buoyed by weak equity markets and concerns about economic growth. This was part of a general pattern of increased risk aversion which saw both emerging and corporate credited spreads widening. The US Dollar had little change against European currencies but weakened by 2.5% against a stronger Yen. The fund remains defensively positioned in terms of interest rate and credit exposure and retains a bias towards the US Dollar. On balance we have become slightly less negative about bonds given recent growth and inflation dynamics but still cannot see great value at current levels. We continue to believe that the US Dollar remains in a corrective phase supported by widening interest rate differentials and some improvement in the US fiscal position.

US bond yields continued to move up in March. The Federal Reserve Board increased short term US interest rates for the seventh time in a row taking them back up to 2.75% as part of an unchanged policy of measured interest rate normalisation. This came against a background of generally strong economic growth releases and some indications of an uptick in inflation. The US ten year Treasury bond yield rose from 4.27% to 4.49% over the month, which accounted for most of the rise in yields over the quarter of 27 basis points.

Corporate and sovereign credit spreads also widened sharply over the month having compressed to very narrow levels, reflecting renewed investor risk aversion. Having dipped in February, the US Dollar rebounded in March, rising by 2.8% and 2.3% against the Yen and Euro respectively. On a year to date basis the US Dollar is up by 4.3% against both of the former and it has risen by 1.% in Sterling terms. We retained a US Dollar centric currency stance over the quarter and reduced credit exposure into strength. The overall duration of the portfolio remained defensive.

Despite a modest setback in February and talk of Asian central banks selling US Dollars, underlying factors are continuing to move in the latter's favour. We realise that this is hardly a consensus view, but the bears amongst you - and we still are in the same camp on a longer term basis - should try to consider where we are in the US Dollar's bear market cycle objectively.

Having been extraordinarily unsupportive, US short term interest rates are finally going up in both nominal and real terms. 12 month US Dollar Libor has moved up from 3.12% at the end of December to 3.85% currently, having troughed at 1.05% in June 2003. It was 1.32% a year ago. Recent US data points to a reacceleration in the economy with consumer spending remaining solid, supported by positive income growth and firm property and equity prices and capital spending improving. Such a background will allow the Fed to go on raising rates to more supportive levels in real terms. Longer term rates have remained relatively stable but spreads relative to long term rates have moved decisively from positive to negative. The critical US fiscal position is improving and the chances of political action on this front have increased. Although the short term technical oversold position which was extreme in December has unwound, strategically, private sector investors remain bearish and central scenario suggests that this bearishness is likely to be tested. Our view on bonds is unchanged and our patience is finally being rewarded. Long term rates are still too low in our view and we intend to remain on the sidelines in line with our cautious remit.

The concerns about weaker US economic performance that had dominated bond markets in the summer months began to ease in October. Oil prices subsided having hit a peak of $55 per barrel and US employment growth appeared healthier than originally appeared to be the case. 10 year US treasury bond yields rose from 4.13% to close the quarter at 4.3% - only modestly higher than where they began the year at 4.25%. By contrast equivalent European bond yields continued to decline over the quarter from 3.87% to 3.69%, effectively decoupling from US long term interest rates. This stemmed primarily from strength against the US Dollar and other major world currencies which caused investors to downgrade growth and interest rate expectations. Movements in long term interest rates were overshadowed by developments in currency markets. Having rallied modestly since its low point in February it weakened sharply in the fourth quarter against other major and minor currencies. The Euro and the Yen strengthened by 9.4% and 7.6% respectively and were up by 7.8% and 4.6% for the year as a whole. The Rand was again strong, advancing by 14.9% in US Dollar terms in the final quarter and by 18.5% over the year as a whole.

We maintained a defensive stance with regard to interest rate exposure believing that at current levels bonds offer poor value in the great majority of markets reducing bond exposure further. We cut back US Dollar exposure in favour of Euros but reversed that position in December given the speed and extent of the US Dollar's fall, which had taken it into severely oversold territory.

Although the US Dollar ended the year close to its lows the current bearish consensus was clearly fully priced in. Somewhat controversially, we moved the Investec Global Opportunity Income Fund back into the currency and so far in 2005 this has been justified by the beginnings of a sharp bear squeeze which has reversed c.50% of the fourth quarter move in a matter of days. It is perhaps worth noting that in the 1985 - 1995 US Dollar bear market 85% of its decline in real terms had occurred by 1998 and it ceased to become a 'one way bet' after that. Better opportunities to reduce the fund's US Dollar exposure will present themselves later in 2005. We remain strategically bond negative. 2004 was frustrating for bond bears given the extent of the rally in the summer months. Global growth prospects look positive and interest rate 'normalisation' is likely to characterise 2005.