Bonds generally lost ground in October as stockmarkets rallied. The sharpest of the bond markets' declines were largely recouped by the end of the month, however, as press speculation and weak US data renewed conviction that the Federal Reserve would act sooner rather than later to cut interest rates. For the month as a whole, the global bond market fell 0.5% despite a strong rally in the final week. The US was the laggard, as yields rose on long dated bonds. The fund is principally invested in short dated bonds and these tended to fare better as the almost universal view now is that a cut in US interest rates will be announced following the November 6th FOMC meeting. Unemployment and ISM data due for release later today will probably determine the final decision. If the data is very weak, a 50 b.p. cut cannot be ruled out, but overall 25 b.p. looks more likely. This should be a positive for the market, particularly if the UK and Europe follow suit when their own central banks meet the next day. Cash in the portfolio is at a low level of just under 2% accordingly.

The distribution for the quarter ending September 2002 was 6.4344 cents per unit. Yet more equity market weakness translated into further gains for bond investors in September with the JP Morgan Global Government Bond index again returning more than 1% over the month. The US was again the strongest performer, as concern focuses on the corporate sector and the sustainability of the increasingly anaemic economic recovery. White House rhetoric regarding intentions towards Iraq kept the "safe haven" premium intact in addition, prompting yet further falls in US bond yields which have now reached levels last seen in 1958 - when Dwight Eisenhower was President. Unless the world is heading into a period of deflation, the recent bond rally looks increasingly like a bubble waiting to burst with 5 year Government bond yields down to 2.6% and 10 year yields down 3.6%. Although the economy is performing less well than forecast, this type of movement appears extreme. The Federal Reserve again chose not to cut rates - suggesting it, too, sees little prospect of deflation an argument reinforced by the fact that the differential in yields between conventional and inflation proofed bonds has remained broadly constant throughout. Clearly the market remains risk averse and our bias remains very much at the high end of investment grade.

August proved another strong month for bonds as economic data suggested that the global economy may endure a more protracted period before recovering. The US Federal Reserve, however, chose not to cut rates, albeit that it has left its options open with regard to the next meeting scheduled for 24 September. Indeed rates look likely to remain on hold in most major markets until economic data either improve or deteriorate from here. Overall the Global Bond market has returned 2% in US dollar terms in August. Longer dated bonds have generally been the best performers on this occasion. Sweden and Canada both benefited from firmer currencies whereas UK Gilts provided the best performance in Sterling terms. September and October look likely to remain trying times for economies and stockmarkets, particularly with the prospect of a potential action against Iraq in the background. Accordingly the near term outlook looks likely to remain supportive for bonds.

Bonds benefited from a continued flight to safety in July, with the JP Morgan Global Government Bond index returning 1.37% in local currency, although this was reduced to 1.1% when measured in USD terms, as the dollar recovered some lost ground against the euro and the yen. The UK proved the strongest performing market, as sterling remained firm. Generally short dated bonds again performed well as the market became ever more convinced that the collapsing stock market would prevent Central Banks from raising interest rates. Indeed the latest GDP data in the US was so weak that it has re-ignited speculation that the Fed may have to cut rates further. This still doesn't appear the most likely scenario, but cannot be ruled out given the latest economic readings. Ultimately, it looks like the equity market holds the key. The more stocks fall, the more bonds benefit. Eventually, this will come to an end. Its not yet clear whether this weeks rally will lead to a more stable period for the stock market, but it has been sufficient to cause bonds to retreat from their very best levels a week earlier. In respect of the Fund, the fund manager's have increased the fund's non US dollar exposure by increasing other dollar bloc currencies, principally the Canadian dollar but also latterly a moderate weighting in Australian dollars, both of which confer a yield advantage relative to the US.

Despite some profit taking at the end, the month of June 2002 has proved a decidedly profitable time for bond investors as cash has fled the uncertainty of equity markets in favour of the safe haven of the bond market. Not surprisingly, bonds issued by telecom companies have been a noticeable exception to this as have a number of higher yielding sectors where fears of default have intensified. The fund's bond holdings remain focussed towards the very highest credit ratings and the fund manager's have therefore avoided any such problems to date. In the current climate of uncertainty, the fund manager's intend to continue this cautious approach. The fund's euro exposure has proved a marked positive this month as, to a lesser extent, has sterling as the dollar has continued to weaken from its previous lofty levels. The fund manager's anticipate retaining the fund's non US dollar currency diversification and may well look to add exposure to other dollar bloc currencies at the expense of the greenback in due course. Looking ahead, the Federal Reserve looks increasingly unlikely to raise interest rates in the coming quarter - indeed the first rise may be postponed until the year end. This should lend support to bonds of short maturity, albeit that economic data remains positive on balance. At present sentiment rather than economics is driving market movements and whilst equity markets remain under pressure, bonds should benefit. Should equity markets regain composure, however, some of the bond market's recent "flight to safety" gains may well be given up.
The distribution from the fund for the quarter was 5.29 cents per unit. This is down from quarter one as a result of a far stronger rand during quarter two.

Instability in the Middle East & Asia has certainly added to the safe haven attraction of bonds over the past month. In the current climate of uncertainty the prospects for an early interest rate hike from the US Federal Reserve are rapidly reducing to a very low order of probability and even August 2002 may now prove too early. That has prompted some buying of short dates in particular. The effect on the dollar, however, has been rather different. Signs are increasing that the dollar's strength over the past few years may have come to an end, particularly vs the euro where the fund managers' have retained the funds exposure. Politics aside, economies continue their relentless recovery and even though the timing of the first interest rate rise may have been postponed - it is only a case of postponement rather any fundamental change in outlook. Accordingly, in the absence of greater escalation of events in Asia and the Middle East, bonds may weaken as the summer progresses.

Unrest in the Middle East combined with the realisation that interest rates are unlikely to rise in the immediate future led to some recovery in global bond markets during the month of April 2002. The J P Morgan Global Government Bond index was up 1.3% in local currency terms with best performances recorded in the United States, where fears of imminent interest rate rises had been the most acute. In terms of currencies, continued evidence of weakness at the corporate level in the US economy served to weaken the Dollar, which fell against all major currencies including the Euro and Sterling. Weaker equity markets, too, heightened the safe haven appeal of government bonds. Having originally anticipated the US Federal Reserve would begin increasing US interest rates in May 2002, consensus has gradually deferred expected timing of the first interest rate rise to August 2002. This has permitted a rally across most maturities. In the corporate sector, however, telecommunication bonds have again come under pressure with Worldcom the most high profile casualty. Whereas high quality corporates continue to benefit from the improvement in the global economy, caution is still warranted and our bias towards the highest credit quality issues remains unchanged.

Bond markets have continued to remain depressed by the positive economic data flowing from the US. Where figures diverge from consensus expectations, it is usually on the upside. Alan Greenspan's testimony to the Senate was notably more positive than that he had given two weeks earlier to the House of Representatives reflecting these improving fundamentals and, correspondingly, the Federal Reserve announced that its expectations were now neutral when previously they continued to favour lower rates. Europe and the UK are also seeing improving economic news. The bottoming of the interest cycle coupled with above consensus economic news has led to some concern that interest rates may rise higher and quicker than previously expected. Central banks, however, sought to reassure investors that they are in no hurry to raise rates which markets have interpreted to mean that there will be no rate rises are until the middle of the year. Whilst there remains little evidence of inflation, market expectations for interest rates, may well be overly pessimistic. With yields rising in recent weeks it now appears more appropriate to look to invest further the high cash position that has built up in the fund, primarily into short to medium dated dollar bonds.

The Marriott Global Income Fund is largely invested in bonds with short dated maturities which have proven to be a haven of relative safety while benefiting from falling interest rates. Just over half the fund is denominated in US Dollars with the balance being in Euro's and Sterling.