Bond yields fell sharply 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, yields are likely to continue to come down, 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 bond yields may rise next year, given the relatively optimistic expectations about inflation and interest rates built into current yield levels. As a result, we expect to reduce duration further into strength.

The fund continues to be managed conservatively with respect to credit and interest rate risks.

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

Bond yields continued to decline sharply during June. The rally was led 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.

Looking ahead, inflation should continue to fall quickly this year. This in turn will allow the Reserve Bank to lower interest rates further, which should result in bond yields coming down over the coming months, although the rally is now quite mature.

The fund continues to be managed conservatively with regard to interest
rate and credit risks.

Bond yields continued to decline during the first quarter of 2003. The fund was well positioned for such an outcome, with a moderately overweight duration versus the benchmark.

Looking ahead, both inflation and ultimately interest rates are likely to fall by more that 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 cause bond yields to continue to come down over the coming months.

Bond yields fell 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 expect yields to gradually make their way lower and will look to take advantage of any market weakness to increase duration.

The fund continues to be managed conservatively with regard to interest rate and credit risks.