This is a medium-risk portfolio which invests in the domestic market only. Fund manager Gail Daniel allowed the equity holding to increase from 60 % to 65,3% in October when the equity market returned 9,8%. But she trimmed back on gold shares, particularly AngloGold, as well as taking profits in MTN and Naspers. Holdings in SABMiller, Investec and Comparex were increased.

Two macro economic events dominated the local investment markets in September. Firstly, the South African Reserve Bank called an emergency meeting, which resulted in a 1% cut in the repo rate. In the last weekend of the month, the G7 held a meeting in Dubai that led to a change in policy with regards to intervention in the foreign exchange markets. The outcome is likely to be a continuation of the US dollar (USD) bear market. Despite a 1% cut in interest rates, the rand strengthened from R7.46 = 1USD at the start of the month to close below R6.94. Whilst we believe that the rand has now reached levels that are hurting the local economy, we do not believe that the USD bear market is over. It is thus difficult for us to see too much rand weakness against the USD. It is interesting to note how that weak USD effect dominated over local rate cuts.

Bonds made a come back during the month, returning 2.7% whilst the JSE All Share Index returned -2.9%. Our equity weighting is just below 60% compared to 61.5% at the end of August. We remain cautious given pressure on earnings growth and extended valuation levels of offshore markets. Our bond weighting is 21.5%. It is interesting to see how muted the response from the bond market has been to the deteriorating local economic conditions and the stronger rand. We maintain that wage settlements in excess of 7% are a concern and that rising unit labour costs will prevent inflation from declining sustainably below 6%.

Within the equity portfolio we remain very underweight in local manufacturers, and although the outlook for the consumer sector is not as strong as it used to be, it is still far more robust than sectors exposed more directly to the stronger currency. Upside from within the equity portfolio came from telecommunications stocks, led by a 9.6% gain in MTN. We benefited from our 3.5% weighting here. MTN announced a positive earnings surprise and we believe the share is worth in excess of R27. Other counters we hold that performed well during the month were Naspers, Netcare and Impala whilst Anglogold disappointed.

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

Bonds led the way again in June, returning 2.4% for the month compared to a -2.2% decline from the equity market. Cash returned 1.1%. Since the start of the year, bonds have delivered 11.8% against -8.2% for the equity market and 6.9% for cash. This vindicates the more cautious stance we adopted since running the fund in February. The key question obviously, is what do we expect for the next six months?

Well, we still think the US market is very expensive even though growth for the second half of the year is being borrowed from 2004. We still do not believe in the US dollar, although the Euro is not particularly attractive either. We remain with our preference for the higher yielding currencies such as the Australian dollar and the rand. We also do not believe that the local equity market is pricing in the current rand (or anywhere near it). Consequently, although bond yields have moved a lot lower, we are still nervous about equities, although within the equity markets there are certain sectors and shares that excite us.

The improved inflation outlook for South Africa has yet again rendered cash an attractive asset. Indeed, the cash we locked in at 12.5% for 12-months will deliver investors a very attractive real return. It may well prove to be unattractive on a relative basis, time will tell, but on a real basis we are confident.

Over the last month our lower equity weighting at around 52% served to help the portfolio in very turbulent markets. The climate for equities is dogged by geopolitical uncertainty, which is resulting in currency turmoil and reduced international consumer confidence. On top of this, valuation levels in the US equity market are still stretched. Whilst the South African equity market is trading on less than 10 times earnings, it is the earnings outlook that is causing grave concern. With valuation levels attractive across the board, the scarcity in the market is now earnings growth. Our trading over the month reflects this theme as we sold where we are less confident on earnings, and bought into those companies with more secure earnings growth. With the rand below R8=1US$, we have tended to sell rand hedge shares and buy into local companies where they have a degree of pricing power. A lot of this pricing power tends to be in areas of administered prices such as telephone charges and bank charges. We have up-weighted bank shares and lowered our weighting to insurers. Companies with excess capital could well start to outperform as the market stops criticizing prudent management and rewards them instead for their more conservative approach.

What will turn the equity market around? The equity market will respond positively to a reversal in the strength of the rand. This time, however, it requires a reversal in the decline of the US$. The US is running a current account deficit in excess of 5% of its' GDP, and needs to attract in the order of US$ 2 billion a day to fund this. The rest of the world has, however, lost confidence in the US and are unlikely to fund the deficit at the same price. The US equity market will need to become cheap before this bear market is over. At best it is fair value. It needs to trade at least below 15 times earnings.

Bond yields are attractive in real terms, and cash is providing a very attractive real return over the next 6 months. The bond weighting is in the order of 25%. Bonds returned just under 1% for the month, whilst equities were down just under 8%. It is against an attractive real return of about 4% for cash that we need to up any additional investments into the equity market. We remain committed to preserving capital in this portfolio, and look for more realistic valuation levels in the US market before becoming less cautious on South African equities.

A challenging quarter has passed, in which previously out-of-favour sectors returned to the limelight, and the rand surge almost exactly mirrored its fall of last year, emerging as the strongest currency for the year against the dollar. As a result, the local market with its bias to rand hedge stocks produced negative returns (-1.4%). Bonds, however, gained ground as inflationary fears ebbed, and the prospects of rate cuts for 2003 started to surface.

Financials benefited from the rand and the improving outlook for interest rates, with banks performing particularly well. Ratings remain attractive, alongside dividend yields, and a continued improvement in the local economy will underpin the strong performance of the sector. Within the Industrial sector where we have an overweight position, resilient local spending fuelled the sector. It is expected that tax cuts in 2003, combined with lower food inflation will prolong the trend, and we remain confident of the prospects for local consumer stocks. Within the resources sector, large rand-based costs and a shrinking dollar-based revenue line combined to drag down Resources stocks over the past quarter,where we have an underweight position. Additionally, the leaked mining charter depressed prices, although further negative surprises are not anticipated in this regard; prices are currently at attractive levels, and we remain confident buyers as prices reach target levels. 2003 for SA should be positive with 3 rate cuts forecast, significantly reduced inflation and a stable currency.

However, we remain vigilant to any risks to your portfolio associated with the potential military threat in Iraq, as well as the build-up of tensions in the Middle East. We remain confident of future prospects for the fund.