The fund returned 2.6% versus the All Bond Index return of 2.7%. The long R153 bond rallied by 40bps while the shorter -dated R150 rallied by a full percent. This sharp lowering in bond yields, and especially in shorter -dated bonds came as a result of the surprise meeting of the Monetary Policy Committee of the Reserve Bank on the 14th of August. During this meeting the repo rate, at which commercial banks borrow money from the Reserve Bank, was dropped by 1% to 10%. This decision was mainly driven by the dramatic improvement in inflation and the inflation outlook, given lower food prices, the strong rand and subdued global inflation. According to the Reserve Bank these factors should help to ensure that CPI -X inflation falls within the
inflation target band. The Governor highlighted recent high nominal wage settlements as a key risk to the long-term sustainability of the inflation target.

During the remainder of the month the rand strengthened further and both money supply and credit growth figures came in better than expected. Also, producer price inflation was at 0.2% year-on-year for August. All indicators are that inflation is on track to drop well within the Reserve Bank's target bands.

With current long-bond yields at 9.15% and Reuters' August consensus inflation forecasts for 2004 at 4.90%, a real yield of 4.25% should be achievable from bonds for the next year, assuming that the long bond yields stay static. Given what historical real yields have been in South Africa, we are of the opinion that long-bond yields might be too low and therefore the fund is slightly underweight long-dated bonds.

During the month there was a new three-year corporate bond issue from African Bank. We own the shorter -dated African Bank corporate bond, which has performed very well for the Fund. Given its credit quality and the current spread of approximately 2% above the equivalent government bond we are satisfied with the prospective returns from this investment.

The Fund returned 2.6% for the month, outperforming the All Bond Index return of 2.4%. Over the month long bond yields dropped from 9.5% to 9%. At the same time the yield curve continued to normalise with the short-term R150 bond now trading at a 0.2% lower yield than the long R153 bond. The fund was generally positioned for this reversion and some of the out-performance can be attributed to this.

This ongoing drop in yields during the month followed on evidence that inflation is now under control - official inflation figures have been revised down. It was overstated previously due to the incorrect calculation and inclusion of rentals inflation since January 2002. By March 2003, CPI had been overstated by 2.2%.

Due to currency stability, inflation is in a sharp decline trend. This can be seen by comparing the annualised percentage change in the average seasonally adjusted headline index for the three months up to May at 2.8% versus the average for the previous three months up to April at 3.3%. Measured on the same basis, CPIX fell to 3.6% from 3.9%.

Consensus expectations are that the year-on- year CPIX numbers will be well-below the inflation target by the fourth quarter, and that it will drop to below 5% from the current 7.7% year-on-year.

In the first of an expected number of interest rate cuts, SARB reduced the repo rate by 1.5% to 12.0% during their June meeting. However, they did express concerns about the high unit-labour costs and wage settlements, both running well-above the inflation target.

Real seasonally adjusted GDP rose only 1.5% in the first quarter, which represents a significant deceleration in the economy compared with the 2.4% recorded for 4Q02.

This is the weakest quarter -on-quarter growth rate recorded by the local economy since the fourth quarter in 1998.

We remained very active in the corporate bond market as we believe that the higher yields offered by corporate bonds add to portfolio performance.

The Fund returned 1.1% for the month, outperforming the All Bond Index return of 0.9%. Outperformance was due to favourable yield curve shifts, with good returns coming from shorter dated bonds.

The latest producer price inflation number for February 2003 at 6.2% year on year was considerably better than market expectations. As PPI leads CPIX, the inflation number the Reserve Bank targets, by several months, this should be seen as encouraging from a monetary policy perspective. This raises the likelihood of the SARB easing the repo rate at its June MPC meeting. Also both M3 money supply and private sector credit extension were better than forecast for February 2003.

However, the March MPC meeting highlighted three risks to their CPIX target. These are the recent high wage inflation without accompanying productivity increases, the uncertain international economic environment given the war in Iraq and the continuing rapid rise in administered prices.

The Fund returned 2.6% for the month after bonds started the new year on a positive note with the R153 strengthening from 10.74 to 10.38. This comes in the wake of signs that inflation has turned. Headline inflation is at 14.4% and CPIX at 12.2% for December. Also, the latest data releases show that M3 money growth and private credit extension both appear to be under control.

The yield curve steepened again during January with the R153 long bond yield strengthening by approximately 30 basis points more than the shorter dated R150.

Corporate bond spreads remained stable as did inflation-linked bond yields.