Long bonds finished the month yielding 10%, after trading at yields as high as 10.50% intra-month. The fund's position was neutral relative to that of the All Bond Index for most of the month. However, we increased our position in long bonds slightly at the higher yield levels. The Fund returned 1.1% on par with the All Bond index return (1.1%) for the month of June.

SARB's Monetary Policy Committee met in June. As was widely expected the short- term repo rate was left unchanged. However the governor did mention a number of risks to inflation, including persistently high oil prices. SARB only forecasts a temporary breach of the 6% top end of the CPIX target later on this year.

CPIX inflation remained stable at 4.4% in May, while consensus forecasts were at 4.6%. CPI came in slightly below consensus expectations at 0.6% year-on-year. CPIX inflation has now been within the target for the past 9 months.

The strong commodity prices as well as the closure of the SARB's forward foreign exchange book concomitant with a gradual increase in foreign reserves should go hand in hand with less rand volatility. Given the strong rand and low global inflation it seems more than likely that long-run inflation will remain within the 3% to 6% set target. Given this, long bonds would offer a prospective after-inflation return of at least 4%.

During the month we invested just over 1% of the portfolio in a new, A- rated, corporate bond issue from Supergroup at a yield that is approximately 2.4% higher than the SA Government. Wealso added to our holdings in the second longest government bond, the R203, maturing in 2017.

The R157 long bond weakened by 0.3% during the month from 10.0% to 10.30%. The Fund is positioned duration neutral currently, so performance is in line with the All Bond Index (ALBI). Additional return over and above that of the ALBI is obtained through the higher yield of the Fund, because of the large exposure to corporate bonds.

We believe that the inflationary fear s driving yields weaker are overstated, as was confirmed by the latest CPI X data release. For the year ending April, CPI X inflation came in at 4.4% well below market consensus expectations of 4.7%. However, the main concern is oil prices which could impact inflation in the near future if the current pr ice levels persist. President Mbeki's State of the Nation address was significant i n that he promised that government will ensure that administered prices will not add to inflationary pressures in our economy. Administered prices has been one of the components in the inflation basket that has been of concern given government's inflation-targeting policy.

Currently consensus views are that CPI X will remain well within the target.

Government is now tapping the new R203 bond maturing in 2017. This is the second longest bond, besides the R186, with a 2023 maturity date, in the SA bond market. To compensate for our underwei ght
position in the R186 we participated in the auctions and have added this bond to the fund.

SA Home Loans issued their fourth Thekwini securitisation during the month. Given their very good track record with the first three securitisations, we again participated in this issue by buying into the AAA rated fixed rate tranche at a yield of 0.65% higher than SA government bonds.

The bond market returned -0.2% for the month, with the Fund's return negative relative to the index.

Despite the strong rand, the R153 yield weakened from 9.36% to 9.53% during the month. Weaker short-run inflation seems to be a major market concern. Consensus expectations for the CPIX inflation number is to rise to 5.5% towards the middle of next year, still well within the target of 3% to 6%. Given current bond yields at 9.5%, this implies a real return of 4% from bonds. However, if we assume a long-run inflation number of4.5%, which would be in the middle of the target set by government, then an attractive real return of 5.5% is to be had from bonds.

February consumer inflation data confirmed an increase in the rate of CPI growth. Headline CPI was reported to have increased by 0.7% y-o-y and 0.5% m-o-m, whilst CPIX gained 4.8% y-o-y and 0.5% m-o-m. This increase could be ascribed to slightly higher fuel prices and the base effects of the strenghtening rand falling out.

On the macro-economic front, the final closure of the SA Reserve Bank's very contentious forward currency book took place in March. In effect this event reflects an increase in South Africa's foreign reserves, as there is no further obligation on the Reserve Bank to deliver foreign currency to counter parties in the future.

We particpated in three new corporate bond issues during the last quarter. We bought into a Tier 2 capital bond issue by ABSA at a yield of 1.4% higher than government bonds, as well as a Tier 2 FirstRand Bank capital bond issue at a spread of1.2% above government bonds. We also bought into the second issue of the Eagle bond programme at a yield 0.75% higher than an equivalent government bond. The Eagle bonds carry a US government agency guarantee as the funding is used for financing Boeing aeroplanes.

The Fund returned -0.03% for December, slightly underperforming the All Bond Index, which returned 0.1%.

CPI-X, the inflation rate targeted by SARB, declined rapidly during 2003 to well within the 3-6% target range, primarily due to rand strength. The year-on-year number for November was 4.1% and the CPI-X rates are expected to bottom in the first quarter of 2004. The November producer price inflation at -2.5%, year-on-year, came in below expectations. The Reserve Bank is confident that the CPI-X rate will remain within in the target range for the near future. Given long bond yields in the region of 9%, a real return of approximately 5% is on offer from long bonds. We believe that this represents a fair return from government bonds.

As a result of this dramatic improvement in CPI-X inflation SARB has eased the repo rate by 5.5% since June 2003. There were two rate cuts during the last quarter of the year, the first one was a larger than expected 1.5% in October and the second one a smaller-than-expected 0.5% in mid December. As a result of the 0.5% cut in December, the yield curve flattened considerably, with short dated bonds weakening relative to the longer dated bonds. The yields on shorter-dated bonds are mainly determined by the yield on competing money market instruments, while those on longer-dated bonds are more sensitive to inflation expectations. A final 0.5% rate cut in February is expected by market participants, which would bring the repo rate to a near 25 year low.

Within our corporate bond holdings we remain holders of Nedcor bond, NED2, in the portfolio. This bond currently offers 1.4% more in yield than a similar government bond, which more than compensates for any risk of default.