The Fund returned 1.4% for the month.

The R157 long bond strengthened from a yield of 8.8% to 8.6%. Although there are short-term pressures on inflation due to a weakening rand and high food and oil
prices, over the longer term the inflation target appears to be intact. The real return obtainable from long bonds, given the implied real rates using the long-run inflation target, therefore does look fair. Moreover, long bonds in the US have strengthened considerably in the past month, which makes the SA long bonds attractive on a relative basis, especially given the weakening rand.

Over the shorter term though inflation is expected to increase from the current (PIX rate of 5.0% and this has resulted in an inverted yield curve, in other words shorter dated bonds offer a higher yield than longer dated bonds.

The Fund remains neutral to overall yield movements, but does have an underweight position to shorter dated bonds, as we believe the real rate on offer from these might be too low, given consensus inflation expectations.

Nedbank issued seven-year subordinate debt during the month at a spread of 1.05% above the equivalent government bond. The Fund did not participate in this issue as the pricing relative to senior bank debt did not seem attractive. The yields at which corporates are issuing debt relative to government bonds have continued to increase.

The Fund returned -3.4% slightly outperforming the All Bond Index return of -3.6% for the month.

Long bonds weakened from 7.75% to 8.64% during June. The Fund has been underweight long dated bonds and as a result performed better than the All Bond Index.

The South African Reserve Bank followed global central banks by unexpectedly hiking the repo rate 0.5% on 8 June. According to their inflation forecast, (PIX is likely to breach the upper end of the 3% to 6% inflation target. The rand has also weakened along with other emerging market currencies. This weakening of emerging market yields and currencies should be seen in the light of the rate increases in the developed world, more
specifically the USA. With higher real rates on offer from US fixed income instruments, investment in emerging markets appears less attractive.

Using the long-run mid-point of the Reserve Bank's inflation target, current real yields on offer from long bonds in South Africa are now above 4%. We have therefore increased our weighting in longer dated bonds in the Fund.

Long bond yields weakened from 7.325 to 7.50% during March. This benefited the Fund relative to the All Bond Index as it is less sensitive to yield changes than the All Bond Index itself.

We remain of the view that the real rate on offer from South African long bonds does not adequately compensate investors for term and inflation risk. Given the latest statements from the Governor of the Reserve Bank further bank rate cuts seem unlikely, which implies that the additional yield available for investing in long bonds is only about 0.5% relative to money market investments.

Furthermore, real rates are increasing globally. This can be seen from the US 1O-year inflation-linked bond now offering 2.3% versus the 2.0% a few months ago. Also most of the major reserve banks are either increasing rates or have taken a tightening stance. The US Fed increased short-term rates once again to 4.75% while implying at the same time that it would be necessary to increase their short-term rate even further.

The All Bond Index returned 2.0% for December and 10.8% for the year. The Fund returned 1.8% for December and 10.48% for the year.

The Reserve Bank kept rates on hold at their December Monetary Policy Committee meeting. They indicated that inflation will peak in 2006 at a somewhat lower level than the almost 6% they had previously expected. This can partly be attributed to lower international oil prices along with the strong rand. CPIX inflation for the year to end November is 3.7%, beating expectations yet again. These positive events benefited the bond market as long bond yields rallied 0.3% to 7.46% at month end.

The 10-year bond yield is approximately 0.2% higher than what a one-year fixed deposit would currently offer. This additional yield is not much compensation for the additional term that is taken on in buying the 10-year bonds. South African rand ten-year bonds now offer only a 3% higher yield than US Treasury bonds. This yield differential currently does seem quite low as it needs to compensate investors for the inflation differential, country risk as well as currency risk. As a result the Fund has reduced its investments in the very long bonds, as a weakening of long bonds would result in a capital loss.