There was a dramatic turnaround in the fortunes of the equity environment this quarter. The All Share Index returned an impressive 17,4% over the three-month period. The All Bond Index also rebounded strongly, returning 6,9% for the same period. This compared to 2,0% from cash and 12,0% from quoted property.

The volatility in equities and to a certain extent in bonds for the first 7 months of the year resulted in the Fund being fairly defensively positioned. By this we mean an average weighting in equities, underweight in resources and overweight in domestic SA equities and an overweight position in cash.

The markets then changed dramatically in August and September with the All Share Index rising by just under 15% over the two-month period. This obviously resulted in the Fund producing very good nominal returns.

This strategy of the Fund worked particularly well until the resources sector moved aggressively upward in August. While the Fund benefited from this in absolute terms, it did lose a bit of ground in relative terms (when compared to similar funds).

The current key question is: where to now with regard to strategy? Our strategy within equities is to "harvest" some of the spectacular returns that have been generated over the past two months, particularly in areas such as banks and retail. There are two reasons for this move: firstly, to lock in some of the outperformance and secondly, there is a high probability that the market will correct in the near future allowing us to buy again at lower levels as, despite the strong rise, we remain fundamentally positive on equities.

Within bonds our low exposure during August and September hurt us relative to cash and we will look to add some exposure on any weakness.

Our exposure to quoted property paid off as it handsomely outperformed bonds. We will hold our exposure at current levels.

In conclusion, we will remain defensive in our allocation to equities and keep some extra cash available to add to bonds and equities should there be a correction in the respective markets.

Performance faded in the third quarter, partly because of a surge in resources in August, a sector in which the fund is underweight. The strategy now is to "harvest" some of the returns of the past two months, particularly in banks and retail. Management says there is a high probability of a market correction, which will provide a buying opportunity. Perhaps. But it can be argued that prudential funds are not the place for traders.

A harsh equity environment characterized the quarter, with the All Share Index down by -4.7%. Bonds as measured by the All Bond Index delivered a meagre positive return of only 0.4%. Cash returned 2.0%. The best-performing sector was the quoted property sector returning a solid 4.1% over the quarter.

The focus and objective during the past quarter and for the immediate future are to minimize capital loss by active asset allocation. We believe that the current hostile environment will test our ability to achieve this objective.

We are pleased to report that we have met the objective of not losing capital over the quarter and also for the year to date. Note that the All Share Index returned a negative -1.2% for the first 6 months (y-t-d) and the All Bond Index and cash returned 0.1% and 4.1% respectively.

Our strategy going forward is to be highly focused on the preservation of capital and to be cautious in allocating more capital to risky asset such as equities.

In line with the above, it is no surprise that we increased our cash holdings during the quarter. We largely stayed out of nominal bonds over the period, but bought a few towards the end of the quarter. Equity exposure was reduced over the period as the markets were digesting uncertainty over the pace of global interest rate increases. The continued unexpected strength in the rand is certainly challenging the All Share Index (resource heavy) and we remain underweight this sector.

Asset allocation favouring equity over bonds has helped keep Sanlam Balanced's (formerly Provider Fund) impressive revival well on track. Performance was also enhanced by good share selection, which included an underweight position in resource shares and above-average exposure to banks, retail and chemicals. As one of the new-look Sanlam Investment Management's "shop windows", the fund is worth strong consideration.

The fund had a good quarter and outperformed the All Share Index. The main reason for the fund's positive performance was stock picking. Once again the overweight position in chemicals (+1.0%) and banks (+4.9%) added to the performance. Having no nominal bonds paid off in March as cash outperformed by almost a per cent.

Going forward there is a definite change in the general investment mood as there is increasing certainty that the tightening of the US interest rate cycle is likely to move forward to the third quarter of this year. Bond yields have started reacting negatively to this information. In the short term the fund is likely to maintain its current asset allocation stance on the basis that equities should remain the asset class of choice.

Buys & Sells
No major purchases or sales took place in February.

Performance & Reason
The fund returned 0.53% in February. While the performance was modest in absolute terms, the fund picked up nicely on a relative basis, and on a rolling 12-month basis is ranked 2/31. The main reason for the fund's positive performance was stock picking, as the All Share Index and the All Bond Index returned 0.48% and 0.96% respectively for February. Major contributors to the positive performance were the overweight position in chemicals (+8.1%), insurance (+5.19%) and banks (+1.53%). On the negative side the major detractor of performance was having cash (+0.65%) at the expense of nominal bonds (+0.96%). In addition, the fund was light on the metals sector (Iscor), which had a stunning month returning +13.49%.

Going forward the fund is likely to stay with the broad asset allocation stance on the basis that equities should remain the asset class of choice. This is based on the global view on interest rates remaining low with an outlook of solid corporate profits.

Effective from 1 Apr 04, the Sanlam Provider Trust changed its name to the Sanlam Balanced Fund.

Equities had a very positive month with the All Share Index rising by 6.9% against the 0.1% of the All Bond Index. Within equities, IT had the largest rise of 12.4%, followed by Basic Industries at 10.7%. Resources also performed well returning 8.8% for the month. In terms of the size effect, December was not a feature as all the sectors returned roughly the same, viz. Top 40 +7.0%, Mid Caps +6.2% and Small Caps +7.6%. The main feature of December was the volatility in the rand, which lost -2.8% to the US$ and a significant -5.8% to the UK £ . This provided the catalyst for the large caps, particularly the resources, to have a positive month.