In contrast to the nasty negative returns of share unit trusts, especially offshore ones, the fund showed a reasonable positive return during the quarter, proving the wisdom of diversification (amongst shares, bonds and cash).

Early in the quarter in July share markets offshore fell sharply as corporate scandals proliferated. These scandals caused corporate bond yields to widen relative to the yields of government bonds to record levels. During this period the unit price of the fund fell by 3%, but had more than recovered this fall by the end of the quarter, partially with the assistance of a slightly weaker rand/dollar exchange rate.

The fund 's biggest exposure from an industry point of view was to financial corporate bonds (55% of fund), which includes bonds issued by "supranational entities ",namely international organisations formed by two or more governments. Government bonds comprised 10%of fund. The fund comprised a nice blend of both higher rated bonds (which have the lower yields) and lower rated bonds (with higher yields). 35% of the bonds in the fund were rated AAA by Standard and Poors and Moodys, with 30% rated BBB, 23% rated A and 8% AA.On average, the gross yield of all the bonds in the fund was 4.2%.

While the rand appreciated by 9%against the US dollar during the quarter, the fund 's unit price fell by a lower number (6%), partially cushioned by the relatively strong bond markets in the US. Bonds were strong in the US and other big markets as a flight to quality (more stable assets) ensued out of the equity markets.

The fund tends to focus more (although not exclusively) on corporate bonds and those issued by government agencies, as opposed to Government bonds. AAA rated bonds comprised 40%of the portfolio, AA rated bonds comprised 12%of the portfolio and BBB rated bonds comprised 30%of the portfolio.

During the quarter corporate bond prices were negatively affected when news of the Worldcom debacle and the K Mart bankruptcy broke. This caused corporate bond yields to rise (prices to fall) relative to government bonds as fears of further such news abounded.

The fund 's current yield is 3.7%.

The fund depreciated by more than the 5% appreciation of the rand against the US dollar during the quarter.

The reason for the fall in the dollar value of the fund relates to the fact that bond yields have been rising in the US (and in most of the developed countries) as economic recovery gathers momentum. Bond prices/values fall as bond yields (interest rates) rise, and vice versa.

There is strong anticipation that the US Federal Reserve will soon begin to reverse some of the 11 interest rate cuts instituted in 2001. Hence the 10-year US Government bond yield rose during the quarter from 5.05% to 5.38%.

Corporate bonds, such as those held in the fund, fared better than Government bonds as yields rose less dramatically (apart from a blip when the Enron disaster hit the news). Generally speaking, corporate bonds are more defensive in this environment because the hope of increased corporate profits and cash flows tends to benefit corporate bonds, thereby partly negating the negative effect of rising interest rates.

The fund depreciated by more than the 5% appreciation of the rand against the US dollar during the quarter.

The reason for the fall in the dollar value of the fund relates to the fact that bond yields have been rising in the US (and in most of the developed countries) as economic recovery gathers momentum. Bond prices/values fall as bond yields (interest rates)rise, and vice versa.

There is strong anticipation that the US Federal Reserve will soon begin to reverse some of the 11 interest rate cuts instituted in 2001. Hence the 10 year US Government bond yield rose during the quarter from 5.05% to 5.38%.

Corporate bonds, such as those held in the fund,fared better than Government bonds as yields rose less dramatically (apart from a blip when the Enron disaster hit the news). Generally speaking, corporate bonds are more defensive in this environment because the hope of increased corporate profits and cash flows tends to benefit corporate bonds, thereby partly negating the negative effect of rising interest rates.