The fund finally benefited from some rand depreciation during the quarter, as the rand lost 4.3% against the dollar and 7.4% against the euro. The 5.8% return for the fund in the 3-month period was also assisted by some appreciation in the value of the bond portfolios offshore as bond yields declined in the US by some 40 basis points (0.4%), from 4.6% down to 4.18% and in Germany from 4.3% to 3.95%. Concerns about weaker economic growth helped bonds rally, despite the possible inflationary expectations arising from record high oil prices. In fact, the inflation numbers have so far been lower than expected, especially in the US, and this is helping bond prices to remain much firmer than most forecasters have predicted, especially with the US forecast to grow at 4.4% this year, the strongest growth in many years. Huge imports from China may be hurting President Bush's chances of re-election, but they are playing into the hands of bond investors because they are helping keep prices and therefore inflation down. This is being aided by the fall in the prices of many technology and telecommunications-related products. We held a portion of the portfolio in European bonds to benefit from dollar weakness and that did help during the quarter. However, we have switched this holding back into US bonds because the US dollar is fighting back and showing some signs of possibly surprising the majority and outperforming the other big currencies in the near future, although no-one knows for sure. Over the course of the year to end September the fund still lost value in rand terms because of rand appreciation against the dollar. Patient investors should be rewarded in time. That is the cardinal rule of investing. Stick with your plan. Signs are emerging that the rand is gradually turning against the big currencies after almost 3 years of tremendous appreciation (although it really is nothing more than a strong bounce after many, many years of falling).

Once again rand exchange rate movements over the quarter have dominated returns for investors in the fund, again negatively. The rand gained 4.8% over the quarter against the dollar, accounting almost entirely for the -2.4% rand return for the fund during the quarter. The fund's dollar return was a positive 3.4% for the quarter.
During the year the rand gained 20.1% against the dollar and the fund lost 15%, so of course the rand return was dominated entirely by rand strength relative to the dollar.
In the US during the quarter bond yields declined, with the 10 year US government bond declining from 4.25% to 4%, meaning that the bonds appreciated a bit in value.
As of April 15th 2004 in the new quarter, this decline in bond yields has entirely been wiped out as the 10 year bond yield has shot up to 4.35%, causing a drop in bond values. This comes on the back of heightened fears/expectations of an earlier-than-expected hike in short rates in the US and on the back of rising consumer inflation figures.
The fund has 6.4% invested in the Absa Global Bond fund, 11.7% invested in the Fidelity US High Yield fund and 77.2% invested in the Fidelity US Dollar Bond fund. The latter fund is in turn invested 47% in US Government bonds, 21% in government agency bonds and the balance in US Corporate bonds. The US High yield fund also had a positive dollar return during the quarter (1.3%). This fund is yielding (interest payments) over 5% compared with the 3.3% yield of the US Dollar Bond fund.

Due to the STANLIB amalgamation (27 Feb 2004), Standard Bank US Dollar Bond Fund of Funds will be renamed to the STANLIB US Dollar Bond Fund of Funds.

The fund invests only in US dollar bonds and has therefore been disadvantaged during the year by the fact that the US dollar was one of the weakest currencies in the world, as opposed to other funds in the same sector which invest in various different currencies.
The rand gained 3.7% against the dollar in the fourth quarter and this contributed to a negative rand return for the fund in the quarter, as well as being the main culprit during the year (rand up 28% against the dollar). Also, the benchmark 10 year US government bond lost some capital during the quarter as its yield rose from 4.04% to 4.24%, although since the end of 2003 this bond's yield has fallen back to 4%.
The fund had 43% invested in US government bonds, 24% invested in so-called supranational and government agency bonds and 33% in corporate bonds. The fund's income yield is 3.6% with a risk sensitivity ratio (modified duration) of 5.2, meaning that the fund's unit price would rise or fall by 5.2% in response to a 1% fall or rise in interest rates.
Over the past couple of years the rand value of the fund has been pummelled by the extraordinary appreciation of the rand against the dollar in particular (up 39.6% in 2002 and up 28% in 2003), because in dollar terms the fund was only slightly down in 2003 (-0.2%) and it was up in 2002. Henceforth the currency may instead come to the aid of the fund as it used to (rand hedge), although the bond market in the US probably has more downside risk than upside potential.