The fund had a very good quarter, returning 12.1% in rands or 2.9% in dollars. The return in September was the best at 8.6%, ofwhich 7.6% came from rand depreciation versus the dollar. The fund came 2nd out of 8 funds in its sector over the quarter. Over the year to end September the fund also came 2nd out of 8 funds, returning 26% in rands and 1.3% in dollars.

The 2nd quarter coincided with a very good run in the US bond market, as yields on ten year bonds declined from 5.2% (the high for the cycle) to 4.65%, close to the low so far. Bond values appreciate as bond yields decline. We were active during the quarter, holding some 40% in UK bonds for a period while the pound was gaining against the other big currencies and also holding some euro bonds. At the end of the quarter, we switched back into predominantly USbonds as the dollar began to rally.

The Fidelity US Dollar bond fund, which is 74% of the fund, has a 4.4% current yield, amodified duration (sensitivity to a 1% move in bond yields) of 4.7 and a yield to maturity of 5.6%. Forty nine percent of the fund is invested in AAA bonds, with 29% in US government bonds. Sixteen percent are in A-rated bonds and 15% in BBB bonds. Half the fund has a maturity of 0-5 years,32%of the fund has amaturity of 5-10 years and7%has a very long maturity of 25-30 years. Yields have backed up in October, but overall offshore we have cut our underweight in offshore bonds, preferring a neutral position in a balanced portfolio.

The fund finally had a great quarter in rand terms, rising by 15.7% to the highest unit price in two years as the rand blew out against most currencies. The 36.7% invested in Euro bonds and cash helped a lot as the euro gained by about 4% against the dollar. Meanwhile bond yields rose quite strongly during the quarter, with the US 10 year government bond yield rising from 4.85% to 5.2%, causing a loss of capital. However, during the period only 34% of the fund's assets were invested in government/high grade corporate bonds that would have suffered some capital loss. The balance in high yield and short-dated bonds fared well by comparison, buffering the fund's dollar value against capital loss. The fund's unit price in dollars was down less than1%during the quarter. Although the upward trend in offshore bond yields remains intact, there is a possibility that US and UK bond yields may be close to peaking as interest rates there could be close to the top (flat in UK terms). So we are upping our bond exposure in these two countries.

US bonds lost value (1.3% on average) in the first quarter of 2006 in dollar terms as ten year government bond yields rose quite sharply from 4.35% at the end of December to 4.85% by the end of March. Yields have risen because of the continued increase in the short-term rates by the US Federal Reserve, largely because of concerns about rising inflation. The rand gained slightly against the dollar during this period making the rand loss a bit worse. Over the past 12 months US bonds recorded a return of 2.1% in dollars.

The fund would have done a bit better because 33% is invested in Fidelity High Yield Bond funds (US and Europe) which have actually appreciated during the quarter and year. The high yield bonds are more influenced by the underlying fundamentals of the companies that issue them. Companies are benefiting from improving company profits, cash flows, balance sheets, merger & acquisition activity and stronger stock markets.

However, we have recommended an underweight position in offshore bonds for the past few years and continue to prefer equities.

The rand held steady against the dollar during the quarter, but the fund lost 0.7% in rands and in dollars as bond yields in the US rose a little (meaning bond prices or values declined a little). For example the 10 year US government bond yield rose from 4.29% to 4.35%, enough to generate a small negative return.

During the year, the rand lost 10.8% against the dollar and the fund generated a rand return of 10.6%, indicating a small loss in dollars of around 0.2%. Largely because of the strong dollar against most other currencies (up 12.5% against the euro and up 10.2% against sterling), the fund outperformed all other foreign bond funds in its sector, with the closest competitor being 4% lower at 6.6% for the year. This is because the competitor funds invest in bonds globally, not just in the US like this fund. The average return in the sector was less than half the return of the fund.

During the quarter we were compelled by an industry rule change to reduce our holding in the Fidelity US Dollar Bond fund to the now maximum allowed in one fund of 75% of fund assets. This meant increasing the holding in the Fidelity US High Yield fund to 20%-plus of total fund. This fund's dollar return for the year to end November was 3.3%, slightly ahead of the US Dollar bond fund's 2.8% return. Both funds were in the top quartile of their sectors relative to similar competitor funds.

The Fidelity US High Yield fund is invested in a spread of mostly BBB or lower-rated bonds of companies operating across a range of industries. Consumer discretionary (21% of fund) and Telecommunications (14%) were the biggest industry holdings at the end of November. The fund has a gross yield of 6%-plus versus the 3.9% of the more conservative US Dollar Bond fund, which has a modified duration (sensitivity to a rise or fall of 1%in bond yields) of 4.9 and where 75%of the bonds are rated A or higher.