The fund gained a bit (1.5% in rands, or 4% in dollars) during the hectic 3rd quarter when bonds recovered as equities tumbled in response to the credit crisis in the US. The rand gained 2.5% over the dollar during the quarter. Over the year to end September the fund lost6%in rands as the rand gained 11.3% against the dollar. The return for the year in dollars was 5.9%, which was helped by remaining underweight the dollar during much of this period.

We continue to favour the short-term bonds as bond yields are showing signs of rising again (causing capital loss). The biggest holding in the fund is the Fidelity Euro short-dated bond fund (39% of fund). We have 24%invested in the Fidelity Sterling Bond Fund and 14% in the US Dollar Bond Fund. Sterling has the benefit of being a strong currency and yet the interest rates appear to have peaked there. Lately we have upped our dollar exposure to 34% as the dollar sell-off could possibly be overdone in the short-term.

The portfolio had a positive rand return during the quarter, benefiting from the 4% depreciation of the rand versus the dollar, because the dollar returnwas a negative 1.3%. For the year the portfolio did 24.9% in rand terms or 6.1% in dollar terms. During the quarter bonds were quite volatile offshore, with yields initially rising strongly, then falling sharply, then rising once again, with yields ending higher at the end of the quarter, leading to some capital loss.

We positioned the portfolio very defensively against both a falling dollar and against rising bond yields, by switching 23% of the portfolio into a short-dated euro bond fund, which tends to remain stable in times of rising bond yields. We also switched22%of the portfolio into sterling and euromoney markets. We remain underweight bonds at STANLIB, because of concerns of rising interest rates and rising bond yields, as inflation remains a threat on worldmarkets. Also, yields are very low, similar to cash yields.

The last quarter of 2006 was a difficult one for the fund mostly because the rand gained a sturdy 11% against the dollar, which of course translated back into a negative rand return for the fund (-7.99%). Bond yields also rose a little, meaning bond values declined. Still, the fund delivered a positive dollar return of 3%. The year was a good one for the fund as it returned 16.7% in rands, benefiting from the rand's 9.4% depreciation against the dollar,19%against the euro and20% against the pound.

The fund delivered a positive return of5%in dollars during the year, which is double the dollar return of 2.5% achieved by the STANLIBUSDollar cash fund. The underlying Fidelity US Dollar bond fund, which is typically though not always the core holding, has a 4.4% current yield, a modified 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 amaturity of 0-5 years, 32% of the fund has a maturity of 5-10 years and 7% has a very long maturity of 25-30 years.

We have varied the bond holdings currency-wise during the quarter to shield the fund from the weaker dollar, by holding both sterling and euro bonds. Bond yields have risen over the past month, causing some loss of capital, especially in the UKwhere inflation has surprisingly jumped to 4%, driving their 10 year bond yield up from 4.6% to 4.9%.