Economic Highlights
The last quarter was once again a grim reminder of why diversification is so critical. It was really a tale of two conflicting views. The bond market was concerned with deflation, unemployment, and declining consumer confidence. Greenspan confirmed these fears and justified the bond rally by saying that the Fed would keep rates low for as long as is necessary to get the economy growing faster. Most central bankers cut rates and left the door open for possible further cuts as insurance against slowing growth and deflation. The above pushed bond yields to 49-year lows. Equity investors on the other hand took a completely opposite view. They speculated that the winding down of the war in Iraq, rates at 45 year lows and tentative signs of an improvement would result in an improving global economy. Cost cutting provided better-than-expected corporate earnings, while investor's tolerance for risk rose providing the catalyst for the rebound.

Fund Performance and Market Movements
Global stock markets sprang back to life with the MSCI climbing 16.35% in the second quarter. European markets in particular did well which, after declining to levels last seen seven years ago rose 14% to post their biggest quarterly advance since 99. Not only was the fund overweight in Europe - the best performing region - but the three underlying European funds all outperformed. The European smaller companies, blue chip and growth funds were up 22%, 21% and 19% respectively with the latter two being in the top quartile! Further relative outperformance came from the funds two largest equity funds the America and American Growth funds. The S&P 500 recorded its biggest quarterly gain since 1998 rising 14.9% - just less than the 16% and 17.8% of the funds holdings. Japan's Nikkei also had its biggest quarterly gain in four years. The index rose 13.9%, and like its regional counterparts our Japan fund was not to be outdone rising 15.2%. Unfortunately South African investors due to rand strength did not realize this performance as the local unit gained 5.4%. Although the stock market was the place to be in the last quarter, offshore bonds did not perform badly. The SBWGBI rose 3.17%, while the funds largest holding, the International Bond Fund (33% of portfolio) gained 5.17%. The fund therefore witnessed an interesting phenomenon. Since 1999 there has been a very close correlation between the performance of the S&P 500 and the US 10 year government bond yield. The fund manager has mentioned this in most previous fund reviews where bond and equity prices moved in opposite directions 90% of the time (making this fund the ideal hedge). This correlation started breaking down after the Iraq war with bond yields continuing relentlessly downwards and the equity markets picking up. The equity market seems to be pricing in a recovery while the bond market seems to be predicting further doom and gloom.

Fund Positioning and outlook
The fund manager's think Greenspan has given bond investors comfort by saying he is determined to fight deflation. This has led to bond valuations reaching "bubble like" proportions. As such we have moved into the corporate bonds whose returns should hopefully rival those of stocks as investors continue their hunt for yield. The biggest quarterly gains in five years for most markets could signal the end of the bear market. Global Equities have broken their long-term downtrends, while the lack of attractive alternatives (money market funds average about 0.64% in the US) might mean we could see the markets sustain these rallies. Before getting too excited though one needs to view these movements with caution. The S&P 500 has had four similar rallies in excess of 20%, which have fizzled out. On the other hand history shows that the momentum of the last six months may carry through to the second half of the year. The S&P 500 is up 10.96% year to date. The index has had first half gains greater than 10% in 18 of the last 50 years. In 14 of those years stocks increased an average of 11% in the second half!

Economic Highlights-The outlook for the global economy weakened during the first quarter as a result of geopolitical tensions over the situation in Iraq, coupled with a renewed deterioration of business and consumer confidence. This led to the European Central Bank and US Federal Reserve cutting rates by 25 basis points to 2.5% and 1.25% respectively. The war on Iraq has undoubtedly affected consumer confidence and spending. Rising unemployment and declining consumer confidence may lead to consumers curbing spending further -thereby slowing the economy even further. As such one cannot rule out further weakness in the economy and therefore further rate cuts. Alan Greenspans "soft spot "seems softer than initially anticipated. Retail and homes sales have slowed, while housing starts look like they have topped out. Industrial production has also slowed and capacity utilisation remains close to 18-year lows. Consumer confidence has plunged to a 9-year low and from a top down economic perspective things do look bleak. Fund Performance and Market Movements -Given the aforementioned economic backdrop and uncertainty regarding the war, it was not surprising to see global bonds outperform global equities in the first quarter. Equities declined by 5.5% in US dollar terms, as measured by the MSCI World Index. Bonds on the other hand rose by 2.67% as measured by the Salomon Bros. World Government bond index. The rand however magnified these losses and undermined the gains as it strengthened a further 8.93%. This resulted in the fund price declining by 8.93%. The largest holding in our portfolio, the International Bond Fund (34.91% of portfolio) was the biggest relative contributor to returns. It was up by just over 3% outperforming its benchmark. The overweight position in corporate bonds helped as spreads between governments and corporates narrowed. Within the equity portion of the portfolio Europe was the worst performing market with the MSCI Europe ex UK declining by 9.5% in dollar terms. Our two largest European funds, the European Growth and Euro Blue Chip funds (which make up 6.67%and 4.78% of the portfolio respectively) performed marginally better than their benchmarks. Japan was not much better as the Nikkei declined by 7.7% in dollar terms. The Japan smaller companies fund contributed to relative returns as it did marginally better. The US was the best performing major market declining 3%. The main reason for the relative out performance was the dollar, which has weakened by 10%in the last six months against the Euro (4.08% in the last quarter). 31.36% of the portfolio is in US equities contributing to relative returns as many competitors are underweight the region. The largest equity holding was the America fund, which performed in line with the benchmark. The American growth fund also performed in line with its benchmark. This was disappointing as it has a growth bias. Over the quarter growth stocks outperformed value stocks in the US and as such we were looking for out performance. The reason this didn't materialise was the underweight position in tech stocks -one of the best performing sectors. This underlying fund was also overweight telecom stocks -one of the worst performing sectors.

Fund Positioning and outlook -As usual bonds and equities traded in opposite directions for most of the time. As equities in Europe, Japan and the UK touched fresh lows bond prices rose back to 44-year highs. The bond exposure therefore helped protect investors to a degree as 40%of the fund is in bonds. Underlying inflationary pressures remain well under control, while leading indicators for the OECD continue to point to slowing industrial activity in the second quarter of 2003.Further rate cuts can therefore not be ruled out, and under this scenario one would expect bonds to continue outperforming. That said the decline in markets during the first quarter reflect the poorer economic conditions. There is also renewed optimism from investors, as the war on Iraq seems to be coming to an end. This helps reduce investor uncertainty, which would be good for equities.

Fund Performance and Market Movements
Global equities outperformed global bonds in the fourth quarter. Equities rose by 7.32% in US dollar terms, as measured by the MSCI World Index, while bonds also rose by 4.21% as measured by the Salomon Bros. World Government bond index. The rand however erased all of these gains as it appreciated by 22.78% in the last quarter! This resulted in the fund declining by 15.27%.

The largest holding in our portfolio, the International Bond Fund (32.42% of portfolio)was the biggest relative contributor to returns. It was up by 5.32%, thus outperforming its benchmark. More importantly however, the gains were made with relatively little volatility. In fact it was the perfect hedge as the bond portion of the portfolio rose while the equity portion declined. This was ideal for unit holders, as volatility was once again a key feature of Q4 02. Take the Dax for instance; it touched new 5-year lows in early October only to rebound a massive 38.1% in the next 6 weeks!