The STANLIB Income Fund returned 11.3% for the one year period ending 30 September 2004. The Fund now holds the number one position over all measurement periods from one to fifteen years, outperforming the 1-3 year sector of the All Bond Index over most measurement periods. The fund continued to attract good inflows of R180m over the quarter. Trades for the third quarter ending 30 September 2004 included the sale of government paper in the short and medium end of the yield curve. Exposure to parastatals were also decreased through sales of Transnet, Telkom and Rand Water short dated bonds. The Fund purchased longer dated money market assets, and switched into larger holdings of corporate paper. Purchases in corporate paper included African Bank, Standard Bank, ABSA, NBC, Sasol and Super Group. Exposure to Standard Bank was also increased through the purchase of newly listed preference shares. In this quarter the SARB MPC surprised the markets at the August meeting, by lowering the Repo rate from 8.00% to 7.50%. The SARB cited lower than expected inflation numbers and a strong Rand as reasons to cut rates, although the high oil price was seen as a risk to inflation targeting. The rate decision caused interest rate views to be revised lower and interest rate markets pricing in the probability of more cuts in the current cycle. The persistent high oil price is the cause for concern to the lowering of rates in the current cycle. The money market curve moved lower over the quarter, with the 12 month NCD starting at 8.90%, continuously trading lower, easing to 7.45% at quarter end. With the Rand trading in a stable range around the R6.50 level to the Dollar, but very high oil prices, it is likely that the SARB MPC will remain neutral on monetary policy.

The STANLIB Income Fund returned 9.1% for the year ending 30 June 2004. The Fund remained in the top quartile position over all measurement periods, outperforming the 1-3 year sector of the All Bond Index over three years ending 30 June 2004.

The Fund continued to grow over the quarter with net cash inflows of R250m. Trades for the second quarter ending 30 June 2004 included the purchase of government paper in the short and medium end of the yield curve. Exposure to parastatals were also increased through purchases of Transnet, Telkom and Rand Water short dated bonds. The Fund liquidated money market assets, to switch into longer dated corporate paper. Purchases in corporate paper included Standard Bank, Nedbank, ABSA and Edcon.

In this quarter the SARB MPC kept the repo rate on hold at both meetings in April and June. The inflation fear created by the oil price trading above the $40 per barrel, was offset by the continued strength in the Rand. The Rand's strength is causing most inflation forecasts to be revised down, prompting market participants to revise their interest rate scenarios. Interest rates could move sideways for a longer period of time, than anticipated at first. The money market curve moved higher over the quarter, with the 12 month NCD starting at 8.60%, trading as high as 9.10%, before easing to 8.90% at quarter end. With the Rand close to R6 to the Dollar, we could see the SARB MPC remain neutral for longer on monetary policy.

The Stanlib Income Fund remained the top performing Income Fund over all measurement periods. The Fund returned 12.6% over the one-year period ending 31 March 2004, outperforming the second best fund in the category by 0.7%.
Over the last quarter, the fi xed interest market experienced some volatility leading to money market rates drifting higher. In anticipation of this upward move in yields, the Fund's modified duration was cut from 1.4% at the beginning of the quarter to 1.1%, which helped reduce capital losses substantially. During the quarter holdings of RSA 2008 and Eskom 2008 were liquidated, and the resulting proceeds used to purchase new ABSA 2010 and First Rand 2010 three months fl oating rate issues. New money that fl owed into the Fund was mainly used to buy money market instruments. The duration of the Fund will be kept shorter since the SARB is expected to keep rates unchanged, with the next move likely to be up.
The South African Reserve Bank left rates unchanged at their last MPC meeting this quarter, a clear indication that the downward cycle in interest rates has ended. Infl ation numbers released over the quarter seem to have bottomed out and are expected to start moving higher. The money market curve has steepened as a result of the SARB's decision, with the one-year NCD rate increasing from 8.05% at the beginning of the year to end the quarter at 8.55%.
Modifi ed Duration: 1.1%

Due to the STANLIB amalgamation (27 Feb 2004), the Liberty Income Fund will be renamed to the STANLIB Income Fund.

The Liberty Income Fund returned 14.4% for the year ending 31 December 2003. The fund remained in the top quartile over all measurement periods, outperforming the 1-3 year sector of the All Bond index over three years ending 31 December 2003.

The fund continued to grow sharply with net cash inflows of R700m during the fourth quarter. Trades for the fourth quarter ending 31 December 2003 included the liquidation of longer dated government paper. The proceeds of these cashflows, as well as new cashflows, were invested in the medium and short end of the government curve. The fund's short term purchases included Nedbank and Daimler Chrysler paper, while in the medium term, the fund purchased Investec, Steinhoff, Escom, SA Homeloans, and Firstrand paper.

In this quarter the SARB MPC cut interest rates further, as anticipated by the markets, with inflation trending lower and the rand strengthening against the dollar. At the October meeting, the Repo rate was cut more aggressive by 1.5% to 8.5% and was more than that expected by the market. In December the SARB did not want to aggravate the already higher credit numbers and the Repo rate was subsequently cut by only 0.5% to 8.0%. The money market continued to trade lower as interest rates are expected to move sideways for longer. The 12 month NCD rate declining from 8.50% at the end of September to 8.05 % at the end of December. The low on the 12 month NCD was 7.15%, but the normal year end cash shortage, pushed rates back to 8.05%. The SARB is expected to err on the side of caution at future MPC meetings.