The final leg of the restructuring of this fund was completed during the third quarter. In this restructuring the specialist equity and bond exposures were sold in favour of highly rated balanced fund managers.

The portfolio now consists of five quality balanced fund mangers who will manage the asset allocation more actively than was previously the case. The advantage of having five good managers managing the underlying assets is that the Fund is not reliant on only one particular manager but has exposure to different styles and processes.

The surprise interest cut during the quarter caught most of the selected managers off guard and the portfolio did not benefit fully from the resulting market movements. However, during the past month the managers added considerable value and the Fund managed to out-perform its peer-group benchmark.

The third quarter proved to be a very good quarter for investors in the SA equity and bond markets. The surprise interest rate cut in August helped the ALSI to a positive return of 2.2% for the month. This good start to the quarter was followed by two very strong months of 8.8% and 5.7% in August and September respectively. For the year to date the ALSI is up by 16%. Resources have been the laggard of the three major sectors and returned only 6.7% compared to the very good 20.2% and 27.5% of the industrial and financial sector respectively.

Bonds also did well during the quarter as investors priced in the favourable interest rate environment. After the first two quarters during which bonds did not perform very well, the third quarter saw bonds returning 6.9% over the three months. The total return on the All Bond Index for the year up to the end of September is now 7%. For the first time this year, investors have done better from bonds than from cash instruments.

After the major restructuring during May, no major changes were implemented in the portfolio during June.

The restructuring during May worked well and the fund ended the month in the top half compared with the peer group. For the quarter, the fund is however still below the peer group average.

For the year to date, the underperformance can be ascribed to the overweight position the portfolio had in bonds (versus cash). With hindsight, the portfolio should have been less exposed to bonds and should have contained a higher exposure to cash. The portfolio also had an above-average exposure to foreign assets in a period of significant rand strength.

June was another negative month for the All Share Index. The 2.7% decline during June, together with the 2.4% decline during April, resulted in the Index also ending the quarter down by more than 4.5%. The All Share has now declined by more than 1% for the year to date.

Currency movements during the quarter were extremely volatile. During April the rand depreciated by more than 9% against the US dollar. However, during May and June it bounced back with performances of 6.9% and 4.6% respectively. The result is that the currency has appreciated against the dollar since the start of the year (7.4%). This makes the rand one of the strongest currencies in the world - year to date.

The SA bond market has been a poor performer since the start of the year. A higher than expected oil price fuelled expectations for an interest rate hike during the second half of 2004. This resulted in bond yields kicking up from their lows.

Inflation fears were reduced during the quarter, primarily due to the very strong rand. The positive performance from bonds during the recent quarter (0.4%) helped the year-to-date return into positive territory. However, compared to cash, bonds have still underperformed as cash is up by 4% for the year to date.

Exposure to Allan Gray and RMB was reduced in favour of the Nedbank Equity Fund. This fund is managed by African Harvest Fund Managers and provides additional diversification within the portfolio.

This fund has underperformed its benchmark during the month as well as for the year to date. One of the reasons for the underperformance can be attributed to the fact that the portfolio has a greater exposure to foreign currencies than its peer group. In a month during which the rand again strengthened by nearly 5% against the US dollar, the fund's performance was impacted negatively.

On a one-year view the fund is still in the second quartile with above-average performance against its peers. Both the SA equity market as well as the SA bond market declined in value during the course of the month. The All Share Index declined by nearly 1.4% during the month, leaving the return for the year at 3.7%. Despite the low interest rates, cash outperformed bonds by more than 2% (2.0% vs. -0.3% from bonds) during the first 3 months of the year.

The rand declined substantially against the major world currencies during January but has since recovered strongly. It is still one of the best-performing currencies against the US dollar and has strengthened by more than 6% for the year to date. This has impacted negatively on the resources sector of the equity market, with it lagging financials and industrials by nearly 6%.

Buys & Sells
No changes were made during the month.

Performance & Reason
The fund underperformed its benchmark during the course of the month. The past month's underperformance can be attributed mainly to the fact that the fund has a greater exposure to foreign currencies than its peers. In a month during which the SA currency strengthened in excess of 5% against the US dollar, this fund was impacted negatively. Some of the underlying managers also underperformed during the course of the month.

Market Comments
February was generally another good month for equity investors. The All Share Index increased during the month, with the financial sector the best-performing main sector with a return in excess of 1%. For the year to date, the All Share Index has increased in excess of 5% and by more than 34% over the past twelve months.

The rand was again one of the key drivers of market movements during the month. After weakening substantially during January, the rand strengthened by more than 5% relative to the US dollar in February. This impacted negatively on the local resources sector as well as foreign exposure in this fund. The local bond market rallied on the back of the stronger currency.

Effective from 1 Apr 04, the Sanlam Managed Prudential Fund of Funds changed its name to the Sanlam Multi Managed Balanced Fund of Funds.

During December we adjusted the portfolio slightly by selling out of the RMB Structured Equity Fund and the Coronation Industrial Fund. As replacements, we used the RMB Top 40 Index Fund and the Sanlam Select Fund. We wanted to increase the fund's exposure to a possibly depreciating currency without reducing SA market exposure. In addition, the Top 40 Index tracker provides us with a sufficient rand hedge component in the fund. Also, we reduced the industrial bias in favour of smaller companies in general by including the Sanlam Select Fund.

We can gladly report to investors in this fund that it outperformed its benchmark during 2003. The 17.6% performance of the fund is nearly 1% above that of the average competitor fund and ensures that we are comfortably in the top half of our peers for the full year. This performance is consistent with the objective of providing investors with consistent above-average returns at lower than average risk.

With 2003 a thing of the past, it seems like a good idea to get an indication of what the broader financial community expects for 2004. Here are some of the key issues:
oThe consensus view seems to be that there will be a global economic recovery during 2004. This could prove to be beneficial to global equities.
oConsensus view is for the dollar to remain weak against the other main currencies. This could imply that the rand will stay fairly stable against the dollar but depreciate against the other currencies such as the euro or pound.
oAfter an estimated 1.9% GDP growth during 2003, most market commentators believe that 2004 will be better and they predict growth in the region of 3% for the year.
oOn the interest rate side, consensus is for SA interest rates to start rising slowly in the second half of 2004.

We will continue to monitor these factors and adjust the portfolio composition accordingly. However, for the time being we continue to favour SA equities as an asset class.