The Industrial Index rose sharply by 10.4% in the third quarter, 4.2% of which was generated in the month of September.

We have, for some time now, highlighted the encouraging economic outlook for the South African economy and domestic industrials in particular. Generally, "corporate South Africa" has reported strong earnings growth ahead of the market's expectations, on the back of the healthy economic environment (especially the consumer sector). This has been the main driver of the exceptional returns that we have experienced in the sector for the year and quarter to date.

Domestic shares that performed well over the quarter (that were represented in your fund) were: ABI (+32.5%), Edcon (+27.7%), Woolies (+25.4%), Bidvest (+20%), Imperial (+18%) and Barlows (+17%) amongst others.

The following new stocks were added to the Fund over the quarter: Lewis (the company listed towards the end of the quarter), Ellerine and Advtech. In addition, exposure to the following stocks has been increased: Aveng and Imperial. Exposure to Telkom and Sappi were reduced over the quarter.

We continue to believe that domestic industrial stocks remain relatively cheap. The consumer continues to benefit from the lower interest rates, high real wage increases, improved tax benefits and low inflation (assisted by the strong rand). This is expected to lead to an unprecedented level of spending by the consumer over the festive season. The manufacturing sector is showing signs of a recovery after suffering the effects of the recent strength in the rand. We expect this recovery to continue over the next twelve months. We retain our view that the medium-term outlook remains favourable for domestic industrial stocks. We believe that domestic SA industrials will continue to generate strong earnings growth (well ahead of inflation) over the next twelve months. This is reflected only partly in the rating of the sector.

The Industrial Index rose modestly during the second quarter (rising by 0.45%) despite the continued strength in the rand (it strengthened by a further 1.4% against the dollar). The Industrial Index declined by 0.8% over the month of June. Your fund increased by 2.28% and 1.38% over the quarter and month to June respectively.

Domestic shares that performed well over the quarter (and which are represented in your fund) are Nampak (+9.8%), SAB Miller (+9.8%), Steinhoff (+4.4%), Naspers (+4.2%) and Imperial (+3%). Our overweight position in SAB Miller was particularly pleasing given the exceptional results that were reported for the year to March 2004.

The following new stocks were added to the fund over the quarter: Nampak, Supergroup, Venfin and Famous Brands. In addition, exposure to the following stocks has been increased: AVI and Massmart. Exposure to the following stocks was reduced over the quarter: Altech, MTN, Rembrandt and SAB Miller. Your fund has, however, retained an overweight position in SAB Miller.

Domestic industrial stocks remain relatively cheap. The consumer is currently experiencing the benefits of the lower interest rates, high real wage increases, improved tax benefits and low inflation (assisted by the strong rand). The strong consumer spending cycle is likely to continue at least over the next twelve months. Consumer confidence is at record levels. On the other hand, the manufacturing sectors (generally) have suffered from the rand strength. Recent data points to a slight recovery in the manufacturing sector, albeit a gradual recovery. Generally, domestic SA industrial stocks are benefiting from a healthy economic environment, supported by the strong consumer. The medium-term outlook remains favourable.

It is, however, unlikely that this utopian environment will continue in the long term. For this reason, one should start to question the longevity of the current cycle and position oneself accordingly. We are currently re-evaluating the domestic environment (especially after the unprecedented strength we have seen in the rand) and the rampant strength of the domestic consumer.

Industrial shares rose modestly in March although the rand firmed by a further 5% against the dollar.

Domestic shares continued to outperform as a result. Strongest were Edcon (+17,4%), Telkom (+17,2%) and MTN (+10,8%). Steinhoff (-9,7%), Murray and Roberts (-6,2%) and Richemont (-4,2%) - all of which operate internationally - were the worst performers.

Domestic consumption remains robust, supported by interest rates that are expected to remain flat for most of 2004, and the strong rand.

We have started to take profits on some holdings that have outperformed over the last year and will continue to position the portfolio more defensively. The move from Foschini into Mr Price and Woolies is an example of this.

We continue to take a balanced view on the rand in the portfolio, but expect the rand to weaken from its current strong levels. Rand weakness will be utilized to sell the offshore holdings in the portfolio.

Claude van Cuyck, Sector Head of the Industrial team, has taken over the management of the fund from quarter-end.

Performance & Reason
The fund had a flat return for the month after a strong start to the year in January. Rand strength contributed to the slowdown in returns - the rand was 7% stronger against the dollar and the euro over the month.

Domestic shares outperformed as a result. Strongest were Bidvest (+12,3%), Imperial (+6,1%) and Tiger Brands (+0,9%). Offshore holding Reckitt Benckiser PLC rose by 10% in sterling.

One of the outstanding performers for 2003, Telkom, fell by 10% due to threatened litigation by certain customers and likely disinvestment by corporate shareholders. We believe that the share still offers some value.

Outlook
The call on the future direction of the rand remains crucial. We have tried to take a balanced view on the rand in the portfolio, but would expect the rand to weaken from current strong levels.

The budget contained no surprises, world growth is robust supported through by unsustainably low interest rates, and a commodity upswing is under way.

Domestic consumption will be further supported by flat interest rates for most of 2004.

Effective from 1 Apr 04, the Sanlam Industrial Trust changed its name to the Sanlam Industrial Fund.

The fund outperformed its peers over the December quarter, the first since its transfer to the industrial sector. Some shares have produced exceptional returns over the short-term, especially the TMT trio of Telkom (+59%), Naspers (+47%) and MTN (+43%). Rand hedges such as Sappi (-1%) and Richemont (+11%) performed worst.

Stock selections favour cyclical shares while we are in the downswing phase of the interest rate cycle.

The case for industrial shares is still improving. Further interest rate cuts are expected during 2004, and consumers are benefiting from lower price inflation as rand strength persists.

The divergence in performance between consumer and producer shares continues, but has become extended.

We have taken a balanced view on the rand in the portfolio as we believe that the rand will weaken during 2004