Sanlam Collective Investments (SCI) has two classes of Money Market Fund investments, namely Class R and Class A2. The reason for establishing more than one class was primarily to accommodate different fee structures within one portfolio.

The Money Market Fund Class R has an annual service fee of 0,50%, while the Money Market Fund Class A2 had an annual service fee of 0,35%. However, with effect from 1 August 2004 the service fee for the Class A2 fund was also increased to 0,50%. (SCI informed its investors of the change in fees in April 2004.) As a result of these changes, the fee structures of both classes are now exactly the same, and there is no longer any justification for having more than one class in the Money Market Fund.

SCI has therefore decided to close Class A2 and to move the existing investments in this class to Class R. Statements of transactions reflecting the transfer to Class R will be sent to all relevant investors on 1 November 2004 - the effective date of the transfer. This transfer is free of charge and will have no effect at all on the value
of their investments.

The three-month Johannesburg Inter Bank Ask Rate (Jibar) traded mostly sideways through the third quarter until the SARB surprised market participants with a 50 basis point monetary easing during August and finally closed the quarter at 7.25%, down from 8.1% at the end of the second quarter. It should be said, though, that the twelve-month Jibar declined from 9.02% at the end of the second quarter to 8.62% before the surprise monetary easing, which implies that the market started to price in an unchanged monetary policy on a twelve-month view, compared to the expectation of monetary tightening that dominated the second quarter.

At the end of the third quarter the money market yield curve suggested some room for monetary easing in the short term, but between 1% and 2% of monetary tightening within the next two years. Money market investors therefore appear to be of the opinion that short-term interest rates are at, or very close to, the bottom and that interest rates would mostly drift higher from here.

However, in recent times the money market curve has been a weak predictor of monetary policy and it is not obvious that its predictive power will increase during the next year.

While we also failed to anticipate the August monetary easing, SIM did not expect any monetary tightening either and therefore invested in the longer end of the money market curve during the first part of the quarter. Our money market portfolios therefore benefited from the flatter curve and the subsequent downward movement. We expect monetary policy to remain unchanged over the short term and the duration of the money market portfolios therefore declined towards the end of the quarter.

During the second quarter the interest rate outlook started to change with the level of the money market curve shifting higher - the 3-month NCD rate closed unchanged at 8.2% - while the overall curve became more positively sloped with the 12-month NCD trading up to 9.05% from 8.8% at the beginning of April. Purely based on the reshaping of the money market curve during the quarter, it would seem that the probability of a moderate tightening of monetary policy during 2004 has increased. Certainly the odds of further monetary easing, at least in the short and medium term, seem very remote.

SIM increased the duration on all money market portfolios to take advantage of the positive slope of the current money market curve. This strategy contributed to a slightly higher yield, but it also added some market risk to the portfolios.

Following the 50 basis point rate cut by the SARB during December 2003, the short end of the money market traded below 8% at the beginning of January 2004. However, the overall curve had already adopted a positive slope, with the 12-month NCD trading at 8.25% - some 30 basis points higher than the 3-month NCD rate. Expressed on a quarterly compounding basis the money market yield curve was rather flat at the start of the quarter, suggesting no change to money market interest rates during 2004.

Through the course of the first quarter the interest rate outlook started to change with the level of the money market curve shifting higher - the 3-month NCD rate closed the quarter at 8.2% - while the overall curve became more positively sloped with the 12-month NCD trading up to 8.8% at the end of March. Based purely on the reshaping of the money market curve during the quarter, it would seem that the probability of a moderate tightening of monetary policy during 2004 has increased. The chances of further monetary easing, at least in the short and medium term, certainly seem very remote.

SIM's money market portfolios had a low duration at the start of the quarter and as the market factored in monetary tightening, we also stared to invest in the longer end of the money market curve, i.e. we increased the duration of the money market portfolios. This strategy contributed to a slightly higher yield, but it also added some market risk to the portfolios.

The exchange rate of the rand stabilized below R7 to the USD during February and fears of an imminent tightening of monetary policy subsided somewhat during the month. At its two-monthly meeting during February the South African Reserve Bank decided to keep its repurchase rate unchanged, which in turn suggests that the SARB expects CPIX - the targeted measure of inflation - to remain in the 3% to 6% band during the next 12 to 18 months. As a result, the 3-month Johannesburg Interbank Call Rate traded sideways at 8%, while 12-month Jibar traded sideways at 8.45%.

With measures of domestic inflation declining through the fourth quarter of 2003, the SARB had room to lower its repo rate by 150 basis points in October 2003 and by a further 50 basis points during December 2003. The additional 200 basis points of easing brought the accumulated easing for 2003 to 550 basis points since mid-2003 and resulted in the repo rate falling to 8% by year-end, the lowest level since its introduction in 1998.

The two rounds of monetary easing during the final quarter of 2003 resulted in a 145 basis point rally in the three-month area of the money market yield curve, to 7.72% at year-end, and a 100 basis points rally in the one-year area of the curve to 7.84%. The money market yield curve became flatter as the level of money market rates shifted lower, suggesting that money market participants see limited scope for further monetary easing beyond the fourth quarter of 2003.