The fund continues to benefit from rand weakness. A combination of SA's record current account deficit and emerging market jitters has resulted in the local unit being the worst performing primary currency in the world over 3 and 12 months. For the quarter it lost 7.7% against the dollar extending the 12-month loss to 18.2%. Against the crosses the dollar was basically flat against the euro for the quarter but over 12 months the greenback is 5.2% weaker. Currently no instrument within the fund has a maturity greater than one year with an average weighted maturity of 52 days. The underlying funds are also Triple A rated by Moody's and are therefore safer than 99%of bank accounts.

The quarter was characterized by the Feds decision to leave rates unchanged at 5.25% (following 17 consecutive 25bpt hikes) resulting in the underlying fund yield rising to 5.18%. As such the portfolio has a positive real yield of 3.38% (CPI currently 2.1%). Consensus currency forecasts put the dollar at $1.32/EUR 12months out although risks to the weaker dollar view would be improving sentiment towards a better budget deficit in the US (Dollar no longer undermined by "twin deficit" concerns). We therefore continue to recommend a spread of currencies. As Greenspan once said "Despite extensive efforts on the part of analysts, to my knowledge, no model projecting directional movements in exchange rates is significantly superior to tossing a coin... My experience is that exchange markets have become so efficient that virtually all relevant information is embedded almost instantaneously in exchange rates to the point that anticipating movements in major currencies is rarely possible".

During the quarter the portfolio gained 15.4% in rand terms to be one of the top performing funds in SA. Rising geopolitical tensions, a spike in the oil price to record highs coupled with tighter monetary policies bymost major central banks were headwinds for other asset classes. Clearly the fund also benefited from emergingmarket jitters, which hurt sentiment towards the rand but this was compounded by news that our current account deficit had ballooned to 6.4% of GDP. Fed governor Bernanke hiked rates for the 17th consecutive time to 5.25% preserving the yield advantage of dollar denominated deposits over their sterling and euro counterparts. The gross simple yield of the underlying Fidelity holdings is now 5.2% providing a positive real yield of 1%(core inflation has risen to 4.2%). We think rates are close to peaking, which could be negative for the dollar as traders often switch from currencies where rates are peaking to those that are entering a rising interest rate cycle. Consensus is calling for the dollar toweaken to $1.31/EUR, however risks to this view would be improving sentiment towards a better budget deficit in the US (dollar no longer undermined by "twin deficit" concerns) as well as geopolitical tensions causing a flight to quality with the dollar being the obvious beneficiary. We would therefore recommend a spread of currencies. As Greenspan once said "Despite extensive efforts on the part of analysts, to my knowledge, no model projecting directional movements in exchange rates is significantly superior to tossing a coin. My experience is that exchange markets have become so efficient that virtually all relevant information is embedded almost instantaneously in exchange rates to the point that anticipating movements in major currencies is rarely possible". Currently no instrument within the fund has a maturity greater than one year with an average weighted maturity of 59 days. The underlying funds are also Triple A rated byMoody's as well as Standard & Poor's. As such they are safer than99%of bank accounts.

The good news for the fund is that US interest rates continue to rise, with the US Federal Reserve having raised rates by 0.25% on 15 occasions in the past two years. Hence US money market funds are now paying 3.5% (and rising), higher even than British pound rates (3.4% and not rising) and much higher than European rates of 1.3% (rising a tad).

On the currency front the rand appreciated by 0.3% against the dollar during the quarter and by 1.5% over the past year. There is a perception that the dollar may depreciate against the euro and pound in 2006 because dollar interest rates are close to peaking, whereas Euro rates have only just begun to rise (up 0.5% so far). Sterling interest rates are unlikely to rise, but sterling tends to move more in line with the euro than with the dollar.

Commenting on the rand/dollar rate is a tricky one. The STANLIB house view is for 6.50 at end. What is interesting is that the rand/dollar rate is currently the same as it was in July 2004 and for a period in 2005 too. So while it may seem that the rand has been gaining against the dollar, it has actually made no headway for much of the past 2 years, i.e. the big up trend of the rand has flattened out for the past 2 years. This could be a sign that things are gradually turning around for the currency, i.e. that its strength may be waning. The rand first traded at 6 to the dollar in 1998 before trading at this level throughout much of 1999 en route to its low level of 13.85 in late 2001.

The rand held steady against the dollar during the quarter, so the fund's rand return was flat as the income generated in the dollar currency fund matched the costs of managing the fund.

During the year the rand depreciated by 10.8% against the dollar but the fund was able to generate a superior rand return of 13.6% (the STANLIB Euro Currency Fund generated a negative return of 1.8%).

The US authorities have now raised interest rates 13 times in the past 18 months, each by just 0.25%. This means that the annual yield on an offshore retail dollar currency fund (money market fund) has gradually climbed to 3.2%, not far short of the British money market yield of 3.4% and way above the euro yield of 1.1%, Swiss yield of 0.1% and of course the Japanese yield of zero.

So the STANLIB fund starts 2006 with a much better yield on its holdings in the dollar money market than over the past few years.

Also 2005 marked a big turnaround for the dollar as it gained against most other global currencies, as well as the rand, for its first winning year in the past 4 years.

The dollar gained 12.5% against the euro and 10.2% against the pound. However, there are early signs in 2006 that the dollar's rally may be over against the euro and pound, amongst others. It seems that the movements in interest rates do play a fairly important role in the movements of currencies and dollar interest rates are perceived to be close to the top, so interest is now shifting to other currencies like the euro, where interest rates have only just started to rise.