Income investments remained in favour during the quarter, benefiting significantly from the surprise 0.5% cut in interest rates in August. Although the STeFI call deposit (+1.8%) and the BEASSA 1-3 year Index (+4.2%) both produced positive returns, equities (+17.4%), property (+11.8%) and bonds (+6.9%) were the key beneficiaries. Although the fund marginally under-performed its benchmark during the quarter, it beat the peer group and was ranked 5/11 for the quarter. STANLIB Asset Management was the better performing manager for the period. Underperformance relative to benchmark is attributable to the fact that that rate cut took the entire market by surprise and the managers were caught short of duration. In South Africa we are currently enjoying the immediate benefits of accelerating economic growth, declining inflation, a strong Rand and declining interest rates. This has boosted consumer confidence and expanded gross domestic expenditure resulting in a virtuous circle of economic growth. This has created a positive environment for all asset classes. To the extent that these variables remain in place, we will continue to remain positive on the prospects for income producing asset classes.

Cash proved to be a safe haven in the 1st quarter as other income producing asset classes performed poorly. STeFI Call Deposit (+1.8%) and the BEASSA 1-3 year Index (1.4%) out performed both bonds (-0.31%) and property (-0.94%). Interest rates were left unchanged in February fuelling the perception that we are at the bottom of the interest cycle. This was negative for longer dated interest sensitive assets. Equities (+3.7%) were the best performing asset class for the quarter.
The Portfolio performed well during the quarter producing a 1.71% return relative to the benchmark return of 1.36%. The Portfolio was ranked 4/13 for the quarter. The segregated mandate written with African Harvest in the previous quarter has bedded down and their returns have been slightly ahead of the benchmark over the past 3 months. STANLIB Asset Management also outperformed the benchmark during the period. The Portfolio is split evenly between the two managers. Having two managers in the portfolio has improved the diversifi cation benefi ts of the Portfolio for investors and will help to produce more consistent returns over time.
Interest rates should remain stable for the rest of the year. The portfolio is currently positioned at the short end of the maturity curve relative to the benchmark, which should protect the portfolio should rates start to tick up toward the end of the year. Overall the portfolio is well diversifi ed and should continue to produce returns in line with the benchmark going forward.

Due to the STANLIB amalgamation (27 Feb 2004), Standard Bank Multi-Manager Income Fund will be renamed to the STANLIB Multi-Manager Income Fund.

Cash was the worst performing asset class during the quarter with the STEFFI call deposit producing a return of 2.08% for the quarter. Although cash under performed during the quarter, it consistently produces positive returns with no risk of downside relative to the other asset classes and hence must be seen as a vital diversifier in any investor's overall portfolio. The fund performed well during the quarter producing a 2.08% return (after fees) relative to the benchmark return of 1.08%.
In total, interest rates have dropped 5.5% during the course of the year thanks to an improved inflation outlook. CPIX inflation dropped to 4.1% (y-o-y) in November prompting the Reserve Bank to lower interest rates by 50bps in December. This was lower than the market expected and interest rate sensitive asset reacted negatively. This was exaggerated by the weakness in the rand toward the end of the year. The market is no longer expecting any further interest rates cuts in this cycle and as such a quantum shift in expectations has taken place. The Prime Lending Rate now stands at 11.5%.
During the quarter a segregated mandate was written with African Harvest. As a specialist income manager, African Harvest has a fundamental approach to investing, taking a longer-term view on the direction of interest rates and positioning the portfolio accordingly. STANLIB are confident in the investment skills of the African Harvest team and feel that their inclusion in the portfolio, along with STANLIB Asset Management (the existing manager) will make this fund more competitive in the Income category of collective investment schemes. Having two managers in the portfolio will also improve the diversification benefits of the fund for investors and help produce more consistent returns over time. The fund is split evenly between the two managers. The focus of both managers will be on income producing assets and the benchmark of the fund changed from the STEFFI Call Deposit rate to the BESA 1-3 year bucket with effect from 1 Dec 2003.