On the 1 November 2003, the African Harvest Money Market Fund, BoE Money Market Fund, FTNIB Money Market Fund and the Nedbank Money Market merged to form the Nedbank Money Market Fund. The history of the African Harvest Money Market Fund has been retained. This fund is part of the Active Return Range.

The Money Market fund had a return of 2.92% for the quarter. This is exactly the same return as the STeFI composite index, which has become the generally accepted money market performance benchmark. On a relative basis, the fund has performed very well, coming 1st over 1, 3 and 6 months, 6th over 12 months, 3rd over 24 months and 2nd over 36 months.

Economic Overview
The pace of local economic expansion continued to wane over the second quarter with real gross domestic product expanding by a seasonally adjusted and annualised 1.1% following 1.5% over the preceding quarter. But the latest numbers confirmed the local economy’s 19th consecutive quarterly expansion, the longest period of unbroken expansion on record.

The production side of the economy remained weak over the quarter as key sectors like manufacturing continued to haemorrhage under the strain of rand strength, lacklustre global demand and last year’s interest rate hikes. Local demand remained buoyant on firm consumption and fixed investment spending. Household spending remained firm, buoyed by tax cuts, government transfers, real wage gains and increased debt.

Inflation continued its sharp decline from peak rates recorded over the fourth quarter of 2002, driven lower mainly by lower food prices and the sharp appreciation of the rand in 2002. Consumer inflation - measured by the annual percentage change in the CPIXu - fell to 6.3% in August from a peak of 11.3% in October and November 2002. Notwithstanding the rand’s continued strength there are increasing signs that inflation may be nearing its bottom.

The Reserve Bank has eased its benchmark Repo rate by 350 basis points since mid-June to 10%. Over the remainder of this year the Reserve Bank will cut rates again. But the current easing cycle does not imply a material loosening of monetary policy. Real rates remain restrictive, as it should given significant medium-term structural inflation bugbears. These include high and sticky administered price inflation and rising unit labour costs.

Market Background
The past quarter saw a fair degree of volatility. During July and August long-bond rates generally moved up on the back of rising United States bond rates which rose from a level of 3.5% at the end of June to a high of 4.6%. This upward move in our rates occurred notwithstanding a cut in the Repo rate of 100 basis points in August. During September, we saw a retracement as the growth numbers came in lower than expected and the South African Reserve Bank surprised the market with a special Monetary Policy Committee meeting at which the Repo rate was reduced by a further 100 basis points. This move was supported at the end of the month by lower than expected Producer Price Inflation, money supply and credit extension numbers. The strength of the rand also added fuel to this fire dropping to below R$7 from a level of R$7.46 at the beginning of the quarter.

The end result of these moves is that we are currently sitting with a yield curve that has normalized meaningfully, particularly with the short rates that have moved down significantly. The very long end has surprised with its strength and the medium area of the yield curve is in fact higher than it was at the beginning of the quarter. This is illustrated by the R150 (2005) having fallen from 8.89% to 8.42%, the R153 (2010) having risen from 8.97% to 9.15% and the R186 (2026) having fallen from 8.90% to 8.55% over the quarter.

As can be by the money market watch, the money market responded dramatically to the cuts in the Repo rate with the three-month NCD rate declining 235 basis points from 11.40% to 9.05% over the quarter and the 12-month rate declining 130 basis points form 9.90% to 8.60%.

Portfolio Review
As mentioned above, rates have declined very rapidly in anticipation of cuts to the Repo rate. The question then was how much further are they likely to go. With these doubts in our mind, we shortened the term of our investments over the quarter. We purchased R15 million four-month paper at an average rate of 9.39%. The average maturity of the assets in the portfolio is still near the maximum at 83 days. The current yield on the portfolio is 11.01%.

Outlook
With the ongoing strength of the rand and its negative impact on the economy, the debate now revolves around whether the Reserve Bank will start buying up dollars or cut interest rates more aggressively to relieve that pressure. On balance, we believe there is likely to be a bit of both. We have taken the view that there will be at least one further cut in the Repo rate at the October Monetary Policy Committee meeting of 100 basis points, with the possibility of a further 100 basis points cut some time between the December and February 2004 Monetary Policy Committee meetings. As a lot of those expectations are already priced into the market, we are likely to continue investing in the shorter-end.

Performance Summary
The Money Market fund had a return of 4.31% over the quarter. This comfortably outperformed the STeFI composite index, which has become the generally accepted money market performance benchmark, of 3.23%. On a relative basis the fund had a very good month coming 1st out of 23 competitors [Source: Micropal].

Economic Overview
The local economy continued to put in a solid performance recording its 18th consecutive quarterly expansion in the first quarter of 2003, although the performance was more subdued than in the fourth quarter of last year. Real gross domestic product - the broadest measure of output in the economy - grew at a seasonally adjusted and annualised rate of 1.5% in the first quarter compared to 2.4% in the fourth quarter. On a year ago, GDP grew by 2.6% in the first quarter compared to 3.0% in the fourth quarter.

The production side of the economy was noticeably weaker over the quarter as key sectors like manufacturing buckled under the strain of rand strength, lacklustre global demand and successive interest rate hikes in 2002. Local demand remained buoyant as households were in a better position to withstand last year’s monetary tightening, government continued to expand consumption and investment, and private fixed investment continued at a strong pace.

Inflation peaked in the fourth quarter of 2002 and has been declining sharply since then, driven mainly by lower food prices and the sharp appreciation of the rand in 2002. Consumer inflation - measured by the annual percentage change in the CPIXu - fell to 7.7% in May from 8.5% in April and a peak of 11.3% in October and November 2002. Inflation will continue falling over 2003 on lower food prices, the firmer currency and last year’s high bases.

Despite these cyclical positives for inflation over the next few months a number of structural bugbears remain. These include high and sticky administered price inflation and the impact of deteriorating inflation expectations as evidenced by rising unit labour costs. Thus, the Reserve Bank is likely to keep monetary policy fairly restrictive, allowing rates to decline in nominal terms while maintaining high real rates.

Market Background
The major event over the past quarter was the first step by the Reserve Bank in beginning to unwind the four percentage point hike in official interest rates we had during 2002, after the rand crisis at the end of 2001. On the 12th June the Reserve Bank reduced the Repo rate by 150 basis points from 13.5% to 12.0%. This cut in the Repo rate would have been made in the belief by the Reserve Bank that they were likely to meet their inflation targets going forward. This was against a backdrop of:

better than expected Producer Price Inflation;
a further recovery of the rand from R$7.92 to R$7.51 over the quarter;
a better than expected Consumer Price Index after an unexpected revision of the these numbers when Stats SA admitted that they had significantly overstated these numbers due mainly to an incorrect calculation of rental increases;
a slowdown in the growth of the economy; and
an end to the Iraq war.

This cut in the official rates led to a further sharp reduction in bond rates with the benchmark R153 (2010) bond declining from 10.18% to 9.07% (111 basis points) over the quarter. Even more significant has been the rapid normalization of the yield curve, The R150 (2005) bond declined from 10.95% to 8.88% (207 basis points) over the quarter. Other than for the very short end of the yield curve, we now have a positively shaped yield curve.

As can be seen below, the money market also responded dramatically to the cut in the Repo rate with the three-month NCD rate declining 185 basis points over the quarter, the six-month rate declining 275 basis points and the 12-month rate declining 290 basis points. These rates would appear to be building another 300 basis points in cuts in the Repo rate over the next six to 12 months.

Portfolio Review
In line with our view that the short-term interest rate cycle had peaked, we very early in the quarter purchased R11 million 12-month NCD’s at an average rate of 12.86%, R13 million 6-month NCD’s at an average rate of 13.15%, R11 million 3-month NCD’s at an average rate of 13.35% and R19 million 3-month corporate paper at an average rate of 13.83%. At the end of the quarter after rates had come down sharply we sold some 7- and 8-month NCD’s at an average rate of 10.6% to lock in some of the benefits of the sharp decline. At the end of June the weighted average maturity of the assets in the portfolio was at the maximum of 90 days. The current yield on the portfolio is 12.89%.

Outlook
Looking forward, we believe that the Reserve Bank is likely to continue cutting the Repo rate over the next six to twelve months. This should result in the further normalisation of the yield curve. We also expect the shorter-dated money market rates to keep coming down.

Performance Summary
The Money Market fund had a return of 1.03% over the month. This very slightly underperformed the STeFI composite index, which has become the generally accepted money market performance benchmark, of 1.06%. On a relative basis the fund was positioned 10th out of 23 competitors over the month.

Market Background
The CPI (x) numbers, monitored by the Reserve Bank for inflation targeting purposes, disappointed the market in as much as a level of 12.0% was expected for March and the outcome was 12.5%, in line with the previous month. The PPI numbers did however, continue to surprise on the positive side. The market was expecting a level of 5.3% and the actual outcome was 5.1%, compared to the previous month's level of 6.2%. We saw a continuation of the improvement in the rand, particularly to the dollar, as can be seen in the table below. These factors resulted in the benchmark Government bond, the R153 (2010), declining from a level of 10.19% to 10.00% over the month. From the table below we can also see that the money market rates, particularly the longer-dated ones, are beginning to anticipate a decline in the official rates.

Portfolio Review
We continue to believe that we will see a cut in the Repo rate within the next few months and, as a consequence, have continued lengthening the duration of the portfolio. To this end, we have bought R9 million three-month paper at a rate of 13.35%, R13 million six-month paper at a rate of 13.15% and R11 million 12-month paper at an average rate of 12.87%. The current yield on the portfolio is 13.35%

Outlook
Looking forward, we believe that the Reserve Bank is likely to cut the Repo rate at the next MPC meeting that is scheduled for June. We therefore plan to continue buying longer dated paper as existing paper matures to take advantage of the current higher rates.

Performance Summary
The fund had a return of 3.09% over the quarter. [Source: Micropal]. This slightly underperformed the Stefi composite index, which has become the generally accepted money market performance benchmark, of 3.21%.

Economic Overview
The South African economy recorded its 17th consecutive quarterly expansion in the final quarter of 2002, making the current upcycle in activity the 4th longest on record. This was despite a continued moderation in growth momentum due to higher interest rates, the firmer currency and lacklustre global demand. Real gross domestic product grew at an annualised rate of 2.4% in the fourth quarter compared to 2.9% in the preceding quarter. On a year ago, GDP growth rose by 3.0% in the fourth quarter compared to 3.2% in the third quarter. For all of 2002 the economy expanded by 3.0% compared to 2.8% in 2001. The key driver of activity remained buoyant local demand, especially fixed investment spending.

South Africa's current account registered a surplus of R4.3bn annualised (0.4% of GDP) in the fourth quarter after a deficit of R2.2bn (0.2% of GDP) in the third quarter. For the year a surplus of R3.3bn (0.3% of GDP) was recorded compared to a deficit of R2.8bn (0.3% of GDP) in 2001.

Inflation peaked in the fourth quarter of 2002 and has been declining sharply since then, driven mainly by lower food prices and the sharp appreciation of the rand in 2002. Consumer inflation - measured by the annual percentage change in the CPIXu - fell to 11.3% in February from 11.8% in January and a peak of 12.7% in November 2002. Inflation will continue falling sharply over 2003 on lower food prices, the firmer currency and technical factors. Despite these cyclical positives for inflation over the next few months a number of structural bugbears remain. These include high and sticky administered price inflation and the impact of deteriorating inflation expectations as evidenced by rising unit labour costs. Thus, the Reserve Bank is likely to keep monetary policy fairly restrictive, allowing rates to decline in nominal terms while maintaining high real rates.

Market Background
The major event in the market over the past quarter has been the rapid unwinding of inflationary forces as seen in the Producer Price Index (PPI) numbers where they have surprised on the positive side for each of the past three months. PPI has now come down from a high of 15.4% in September 2002 to 6.2% in February 2003. This has been driven largely by declining agricultural prices and supported by the strengthening Rand. Over the quarter the Rand appreciated from R$8.64 to R$7.92. Statements from the major international rating agencies that they were upgrading the outlook for the country's credit rating lent support to the bond market. Long bond rates, as represented by the R153 (2010) Government bond, declined from a level of 10.73% at the end of December last year to a level of 10.18% at the end of March.

As can be seen below, the money market largely moved sideways over the quarter with the Governor of the Reserve Bank at an early stage in the period warning that rates were not going to be coming down too quickly. This was confirmed at the March meeting of the Reserve Bank's Monetary Policy Committee (MPC) where the Repo rate was left unchanged. It was only during the latter part of March that we saw the first slight declines in money market rates.

Portfolio Review
As has been mentioned previously, we have taken the view that the short-term interest rate cycle has peaked. As a consequence, we have gradually been lengthening the duration of the portfolio. To this end we have started buying 12-month paper. Over the quarter R13 million was bought at an average rate of 12.89%. To enhance the yield on the portfolio we have also bought two, three and four-month corporate paper at rates of 13.38%, 13.71% and 14.1%, respectively. At the end of March the weighted average maturity of the assets in the portfolio was 85 days. The current yield on the portfolio is 13.02%.

Outlook
Looking forward, we believe that the Reserve Bank is likely to cut the Repo rate at the next MPC meeting that is scheduled for June. We therefore plan to continue buying longer dated paper as existing paper matures to take advantage of the current higher rates.

The SA economy maintained its robust pace over the third quarter, buoyed by local demand as exports faltered. Gross domestic product grew at an annualised rate of 3.0% over the quarter after upwardly-revised growth of 3.0% and 3.8% over the second and third quarters respectively. On a year ago, GDP growth rose by 3.3% over the third quarter compared to 2.7% and 2.3% over the first and second quarters respectively. Investment spending growth remained strong, expanding by 8.7% annualised over the third quarter. Consumer spending growth gained 2.9%, supported by gains in spending on durable goods. The buoyant pace of consumer spending growth is expected to taper off due to successive interest rate hikes.

South Africa's current account registered a deficit of R4.8bn annualised (0.4% of GDP) in the third quarter compared to a surplus of R3.1bn (0.3% of GDP) in the preceding quarter. The deficit was due to lower exports and continued dividend-related outflows.

Inflation remained a major bugbear on the back of the rand's sharp deterioration in 2001, rising food and energy prices and sticky administered prices. Consumer inflation - measured by the annual percentage change in the CPIXu - rose to 12.7% in November from 6.5% in December 2001. The deterioration in inflation and the substantial risks to meeting the price targets over the next two years prompted the Reserve Bank to hike rates by 400 basis points since January.

Market Market Movements
After an initial scare during the early part of October when the inflation numbers came through fairly negatively, the longer end of the money market, driven by a very strong rand (R$10.55 to R$8.59), performed very well over the quarter- see the table below. The market took the view that we had seen the last hike in interest rates and particularly the 12- month area came down strongly. This was reflective of the view that it would be some months before we started seeing cuts in the official interest rates.

Looking forward, we believe we are at or near the peak in the inflation cycle and that should create scope for the Reserve Bank to start reducing short-term rates some time during the second or third quarters of 2003. It remains unlikely that the inflation target for 2003 will be met, but with the 2004 target having been revised upwards, it is now possible for that to be realised.

Portfolio Activities
Once we were over the hump of October we took the view that we had seen the top of the interest rate cycle and extended the duration of the fund to the maximum allowable. To this end we purchased some 12-month paper at rates of 13.60% and 13.45% as well as eight - month and five- month paper at rates of 13.30% and 13.45% respectively.