The Liberty Bond Fund retained its top performing position under its category over the one, two and three year periods respectively, beating the next fund by 1.0%. The fund delivered a 25.0% return over the 12 months period, outperforming the All Bond index by 1.5%.

Over the third quarter, yields traded in a tight range, with the RSA 2010 trading a high of 9.75% and a low of 8.90% with a quarter close of 9.15% compared to a previous close of 9.07%. The modified duration of the fund was kept closer to the benchmark as the market was expected to trade in a narrow range. During the quarter, a portion of Investec Preference shares was bought into the fund to take advantage of the declining interest rate cycle. The size of the fund marginally increased over the quarter, with the proceeds used to purchase the Eskom 2020 paper. The fund maintained its bullet investment strategy of being over weight in the middle sector area of the All Bond index.

During the quarter, the SARB cut the repo rate by a further two hundred basis points to 10%, after calling an unscheduled meeting that surprised the market. As a result, the shape of the yield curve normalised further in line with money market rates. Inflation is still on a downward trend, which together with a strong rand could lend a strong case for the South African Reserve Bank to continue cutting rates.

Over the past 12 months, the fund outperformed the All Bond index by 2.0%, registering a return of 26.7%, making the fund the best performer in its category over one, two and three years respectively. Over the second quarter, yields continued their downward trend with the RSA 2010 bond declining from a previous quarter close of 10.16%, to close at an all time quarterly low of 9.07%. The fund's modified duration was kept slightly longer but reasonably close to the benchmark as most of the good news with regard to interest rates had already been discounted. A sizable portion of the fund was sold out during the quarter to fund further disinvestments, which explains the reduction in RSA bonds over the quarter. The fund's better returns are partially attributed to the bullet investment strategy. That is reflected by the overweight position to the middle sector of the yield curve and an underweight position to the short and very long dated bonds.

The outlook for the market has become mixed after the SARB cut the repo rate by 150 basis points to 12.00% at the June MPC meeting. The SARB's MPC is expected to continue cutting the repo rate by at least 2% over the remainder of the year, however, most of this is already discounted. The shape of the yield curve is expected to normalise due to further downward movements in money market rates and increased supply of bonds from a higher than expected fiscal deficit.

Following an outstanding year ending December 2002 the Liberty Bond Fund continued to record excellent performance figures for the twelve months ending 31 March 2003. The fund outperformed the All Bond index by 1.9%, returning a year on year return of 29.4. The fund is now the best performer in its category over the one, two and three year periods.

Yields marginally declined over the quarter, with the RSA 2010 declining from a year-end level of 10.74% to close the quarter at 10.16%. The modified duration of the fund was kept close to the benchmark, reflecting the view that no substantial movement was expected either way. During the quarter, investments of Investec secondary capital and Daimler Chrysler five-year papers were introduced into the portfolio, utilizing cash inflows.

The outlook for the market, considering that the Government is to issue more paper in the market, has shifted to that of caution. The SARB's MPC kept the repo rate unchanged at 13.50% at its previous meeting, increasing the possibility of a cut at the June meeting. A cut in the repo rate is likely to result in the yield curve normalizing from the current levels. Bond yields remain at expensive levels, and the level of yields continues to reflect expected positive developments from key fundamental indicators.

The Liberty Bond Fund had an outstanding year in 2002, returning 18.5%. As per Unit Trust performance numbers released by the University of Pretoria, this performance was 1.6% ahead of the second placed bond fund and 2.2% ahead of the All Bond index benchmark. The fund continues to be the number one performing Bond Fund over one and two years.

During the fourth quarter the fund benefited from the positioning relative to the All Bond index. The fund remained underinvested in the short and very long end of the market. The downward movement in bond yields and normalisation of the yield curve both contributed to the performance over the quarter. At year end the modified duration of the Fund was 0.4% longer than the All Bond index. Just before year end a holding of tax free Nedbank preference shares, yielding 75% of the prime rate, was introduced to the portfolio.

Due to the lack of scrip in the domestic bond market the absolute levels remain overvalued. However, as inflation and subsequently short term interest rates are expected to move lower during 2003 bond yields are unlikely to weaken significantly from current levels. Increased supply from government and an expected reversal of the current phase of fand strength will, however limit significant downside in bond yields. The yield curve is therefore likely to further normalise during 2003.