Future Income
The 1% increase in official interest rates at the end of the September quarter will result in higher income in this quarter from the fund's large cash and near-cash holdings. The income generated by bonds will remain constant, while the fund's listed property holdings are unlikely to show income growth in the next quarter. Growth in property income, however, is likely to increase over the next few years as property fundamentals improve. The distribution for December 2002 is therefore forecast to be slightly higher than the September 2002 distribution, bringing the full year distribution to 11.75c per unit.

Capital
The capital values of bonds and property have shown weakness as a result of the 4% increase in official interest rates during 2002. Should interest rates be raised again in November 2002, a further drop in capital values may be experienced by unitholders, although the impact of higher interest rates on capital values has been diminished by not investing in bonds with a maturity greater than three years. This, though, will have no effect on distributions.
It is likely, however, that interest rates over the medium term will decrease, continuing the trend that commenced in previous years and which was interrupted by the collapse of the rand in December 2001. As the capital values of bonds and listed property are inversely related to interest rates, the capital weakness experienced during 2002 will be reversed in the period ahead.

Distribution
The Marriott Income Fund has pleasure in distributing 2.8782 cents per unit for the quarter ended September 2002 (2.9234c June 2002). This distribution is in line with the annual forecast of 11.75 cents per unit and brings the distribution for the past 12 months to 11.65 cents per unit, a yield of 11.4% based on current capital values.
Future Income
A 1% increase in official interest rates at the end of the September quarter will result in higher income in the next quarter from the fund's large cash and near-cash holdings. The income generated by bonds will remain constant, while the fund's listed property holdings are unlikely to show income growth in the next quarter. Growth in property income, however, is likely to increase over the next few years as property fundamentals improve. The distribution for December 2002 is therefore forecast to be slightly higher than the September 2002 distribution, bringing the full year distribution to 11.75c per unit.
Capital
The capital values of bonds and property have shown weakness as a result of the 4% increase in official interest rates during 2002. Should interest rates be raised again in November 2002, a further drop in capital values may be experienced by unitholders, although the impact of higher interest rates on capital values has been diminished by not investing in bonds with a maturity greater than 3 years. This, though, will have no effect on distributions.

It is likely, however, that interest rates over the medium term will decrease, continuing the trend that commenced in previous years and which was interrupted by the collapse of the rand in December 2001. As the capital values of bonds and listed property are inversely related to interest rates, the capital weakness experienced during 2002 will be reversed in the period ahead.

Bonds will revert to their nominal values over time and listed property securities should grow in line with the underlying growth in income. The capital value of cash, as always, remains constant.

Another disappointing series of inflation data at both the producer and consumer level pushed longer-term deposit rates higher as the market braced itself for a possible 1% rate hike when the South African Reserve Bank meets again in the middle of September. While bond yields did move up (and therefore capital values declined), the move was insignificant and had little effect on the capital value of the Marriott Income Fund, which has no exposure to bonds with a maturity in excess of four years. The fund's listed property exposure continues to provide a substantial yield pick-up over long-term government bonds, but in light of the uncertain interest rate outlook, exposure to listed property securities will be restricted to current levels.

The yield on the Marriott Income Fund has increased steadily this year and currently exceeds 12%. The higher yield is a direct result of higher income earned on the fund's cash and money market holdings after the South African Reserve Bank (SARB) raised official interest rates three times this year, each time by 1%. While it is not easy to predict the next move in interest rates, we are reasonably confident that last year's distribution of 11.82c per unit will be exceeded this year, having already distributed 5.97c per unit in the first half of the year.

The South African Reserve Bank (SARB) raised official interest rates by 1% for the third time this year when the Monetary Policy Committee (MPC) met in June. The move had been widely anticipated and had no immediate impact on the values of interest rate sensitive securities like bonds and listed real estate. The current higher interest rate environment should be beneficial to investors in the Marriott Income Fund who will receive a higher level of income while rates remain at these high levels. The June quarterly distribution of 2.92c per unit equates to an annual yield of 11.5%, significantly higher than the yield on the fund at the beginning of 2002.

In an address to the Rand Club at the end of the month, South African Reserve Bank Governor, Tito Mboweni said he wanted a further 1% increase in official interest rates when the Monetary Policy Committee meets on 13th June 2002. Despite the current strength of the rand, which has appreciated to R9.78/US$, a full R4/US$ below it's December all-time high of R13.80/US$, Mr Mboweni is concerned about achieving the inflation target in 2003 and maintaining that level of inflation into 2004. The bond market did not react to the Governor's comments, indicating the market had been anticipating further monetary policy tightening to the tune of a 1% increase in official interest rates. In light of the above, the Marriott Income Fund should produce distributions in 2002 that compare favourably with last year's distributions which totalled 11.84c per unit. The quarterly distribution at the end of June 2002 is forecast to be 2.95c per unit and the fund is currently yielding 11.82%.

Despite rising inflation, yields on South African long bonds fell by more than 1% during April 2002. This can be attributed to a number of factors, including a significantly stronger Rand and the government's successful USD1bn bond issue. This would also enable the Bank to unwind this year's interest rate hikes during the course of next year. In the short-term however, rising food prices will drive inflation higher and the Reserve Bank may feel pressured into raising official interest rates for the third time this year when the Monetary Policy Committee meets again in June 2002. Investors in the Marriott Income Fund can therefore anticipate a June 2002 quarterly distribution at least equivalent to last quarter's distribution of 3.05c per unit.

As expected, the South African Reserve Bank (SARB) raised the repo rate by 1% at the March meeting of the Monetary Policy Committee (MPC). The SARB commented that an increase in inflation expectations, domestic spending exceeding national disposable income, a rising trend in nominal unit labour costs and the high growth in money supply had all contributed to the decision to raise interest rates. Further evidence of inflationary pressures were borne out in February's Producer Price Index (PPI) release. Producer prices increased by 13.2% in the year to February and given the broad base of categories that contributed to the increase, the higher producer prices will filter through to higher consumer prices. Most economists now feel that the SARB will increase interest rates by a further 1% at the June 2002 meeting of the MPC. While this may have a marginal impact on the capital value of the fund, the fund's quarterly distributions are now confidently expected to exceed 3 cents per unit.

The SARB increased the repo rate by 1% in early January 2002 in order to counter the effects of the Rand's depreciation on inflation. This move has resulted in some short-term capital volatility but has also lead to higher levels of income from the fund's cash holdings. The quarterly distribution of 2.8cents per unit in December 2001 represents an annualised yield of about 10.8% which is 2.3% above the overnight call deposit rate.