In October the Fund outperformed the FTSE/JSE Index return by 0.9%. Most of this gain was achieved in the Fund's Resource holdings, which although negative outperformed the Resource index return by 1.5%. The Fund's Industrial holdings underperformed marginally, while the Financial holdings were flat with the index. The strength of the rand, whilst good for the longer- term prospects of Industrial and Financial shares, has had a negative impact on rand hedge shares and this, in turn, has a negative impact on the performance of Resource counters. For many Resource counters earnings growth is a thing of the past and it is for this reason that the fund managers are concentrating on stocks with high dividend yields. This philosophy has helped in the Gold sector, where Anglogold, with a dividend yield of 5% outperformed the sector by 6.7%. Anglogold is one of the fund managers bigger holdings. Within the global Gold sector it has the highest dividend yield, but at the same time has the potential for most growth amongst the major global gold counters. By comparison Newmont, the biggest global gold producer has a dividend yield of 1%, but its production should fall in the years to come. Stocks that did well in the Basic Industries sector were AECI (up 9.0%) and Iscor (up 14.4%). Within Industrials the best performances came, once again, from the domestic industrial holdings namely Illovo (up 8.2%), Pepkor (up 9.5%) and Avis (up 6.9%). The biggest feature within Industrials in the last month has been the rebound in TMT stocks. The fund managers have exposure to this sector via Datatec, which returned 20.3% for the month. The strongest performing sector within the JSE has been the Banking and Insurance sectors where the fund managers have a large exposure. Absa returned 7.1% and Nedcor returned 9.3%. Old Mutual had a good performance in line with most overseas markets and returned 10.8%. With short-term interest rates close to their peak and global equity markets stabilizing, the fund managers still believe that the banking sector will continue to do well in the months to come and the fund managers have consequently raised the fund managers weighting in this sector.

The Fund returned 0.6% versus the Index return of -1.5%. We outperformed in all three main sectors with Resources holdings returning 5.2% (index 3.5%), Industrials -2.5% (index -7.3%) and Financials -2.7% (index -4.2%).

The large overweight position in AngloGold returned 16.4% and our position in Goldfields returned 8.2%. While AngloGold might, on the face of it, appear expensive on a PE basis, the dividend yield of 5% remains attractive. In addition South African Gold stocks trade at a substantial discount to their North American peers. Impala continued to recover from its depressed levels brought about by the release of the draft of the Mining Charter and returned 9.8% for the month. There has been a lot of media coverage about asbestos claims relating to Gencor, unfortunately very few facts regarding the liability have been disclosed by either side. An agreement reached by Gencor and the lawyers representing the litigants has compelled the litigants to submit their case by the 14 th of October.

Within Industrials there were mixed performances across the sectors. However, Richemont, which is the biggest stock in the Industrial index, performed very poorly and the Fund's holdings were down by 21.1%. Fortunately the Fund has a very negligible position in Richemont and, while valuations are improving, we are happy to maintain an underweight position. Industrial holdings that performed well were Rebserve (up 10.0%), Pepkor (up 6.0%) and Tradehold (up 7.1%).

Despite the 1% hike in interest rates, the Banking sector has come through the month fairly unscathed with holdings in Absa gaining 8.0%. Usually Banking stocks react very negatively to an interest rate hike but their low valuation and high dividend yields have provided some immunity to interest rate increases.

The Insurance sector performed very poorly with Old Mutual holdings returning -15.3% and Sanlam -8.8%. Old Mutual has been very negatively affected by the weakness in European Insurance stocks.

The Fund outperformed the FTSE/JSE Africa Index by 3.0%. The Fund's Resource holdings performed poorly as did the Financial holdings, while the Industrial holdings outperformed the index by 4.3%. The overall performance of the Fund was -10.1% versus the Index return of -13.1%.

The worst performing stock in the Mining sector was Anglo American, which fell by 26.4%. Clearly the stock was negatively influenced by world events, but more importantly the leaked Mining Charter added to concerns. The Mining Charter relates to Black Economic Empowerment targets and how they will be achieved within the Mining Industry. The Charter has been dismissed by government as not being official policy, however, uncertainty will now remain until the final bill and charter is legislated. The only positive to come out of the leaked charter is that it should now ensure the involvement of senior government officials as well as the involvement if the Constitutional Court. It is important to bear in mind that in its current format the charter will have little effect on earnings for the next 5 years. However, were the Charter to remain in its current format a negative would be that future investment in the mining industry would in all likelihood come to a standstill.

Within Industrials the strategy of being underweight global industrials in favour of domestic industrials has paid off as globals have derated in line with world markets. For example SAB lost 12.1%, while Tiger Brands only dropped by 1.7%. Generally the Fund's holdings in Food and General Retailers performed well with returns of 8.5% for Astral Foods and 5.0% for Pepkor. Remgro also performed well in line with other global Tobacco stocks.

Given the collapse in world markets as well as the poor performance of Financial stocks in the US, the Banking sector has held up reasonably well. The recent purchase of Saambou's book by Firstrand and Abil adds to the consolidation that is happening in the Banking sector.

In recent results released by domestic Banks and domestic Industrials it was encouraging to see how volumes have grown and margins improved, given the high interest rates and poor global economic backdrop.

Prudential Optimiser comment - June 2002

The Optimiser had a good quarter and its value increased by 3.6% vs. the All Share's return of -2.7%. The fund's Financial sector returned 16.27% and Industrials 9.75% offsetting the Resource sector's return of -6.9%.

The rand strengthened by a further 10.8% in the quarter, which had a dampening effect on the performance of Resources. However, the strong gold price helped the Gold sector return 1% for the quarter. Given the good gains in Goldfields, we have sold some of our exposure and replaced it with Anglo Gold. Despite the large gains from Gold shares year to date, the fund managers have maintained a weighting of 7% as global equity markets remain under pressure and producers continue to hedge buybacks. The fund managers have also replaced some of our platinum holdings with Anglo American. Most of Anglo American's underlying divisions are performing well and it currently trades on a forward PE of 12 which is below that of the market. The fund managers have also acquired a new position in Iscor. The combination of a rights issue and better operating margins should substantially reduce Iscor's debt levels and enable the company to pay a dividend.

Good quarterly gains were achieved by the fund's holdings in Sanlam (up 21%) and PSG (up 34%). Overall the Financial sector is still being held back by rising short rates and negative inflation news. Another significant event has been the breakup of BOE and Saambou. The number of companies in the financial sector continues to fall as mergers persist. These mergers should benefit this sector in the long term and are one of the reasons for our positive stance on Financials. Even in the micro lending industry the number of entrants has been reduced from 3 to 1 as first Unifer and then Saambou collapsed. The dividend yield in the Financial sector is higher than that of any of the other main sectors of the JSE. Given that short term rates are close to peaking the fund managers expect good returns from this sector going forward.

Within Industrials, the overweight in domestic industrials has benefited the fund with good gains coming from Nampak (up 19.3%), Avis (up 31%), Shoprite (up 19%) and Supergroup (up 27%). This is probably the first time in 6 years that there has been an improvement in the overall profitability of these companies. For the last 6 years Domestic Industrials have been operating in an environment of falling volumes, dismantling of trade barriers, high real interest rates and job losses. As a result many Industrial companies have needed to restructure, close down divisions or merge to survive. A very good example of this is the Packaging sector, where 6 years ago there were numerous packaging companies all competing to win market share. Today there are effectively 2 packaging companies left, which allows them greater pricing power and subsequent higher margins.

The value of the Fund increased by 2.0%, which was in line with the JSE's performance. The Fund's Resource sector returned 1.8% versus the Index return of 2.3%, while the Fund's Financial and Industrial holdings outperformed their respective indices with returns of -0.7% and 5.0%, against -1.3% and 3.8%.

The rand strengthened by a further 8.8% in May, which has had a dampening effect on the performance of Resources. However, the strong gold price helped the Gold sector return 7.4% for the month. The Fund's holdings in Harmony returned 19% for the month. We sold
our entire holdings of the latter after this strong performance. The fund managers continue to believe that one of the best stock to own in the Resource sector is Anglo American. Most of its underlying divisions are performing well and it is currently trading on a forward PE of 12. Anglo American returned 7% for the month.

In the Financial sector there was very little change in the overall market on the back of its strong performance in April. Banks and Financial Services both had moderately positive performances, while the Insurance sector performed poorly for the month.

The main contributor to performance in May was the Fund's Industrial holdings. These counters returned 5% versus the index return of 3.8%. Most of the positive contributions came from Domestic Industrials where we own a number of stocks, mainly Nampak (up 14%), Avis (up 19%) and Supergroup (up 14%). There were also strong performances from the Food sector where Illovo and Tiger Brands returned 6.6% and 5.2% respectively. Most Domestic Industrial companies are currently reporting improving volumes and margins. This is probably the first time in 6 years that the fund managers have seen an improvement in their overall profitability. For the last 6 years Domestic Industrials have been operating in an environment of falling volumes, dismantling of trade barriers, high real interest rates and job losses. As a result many Industrial companies have needed to restructure, close down divisions or merge to survive. A good example of this is the Packaging sector, where, 6 years ago there were numerous packaging companies all competing to win market share. Today there are effectively two packaging companies left, which allows them greater pricing power and subsequent higher margins.

The fund managers think that short rates are close to peaking and from here on we expect good returns from Domestic Financials and Domestic Industrials.

The value of the Fund increased by 5.5%, outperforming the JSE All Share return by 4.5%. The Fund's Resource sector returned -1.9% versus the Index return of -4.8%. Strong positive performances can be seen in the Fund's Financial and Industrial sectors, which returned 23.1% and 6.3%, outperforming their respective index returns of 15.7% and 3.0%.

The most important feature of the month has been the strengthening of the rand, driven mainly by the trade surpluses generated over the past few months, as well as the commitment by the SARB to fight inflation. This had a negative effect on the Resources sector, with the Fund's Resource holdings returning -1.9%. The main contributors to performance have come from our large weighting in Impala Platinum, which returned 14.5% for the month. The other strong performer was Goldfields, up 7.8% for the month. The biggest detraction from performance came from Mining Holdings and Houses where both Anglo and Billiton lost 11.0%. Given the strong outperformance of the single commodity stocks versus the mining houses over the last 4 months, the fund manager has decided to increase our exposure to Anglo's at the expense of Impala, Goldfields and Sasol.

The stability the market was seeking in the Financial sector was restored with the Reserve Bank's intervention to support BOE. This, coupled with Nedcor's proposed buyout of BOE has lifted the Bank sector by 20.8%. Abil returned 40.1% and BO E 35.4%. Subsequent to the Nedcor offer, the majority of holdings in BOE have been sold and replaced by Absa and First Rand. Another stock which did well was PSG based on their decision to pay out a very large dividend as well as indications by their management that they are prepared to clean up their corporate structure.