The Fund returned 1% over the month. The level of forward rates in October previously indicated an expectation of a further repo rate increase. However, with the better than expected PPI figures, the strengthening of the rand/ US $ exchange rate and the upward adjustment in the upper limit of the inflation target for 2004, expectations for future increases in money market rates look less likely. This resulted in the 12 month NCD rate dropping from its peak of 14.3% in mid- October to 13.8% at the end of October. The FRA market is now implying little or no probability of a further rate hike.

There is a large amount of uncertainty in money markets with respect to future interest rate direction. Money market rates have increased substantially since the last repo rate increase and are currently pricing in a strong probability of a further 100bps repo rate hike in November.

The repo rate increased by 100bps in September, putting further pressure on short term rates. The yield curve has inverted even further indicating that inflation is viewed as a problem currently, but that over the long-term confidence is still fairly high that inflation targets will be met.

The recent hike in the repro rate prompted an increase in short-term rates whilst long-term rates remain fairly stable. There is still much speculation about a further 0.5% rate increase in September this year to further curb inflation. The yield curve suggests that such a move is possible and it is clear that the Reserve Bank remains committed to reaching the inflation target band in 2003. The average duration of the fund has been extended slightly, but retains the flexibility to take advantage of anotherrate hike by locking in higher rates.

The fund invests only in A1 rated banks and top quality corporate paper. The average 7 day rolling yield of the fund as at 30/06/2002 remains highly competitive at 11.99% and places it at the forefront of it's sector. The fund's total return since inception (May and June) was 1.8%.

Expectations of a repo rate increase have become more certain with continuing negative inflation figures as well as intimations from Tito Mobweni that he would like to raise rates by 100bps. The event of the increase is therefore certain; it is now only the size of the adjustment which is at question. The majority of the deposits have been on call and in short-term instruments to gain from these higher rates with small holdings in PN's (promissory notes) and NCD's (negotiable certificates of deposit).

The average maturity of the money market fund has been fairly short, in order to take advantage of deposits which reprice quickly. However, the fund managers now plan to extend the maturity of the fund to lock in the higher interest rates for a longer period. If the rand strengthening leads through to improved inflation figures, then rates may drop again and the fund would benefit from being locked in for a longer period.

South African is currently in an inflationary environment, mainly due to currency depreciation. The South African Reserve Bank has the task of keeping CPIX inflation within a set range of 3% to 6%. Their main tool for achieving this is through adjusting the repo rate ( the overnight rate at which banks borrow money from the Reserve Bank). The repo rate has a strong influence on the short-term interest rates banks pay for investors' deposits.

In situations where there is a possibility that the repo rate could rise in response to inflationary pressures, a money market fund invested in short term and overnight deposits would benefit investors, as these deposits would reprice quickly. On the other hand, long- term deposits with fixed rates are advantageous when short-term interest rates are declining. Currently the interest rates received by Prudential M&G's Money Market fund res ets on average every three days, while typically, according to unit trust regulation, this could be as high as 90 days. The fund is thus ideally suited to an environment of rising interest rates. Should the view change, the fund manager would naturally adjust the strategy accordingly. The fund is primarily invested in a number of top quality banks.