Capital markets came under pressure during June as the US Fed chairman Ben Bernanke indicated that they would look to reduce their level of bond purchases in the coming months if the economy continued to improve. The prospect of a 'tapering' of quantitative easing in the US led to a sharp selloff in global equity and bond markets. The FTSE/JSE All Share (ALSI) fell 5.7% for the month with Resources (RESI20) down 13.5%. Bond yields rose during the month and the All Bond Index (ALBI) posted a return of -1.6%. Inflation linked bonds experienced a sharp sell off with yields shifting up 50-80 basis points across the curve, which caused the index to return -5.5%. Listed property returned 4.4% for the month, recovering some of the steep losses experienced in May. Preference shares outperformed money market slightly with a return of 0.7%. In the currency market, the Rand gained 2% against the dollar and Euro, which was a strong performance against a backdrop of depreciating emerging market and commodity currencies.
The Nedgroup Investments Flexible Income Fund performed in line with money market, which was a good result in the environment of rising nominal and real bond yields. The Fund's domestic fixed income allocation performed well as the Fund has been positioned conservatively from an interest rate perspective. The foreign exposure was a slight detractor as the Rand strengthened over the month. A large exposure to yield enhanced money market assets and short term inflation linked bonds continued to provide excellent yield pickup for the month. We have used the opportunity presented by the sharp upward shift in the yield curve to partially fix rates in the 2-3 year area through a combination of swaps and bonds. As a result, 15% of the Fund is now locked into fixed rate assets, increasing the fund duration from 0.4 to 0.7 years. The short end of the bond curve now offers reasonable value and we will continue to look for opportunities in this area.
Inflation linked bonds at the short end of the curve are 12% of the portfolio and are set to benefit from a strong inflation carry in the coming months. The preference shares exposure is around 10% as yields in this asset class are very attractive on both a pre-tax and post-tax basis. During the month we lifted our currency exposure slightly from 3.6% to 3.9% as the Rand strengthened. The currency exposure remains a key holding of the Fund due to its return potential and diversification benefits. We will continue to use it on a tactical basis as valuations fluctuate.
We have begun to see modest value in the yield curve, but we remain cautious due to the fact that both SA and global rates remain at unsustainably low levels. We would not want to take on too much interest rate risk at this point in the cycle. There is currently value in alternative income and hybrid assets such as preference shares and convertible bonds. We will focus on maximising yield, while looking for strategic allocations to the various income asset classes in order to generate additional performance.

After sharply depreciating in October and November, the rand clawed back some ground in December as it appreciated by 4.9% against the US dollar and 3.6% against the euro. The market was calmed by the relatively stable ANC conference at Mangaung, where Jacob Zuma was re-elected as president of the ANC with Cyril Ramaphosa the new deputy president.

The improved sentiment towards South Africa helped to drive flows into the local bond market. The All Bond Index returned 2.3%, outperforming the money market return of 0.4% as long-bond yields fell by 20 to 30 basis points. Inflation-linked bonds returned 3% as they benefited from falling yields and the strong inflation carry during December. Listed property struggled as the sector returned 0.4% for the month, while preference shares experienced some selling pressure as they returned -1.5% for the month.

During December, the domestic holding of the Nedgroup Investments Flexible Income Fund delivered returns through its exposure to yield enhanced money market assets, as well as short-term inflation-linked bonds. The performance of the Fund was negatively impacted by the strengthening rand, which caused the offshore component of the Fund to underperform. In recent months, we have aggressively reduced the currency exposure in the Fund as the rand has weakened. The exposure has been reduced from 14.5% to its current level of 8%. The currency exposure remains a key holding of the Fund due to its return potential and diversification benefits, and we will continue to use it on a tactical basis as valuations fluctuate.

During the month we added some corporate bond exposure with the purchase of Growthpoint issued floating rate bonds. The preference share exposure increased from 4.8% to 9.4%, with yields in this asset class attractive on both a pre- and post-tax basis. We have continued to maintain a low risk profile for the Fund, with a short duration and minimal interest rate exposure due to the very low level of interest rates. We are looking to maximise returns through yield enhancement strategies in the floating rate space. We also see value in alternative income and hybrid assets such as preference shares and convertible bonds. We will continue to focus on maximising yield and look for strategic allocations to the various income asset classes in order to generate additional performance.

The FTSE/JSE All Share (ALSI) finished up 1.2% for the month of March 2013, paring the previous month’s decline. The positive performance was driven by strong performance of Financials and Industrials, which combined were up 2.7% for the month. Resources had a weak month declining 2.7%. Inflation-linked bonds (1.6%) and preference shares (1.1%) outperformed the money market return of 0.4%, while nominal bonds (02%) underperformed. Listed property returned 2.4% for the month, making it the top performing asset class.
In currency markets, the dollar continued to strengthen on the back of improved growth prospects in the US. The rand weakened 0.2% against the euro and 2.2% against the pound as renewed Eurozone worries emerged. Against the dollar, the rand weakened 2%, which brings the 12-month depreciation against the dollar to 16.2%. Over the last year, the rand has significantly lagged both its commodity and emerging market peers.
After moving up in February, US volatilities moved down towards record lows in March. The VIX declined 2.8 percentage points to 12.7%. The Eurostoxx volatility declined 0.1 percentage points to 20.9%. Volatilities in South Africa moved down by 0.3 percentage points to 16.5%, and remain close to their historical lows.

During March, the return of the Nedgroup Investments Flexible Income Fund was driven by its international fixed income holdings, with strong diversification benefits as the rand weakened on a trade-weighted basis. Our preference share allocation performed well ahead of the money market. Preference share yields remain attractive and we continue to see value in this asset class. Our domestic fixed income allocation performed in line for the month.

During the month we maintained our large exposure to yield enhanced money market assets and short-term inflation-linked bonds. We have used enhancement strategies at the short end in order to generate yields above 7% in the money market space. Inflation-linked bonds at the short end of the curve are 12% of the Fund and are set to yield in excess of 7% as inflation moves up over the course of the year. The preference shares exposure is around 10% as yields in this asset class are attractive on both a pre-tax and post-tax basis. We took the opportunity to reduce our foreign currency exposure as the rand weakened against the US dollar. We rolled our derivative overlay in order to provide some protection for the Fund in the case of a recovery in the rand. The options reduce the currency exposure to 5.6% once the rand is below R9.00/USD. The currency exposure remains a key holding of the Fund due to its return potential and diversification benefits, and we will continue to use it on a tactical basis as valuations fluctuate.

We have continued to maintain a low risk profile for the Fund, with a short duration and minimal interest rate exposure due to the very low level of interest rates. We see value in alternative income and hybrid assets such as preference shares and convertible bonds. We will focus on maximising yield, while looking for strategic allocations to the various income asset classes in order to generate additional performance.