The fund generated a total return of 5.91% over the last 12- month period, ahead of the 3-month STeFI benchmark return of 5.01%. During the quarter, the local interest rate market took its cue from developments around the expected scaling back of asset purchases by the US Federal Reserve (Fed) in the near future. After much talk of a potential exit from their aggressive quantitative easing policy since May, the market had largely expected an announcement by the Fed at their September meeting to start scaling back. However, the Fed's decision to delay the tapering of asset purchases prompted a rally in US Treasury bonds as well as in emerging market currency and bond markets. Against this backdrop, the rand rallied against the US dollar, reaching a high of R9.58/$ before settling at R10.03/$ at quarter end. However, this move still represented an overall weakening from the previous quarter end (R9.87/$). Bank one-year fixed rate NCDs ended the quarter around 20 basis points weaker. This followed a correction from the 10 basis point rally in response to the Fed's announcement in September. However, bank funding spreads on floating-rate notes remained flat as banks have very little appetite for short dated funding. The FRA curve moved up, pricing in at least two rate hikes within the next 12-months by quarter-end. Three month JIBAR followed suit peaking at 5.15% and ended the quarter back at 5.142% (versus the repo rate of 5%). South African fundamentals have either remained stuck in poor territory or worsened. The current account deficit for the second quarter registered 6.5% of GDP, compared to 5.8% in the first quarter. Furthermore, the trade deficit remained wide in the first two months of the third quarter; making prospects for the third quarter current account number bleak. This should continue to keep the rand under pressure, especially as South Africa has one of the widest current account deficits among emerging markets. Meanwhile, GDP is poised to remain soft this year, which does not bode well for fiscal revenues. Fiscal expenditure remains sticky, and prospects for the fiscal deficit are not promising. The upcoming Medium Term Budget Policy Statement (MTBPS) in October will likely reveal some deterioration in the fiscal metrics, implying that National Treasury's funding requirement will continue to be under pressure. Amidst the deterioration in the twin deficits (current account and fiscal deficits), consumer inflation rose during the third quarter. In July, CPI breached the upper end of the South African Reserve Bank's (SARB) target band, printing 6.3% year on year and rose further in August to 6.4%. The SARB expects this inflation breach to be limited to the third quarter, but has increasingly struck a hawkish tone in response to inflation expectations lying at the upper end of the target band. The central bank has emphasised that it sees inflation risks biased to the upside and will react appropriately should the inflation outlook deteriorate further. We expect CPI to be around or over 6% for much of the next year and agree that risks remain tilted to the upside. Corporate bond issuance over the quarter was relatively active with names such as Mercedes-Benz, Toyota, Transnet, Sanlam, Liberty, Landbank and the banks coming to the market. The fund managed to participate in some of the attractive yielding issuance and in secondary instruments at close to our fair value spreads. This fund is suitable for money market investors with a longerterm outlook, as it can capture better yielding opportunities by extending the term of investments into the 2?5 year part of the curve. As at quarter end, the fund yielded an annual effective rate of 6.25% (gross of annual management fee). The fund continues to seek out good yielding opportunities.

The fund generated a money market return over the last 12- month period of 6.11%, ahead of the 3-month STeFI benchmark return of 5.08%. In June, the market's concern over the potential withdrawal of monetary policy support from the Fed became evident. This anxiety extended into emerging markets, which saw some significant equity and bond redemptions by foreigners and which impacted on domestic money markets. The rand subsequently exhibited a significantly weaker tone over the quarter, weakening to a worst level of around R/$ 10.36 during June before recovering slightly to close the quarter at R/$ 9.88. The FRA curve, which prices in short-term interest rate expectations over time, moved up and ended the quarter pricing in four 0.5% interest rate hikes within the next two years. Three-month JIBAR followed suit, peaking at 5.15% and ended the quarter at 5.142% (versus the repo rate of 5%). Bank floating rate spreads have tightened further over the quarter. As banks have slowed down their lending, they have no need to borrow as aggressively and thus are reducing their funding spreads. This more liquid market does however remain a core holding in the fund. Corporate bond issuance was slow over the quarter, but we participated in a few issuances such as recent the Transnet and Investec Bank bonds which showed attractive value. It's worth delving a bit further into the speech given by South African Reserve Bank (SARB) governor Gill Marcus on 26 June. Specifically, we note the comments that point out the bank is already more tolerant of inflation at the upper end of the target range because of the growth background, and that there are increasingly strong upside risks to the inflation outlook (because of the rand). But more importantly, we would highlight the comments that current inflation (and the SARB's forecast) constrain accommodation but do not 'automatically' imply a tightening of the monetary stance, and that the SARB will not be 'unnecessarily pre-emptive' - the latter comment coming after the speech notes "there is of course always the danger that we are 'behind the curve'". While we can sympathise with the SARB's unwillingness to tighten policy against the growth background, we think there are a few points that need to be made. The first is that as inflation rises, policy is already becoming more accommodative as real interest rates fall - in other words, if the SARB leaves the policy rate unchanged against rising inflation, it is in fact easing (not maintaining) policy. Secondly, inflation expectations (as per the Bureau for Economic Research survey) are nudging up, now between 6% - 6.1% for the next few years. If history is anything to go by, these will rise as inflation itself does. Thirdly, and possibly most importantly, is the clear implication that the SARB is more willing to make a policy error that results in higher inflation than one that results in lower growth (even though interest rates are not the factor inhibiting growth at present). Again, while we have sympathy with the SARB's dilemma and understand that it does not want to jeopardise a fragile growth situation, it would be remiss of the investor to ignore the implications of the central bank not doing anything to pre-empt inflationary pressures. So apart from the underlying pressures on inflation from the currency and wages, we also have a central bank stance that will (at least initially) underpin rather than offset such pressures. Needless to say, the fall in the rand has underscored our expectation that inflation will breach target this year, and the risks remain clearly skewed to the upside - how much will depend on where the rand settles of course, but the inflation picture remains murky with a weaker rand and pressure on wages the main concerns. We do not see inflation falling comfortably within the target until the fourth quarter of 2014 at the earliest. What this entails for credit spreads would impact on corporate floating rate instruments, as credit spreads have historically exhibited an upward bias in a volatile interest rate environment. This fund is suitable for money market investors with a longerterm outlook, as it captures better yielding opportunities by extending the term of investments into the 2-5 year part of the yield curve. As at quarter-end, the fund yielded an effective annual rate of 6.31% (gross of annual management fee). The fund continues to seek out good yielding opportunities in this low interest rate environment.
Portfolio managers
Tania Miglietta and Stephen Peirce

The fund has generated a competitive money market return over the last 12-month period of 6.17%. This is approximately 0.9% ahead of a traditional money market fund and well ahead of the 3-month STeFI benchmark, which returned 5.21%. The rand exhibited a significantly weaker tone over the quarter. It ended calendar 2012 at R/$ 8.40, and weakened to a worst level of around R/$ 9.32 during March before recovering slightly to close the quarter at R/$9.23. The revival of eurozone worries as a result of the problems in the Cypriot banking system did not help our currency, but the main reason for rand weakness lies with local fundamentals and in particular, the trade/current account deficit. The current account deficit totalled 6.3% of GDP in 2012, having respectively reached 6.8% and 6.5% in the third and fourth quarters of the year. The slight narrowing of the gap is not very comforting considering the size of the deficit. In January and February we were presented with particularly glum trade deficits, which are starting to be the worst on record. While the current account may be past its worst, the ongoing wide deficit will continue to leave the rand vulnerable. Even before one could really expect to see any impact from the first quarter currency weakening, CPI has risen to just under the upper end of the target range at 5.9% in February, partly due to some passthrough from the rand depreciation seen last year. Notably, this rise in the overall CPI number has occurred despite recent softer to stable food and energy inflation - by contrast, core inflation has been rising. We maintain our view that CPI will breach the upper end of the target in the next month or two, and we expect it to remain above target for most of the rest of 2013 and into early 2014. The FRA curve, which prices in short-term interest rate expectations over time, has for the first time in a while started to price out any further interest rate cuts, factoring in a greater probability of repo rate hikes down the track. The sizeable corporate bond position has benefited the fund as credit spreads have contracted enormously since they were bought. We continue to observe spread contraction as investors scramble for better yielding instruments and continue to pay up for this. After a quiet start to the year, March became busy with new corporate bond issuance when Investec Bank, Mercedes Benz, SABMiller, Netcare, Vukile Property, Eskom and PPC all issued bonds, some for the first time. Bid-to-cover ratios were high, indicating strong investor appetite. In most cases, however, we viewed the pricing to be expensive and thus participated in only select names where we saw value. The bank floating rate market, the other hunting ground for this fund, has become less lucrative than in the recent past. As banks have slowed down their lending, they have no need to borrow as aggressively and thus are reducing their funding spreads. This more liquid market does however remain a core holding in the fund. This fund is suitable for money market investors with a longer time horizon as we are able to capture better yields and opportunities for investors by extending the term of the investments into the 2 - 5 year part of the yield curve, which is not accessed by traditional money market and bond funds.

Portfolio managers
Tania Miglietta and Stephen Peirce

The fund returned 6.4% for 2012 versus the cash benchmark (3-month STeFI) which returned 5.4%, thus adding a percent of interest in this low yielding environment. 2012 was a year of less than impressive fundamentals: inflation averaged in the higher end of the target range; fiscal deficits were wider than budgeted; South Africa's credit rating was downgraded; and we saw a significantly weaker rand in the fourth quarter. However, the global environment came to the rescue in 2012. The global search for yield saw large inflows, despite bouts of risk aversion. Net foreign purchases of South African bonds totalled a record R85 billion for the year. And as elsewhere, the market benefited from accommodative monetary policy, which anchored the short end of the curve and incentivised investors to increase their risk in order to gain more yield. The South African corporate bond market benefited from the global search for yield as buyers sought out additional yield from this sector. Prices have risen and credit spreads have compressed, generating some capital gain for investors. The fund holds nearly 50% in shorter-dated corporate bonds (mostly in banks), all of which yield substantially more than the vanilla NCD market. This is in our opinion, a good reason for longer-term money market investors to invest in this fund. Looking ahead, the crystal ball remains murky. We are of the view that the domestic fundamentals for South African bonds remain somewhat negative. The government bond funding requirement remains large: a net R136 billion for 2013/14 fiscal year. The inflation outlook is not encouraging, where pass through from rand weakness will put pressure on CPI and we expect there will be a net upward effect from recent changes to the reweighting of the CPI index. All in all, we expect to see CPI breaching the upper band of the target range this year. We do not see much scope for another rate cut in 2013, as rising inflation offset any worries about poor growth, especially while policy already remains accommodative. The fund is fully invested in floating rate investments and hedged out fixed rate investments. Thus the fund's duration is no more than 90 days and is well positioned for a scenario of flat to rising interest rates. The fund's yield (gross of fees) was an annualised 6.48% at the end of December 2012. We continue to take a conservative view on credit, which we believe is overpriced in general, thus carefully selecting the bonds we view as good quality and well priced. Our focus is on protecting capital and generating a competitive yield that exceeds that of traditional money market funds over the long term.

Portfolio managers
Tania Miglietta and Stephen Peirce