With the substantial deterioration in the inflationary outlook during the second quarter of 2002, monetary policy was forced to respond. This came in the form of a fourth interest rate hike this year in September. Short rates have responded commensurately, and one year NCDs are currently yielding over 14%. Three month and six month rates, on an equivalent annualised basis, are not far behind, and given the uncertainty surrounding the potential for further rate hikes, are very good value. The fund managers have slowly increased the funds exposure to longer term money market instruments, and this will feed through into higher distributions in the months ahead.

The fund managers maintain their focus of delivering higher income without resorting to increased credit risk, and the commitment to a prudent and conservative strategy remains.

As short-term interest rates rose during the course of the year, the fund has been largely focused on maintaining a relatively low average maturity, ie a very high liquidity position. The initial result of this strategy does mean that yields will be slightly lower than would have been possible had the target been to maximise short-term yields.
The fund manager's focus, however, has been on maximising yields over 6-12 month periods. The fund manager's view is that no further rate hikes will be necessary, 12-month rates have probably already peaked and 3-month rates may need to rise a touch further. So, the benefits of our strategy will be seen over the next 3-6 months as cash holdings are invested in longer-term and higher yielding assets.
The fund manager's also maintain the focus on managing credit risk on a prudent and conservative basis. The fund has no exposure to any lower rated banks or other entities, and will continue to focus on delivering superior medium- to long-term returns with capital preservation being the main focus.

The inflation outlook will continue to be the major driving force behind monetary policy for the rest of 2001 and into 2002. Inflation is on a downward trend and there is a strong chance of a 1% cut in interest rates within the next 12 months.