The fund achieved 1.67% for the quarter and 7.25% total return for the 12 months to end September 2010. The daily effective annual yield at quarter-end was 6.5%, after all fees. This compares favourably to prevailing wholesale call rates which are now as low as 5.7%.

The big news this quarter came on 9 September when the Monetary Policy Committee (MPC) announced yet another 0.5% reduction in the South African repo rate taking it to a new low of 6.0%. This decision came after a series of interest rate cuts, followed by a number of pauses. The current downward cycle in interest rates began in late 2008.

The MPC decision was not entirely surprising, given that consumer inflation, now at 3.5% year-on-year, in August has been falling to new lows. This has been largely due to ongoing currency strength, assisted by foreigners searching for yield from emerging market bond markets including that of SA where they have invested around R70 billion year to date. The SA Reserve Bank expects inflation to bottom this year and rise to an average of around 5.1% by the fourth quarter of next year. These figures all remain well within the 3% - 6% target range.

Money market fund investors seeking to maximise their interest income do suffer when interest rates fall to very low levels. Currently the money market yield curve pays between 6% and 6.4% on a fixed interest rate basis. As seen in the chart above, the previous lows seen in 2005/2006 lasted a year, but turned sharply upwards on the reversal. We believe that interest rates going forward are likely to follow a similar course.

As such the portfolio is positioned in a number of floating rate investments (FRNs) which pay an average interest rate spread of 0.7% over the 3-month JIBAR rate for the next year, providing protection to investors in the event of interest rates rising either quickly or unexpectedly. The balance of the fund is made up of 24% in good quality corporate credit names such as MTN, Barloworld, Bidvest, Transnet, Mercedes Benz, SABMiller South Africa and Growthpoint Properties with a sizeable holding of 30%, in SA Government Treasury Bills. These have provided investors with a particularly attractive yield this year compared to bank paper due to Government's aggressive funding programme of up to R6 billion Treasury Bill issuance per week.

The fund is focused on achieving the best returns in the market, but within very strict risk parameters allowing investors to be comfortable in the knowledge that they are getting the best out of the money market in both yield and credit quality.

Portfolio manager
Tania Miglietta Client

Short-term interest rates have largely remained unchanged since the last repo rate cut in April this year. NCDs moved lower over the quarter, but by a small margin with yields ranging between 6.6% and 7% (3 to 12 months) on the curve. 3-month Treasury Bill yields continued to surprise each week with levels remaining consistently above those of equivalent term NCDs. Substantial Government funding needs from Treasury Bills of R6 billion per week have kept these yields higher than they normally would be.

CPI came in at 4.6% in May, comfortably in the middle of the target range and GDP grew by 4.6% in the first quarter, with export sectors as well as domestic consumption showing a rebound.

While CPI is expected to still fall a little from current levels, we think the bottom is near. A potential rise in CPI (especially if the rand weakens) combined with stronger domestic demand and already very low real interest rates, leads us to think that further interest rate cuts are unlikely. Rather, the next move is deciding when factors will combine in such as way as to induce the SA Reserve Bank to start hiking rates (although such a move is probably a year away yet). The fund is designed to protect capital and provide competitive money market returns over time. Given the current low point in the interest rate cycle, the fund has continued to invest in 12-month floating rate notes where the limits allow, together with 3-month commercial paper, such as the recent MTN issue, as well as Treasury Bills. The Coronation Money Market Fund yields approximately 6.8% on a nominal yield basis which is directly comparable to current call rates of 6.2%.

The fund remains well diversified with exposure to the large SA banks, highly rated corporates and the South African Government. The fund returned 7.5% for the year versus the STeFI benchmark return of 7.1%.

Portfolio manager
Tania Miglietta

Money market interest rates continued their downward trend throughout the quarter and were pushed lower on the announcement of the South African Reserve Bank's (SARB) decision to cut the repo rate by a further 50 basis points (to 6.5%) at the MPC meeting on 25 March. The SARB's move, which had not been fully discounted in the markets, was enabled by a combination of lower-than-expected inflation, and generally still soft economic data as well as continued rand strength which bode well for further disinflation. At this stage, we believe that most of the expected good news is factored in, and our base case would be for interest rates to remain on hold for the remainder of this year.

Inflation re-entered the 3% - 6% target range in February at 5.7% (data released in March), which was sooner than many had expected. We think that underlying trends in consumer inflation look positive, while a broad number of categories continue to show beneficial influences from the currency. Indeed, most of the rand-sensitive categories are either within or below the inflation target range. The main factors holding inflation up continue to be administered prices, and even these appear to be less of a problem than had initially been expected (e.g. the Eskom price increase being approved at a lower level than requested). We think CPI could fall to around the mid-point of the target range during the course of this year. Movements in the rand will continue to be crucial, and a reversal of rand strength remains a key risk.

Although growth has undoubtedly bottomed and is moving noticeably higher, this so far seems to be led principally by manufacturing (linked to exports and the global recovery) and domestic car sales (coming off an exceptionally battered base) and with this recovery we note that a sharp reduction in interest rates in 2008 and less so in 2009 worked to get some spending underway again. Money market deposit rates have fallen sharply since the top of the interest rate cycle and are likely to remain at these levels for the remainder of the year. The 1-year NCD, now yielding 7.55%, is close to the same levels last seen in 2005/2006 and once again well below the long-term mean of 11.87%. Ongoing reductions in the repo rate does increase the problem of lower income for those investors reliant on the monthly income derived from a money market fund.

But the fund is primarily focused on capital preservation and strives to provide a competitive yield throughout the interest rate cycle. We take an ultra conservative stance when selecting suitable investments, allowing only F1 rated or higher and the best quality credit names such as Transnet, Netcare, Anglo American, SABMiller, Mercedes Benz, MTN and ACSA. Given the fund's limited duration of 90 days, the fund's yield lags that of underlying interest rate changes. With call rates now at 6.2% the fund's quarter-end yield of 7.3% (nominal, net of fees) continues to pay a healthy margin over prevailing call rates. The fund returned 1.8% for the quarter and 8 % for the last 12 months, all net of fees.

Portfolio manager
Tania Miglietta Client

Money market interest rates remained relatively stable during the quarter after a year of back to back interest rate cuts. NCDs settled to between 7.15% - 8.15% across the curve and 3-month JIBAR, a useful reference rate in the money market was largely unchanged at an average of 7.20%.

Commercial paper (CP) issuance continued on its steady growth path as new issuers, such as Growthpoint came to the market. CP spreads started to tighten during the quarter indicating that sentiment had swung into positive territory and that more participants had moved into this market.

Treasury Bill yields continued to surprise by settling higher than the same term bank NCDs at times, despite being government guaranteed and thus 'risk free' (see chart below). The higher yields have been driven by unprecedented volumes of issuance (R5.7 billion per week), bringing an oversupply to the market. These have been snapped up by money market funds which normally would avoid TBs for their low yield.

We observe an improving trend in the inflation outlook. We ended 2009 with a year-on-year CPI figure for November of 5.8%, which is now within the 3% - 6% target range for the second consecutive month. Continued rand strength coupled with weak money supply and negative private sector credit extension bodes well for the inflation outlook for 2010.

Risks to our relatively benign inflation outlook in 2010 come from a potential unwinding of the base effects of the lower food and fuel prices experienced in 2009, uncertainty over electricity price increases and the chance of a severe bout of global risk aversion which could result in a sharp retracement in the rand.

We expect the repo rate to remain unchanged at 7% for most of this year should inflation remain lower for longer. Money market funds battle to deliver attractive returns when interest rates are at a low. However, given the greater issuance of credit instruments this has become less of a problem. The fund returned 9.40% gross for the last 12 months versus call rates of 6.7%, proving investors with a decent yield pick-up for the year.

Portfolio manager
Tania Miglietta