The fund provided a return of 1.3% for the quarter and 5.5% for the year. With the repo rate at a 30-year low of 5%, and funding spreads over JIBAR contracting further, the resultant yield on money market investments are going to be lower. The market continues to price in lower interest rates with the FRA market expecting two further cuts of 0.25% each by December 2012 and by April 2013 respectively. August consumer inflation (CPI) rose slightly to 5%, indicating that a trough was reached in July. We expect CPI to continue higher from here, partly due to food price pressures, rising towards year-end and into 2013, with another breach of the target expected in the second half of next year. This forecast is at odds with what the SA Reserve Bank (SARB) provided in its latest monetary policy committee (MPC) statement; they expect an average of 5.2% next year and 5% in 2014. Given the SARB's clear tilt towards worrying about domestic and global growth risks, we cannot discount another rate cut. Moody's was the first ratings agency to act on its negative outlook, downgrading SA from A3 to Baa1 in late September (it is now on the same ratings level as Standard & Poor's and Fitch). All three agencies still have SA on negative outlook, and we expect further downgrades to come. It is likely that three important upcoming events - the Medium Term Budget Policy Statement (MTBPS) in late October, the ANC National Policy Conference in December and the Annual Budget in February 2013 - will be watched closely. We currently expect to see further downgrades anytime between late October and late February. Note that while downgrades from the current ratings level still leaves SA relatively comfortably within the investment grade category, two notches down from the current level will mean that SA is on the lowest rung of investment grade. SA currently has one of the widest budget deficits within emerging markets, and needs to do more to rein this in to contain ratings deterioration. Money market NCDs are at all-time lows, with the yield curve ranging between 4.75% for overnight call to 5.35% for up to one-year term to maturity. Here the rate has fallen from 6.3% just six months ago at a time when lower interest rates did not appear to be a possibility. Spreads over JIBAR have dipped lower to provide a yield pickup of 0.4% for one year. Money market fund legislation was amended as at 1 July 2012 to allow for 13-month assets to be introduced for the first time and allowing the fund's weighted days to maturity to extend to 120 days from the old limit of 90 days. This allows for a slightly broader scope and better utilisation of money market opportunities out there. Overall risk does not change as the fund must maintain a low duration of no more than 90 days. Even if one more interest rate cut is a possibility, the most likely longer-term probability is for rates to stay low and eventually move higher. With the fund's three-month duration we are positioned for this eventuality and seek to maximise yield right through the interest rate cycle. We are now entering a period of much lower yields, which is likely to persist until interest rates have completed their cycle and have risen again. However, being a money market fund, which is the lowest risk fund in our range, it is well positioned to protect against both interest rate volatility and, in particular, an unexpected sharp upward move in interest rates.
Portfolio manager
Tania Miglietta Client

The fund returned 1.4% for the quarter, contributing to its latest one-year rolling performance to end-June, which now totals 5.7% net of fees. The benchmark STeFI money market index returned 5.5% over the same period. The fund has been a top quartile performer in the Morningstar rankings in every measurement period for the last 10 years, a pleasing long-term track record which points to our ability to produce competitive long-term money market returns, whilst managing risk through the full interest rate cycle. Whilst the crisis in Euroland has put a dampener on any local interest rates hike expectations, and lower international bond yields (US and German) continued to grind ever lower, local bond yields have pushed down further with the R157 (2015 maturity) breaking below a yield to maturity of 6% for the first time, yielding something very close to the money market. The short end of the yield curve followed the FRA market which started to price in as much as a 60% probability of a further rate cut around December 2012/January 2013. . This recent adjustment to short-term interest rate expectations is further reflected in the NCD market with a sharp downward move in the 12-month NCD seen this quarter, taking it to 5.90% (around the same yield as the R157 bond), but keeping it still some way off its all time low of 5.725% as was seen last year. These repo rate expectations changes were in response to the change in stance by the Monetary Policy Committee (MPC) in their May statement from previously indicating that the next repo move would probably be upwards to now being ready to move 'in either direction' as circumstances warrant. The market has interpreted this (probably correctly) as meaning that the MPC is currently more concerned about the fallout from Europe than current SA inflation. An improved short-term inflation outlook also provided support to the bond market. CPI generally came in below expectations during the quarter, largely due to stronger food disinflation than anticipated, while the sharp drop of 19% in the price of oil (Brent crude) since the beginning of the quarter will exert significant near-term downward pressure on CPI. While CPI will probably fall to around 5% in July as a result, the medium-term outlook is less comforting, as the effects of the weaker rand this year start feeding into the numbers. We now see CPI within the target range for the rest of this year, but for it to turn higher and breach 6% again next year. The fund has achieved its objective of offering investors a competitive yield with full liquidity. The challenge remains in finding the best relative value opportunities for money market investors in this very low interest rate environment.

Portfolio manager
Tania Miglietta

The fund returned 1.4% for the quarter and has achieved a total return of 5.6% for the last 12 months, closing the quarter with an effective annual yield of 6.13%.

In comparison cash, which is yielding around 5.5%, has significantly underperformed other yielding assets during the quarter and over the last year. Note that the real return on cash has barely been positive over the past 12 months, and on a forward-looking basis out to one year, current cash rates are expected to show negative real returns.

Locally, a focus was the annual budget speech in February. This surprised markets on the positive side, with the Minister reigning in the deficit projections. It has since been announced that the expected deficit for the fiscal year just ended (2011/12) is 4.5%, slightly better than expected at the time of the budget. Funding requirements still remain high, and there is some scepticism over the extent to which public sector wage increases can be contained - this being an important contribution to the expected lower deficit numbers. Soon after the budget and despite the improved numbers, Standard & Poor's joined Moody's and Fitch in attaching a negative outlook to its credit rating on South Africa. These agencies cited structural problems and the potential for politics to put pressure on the budget sometime in the future.

On the monetary policy side, although there is clearly no desire to raise interest rates anytime soon, the SARB has started to express its concern about more broad-based inflation. We continue to see inflation remaining above target through the first half of next year. The rand could be a game-changer, but continued passthrough from oil and food price hikes as well as the increasing likelihood of further second-round effects from petrol prices keeps us cautious. We continue to believe that with inflation above target and growth at around 3%, a negative real repo rate is too accommodative and we expect interest rates to start being normalised later this year. The fund has achieved a fair return in what has been a very low yielding environment since late 2010 when the repo rate was adjusted downwards to 5.5%, and has remained unchanged since. Whereas 12-month NCDs have risen to 6.28% they are not fully factoring in the strong possibility that interest rates may well be more than 0.5% higher in a year's time, thus making it a safer bet to remain invested in either short dated (one or two months) or floating rate investments. The fund has been a gatherer of short dated corporate bonds (Nedbank, Investec, Netcare), which have entered the money market universe as their term has shortened to less than one year to maturity. These offer far better value than one-year NCDs at the moment.

The three-month commercial paper market has grown substantially over the past year, with new names such as Resilient, Redefine, Vodacom, Scania and Macquarie entering the market. We caution against investing in commercial paper at prevailing credit spreads which are paper thin - a sentiment which carries through to areas of the corporate bond market as well. While we welcome these newcomers to the capital market, we believe the money market is lending to them at very cheap levels and that corporate credit spreads are unsustainable and not fully reflective of the risks inherent in some of these companies. In a challengingly low interest rate environment, we believe the fund has delivered a fair yield, having eeked out the best value available in the money market. This is evident from the top quartile ranking in its sector over the long term.

Portfolio manager
Tania Miglietta

The fund returned 5.7% for the year to end December 2011. This highly conservative fund has looked to provide a steady income for investors and preserve capital over the long term, both of which it achieved.

The past year was characterised by a combination of rising inflation, a depreciating currency (the rand lost 22% against the US dollar), rocketing food prices and a materially increasing fiscal deficit; all of which would normally be negative for interest rates. Despite this, global growth concerns, worries over the fiscal situation in a number of European countries, the continued foreign bond investor appetite for yield along with record low domestic short-term interest rates, resulted in a decent offset to the fundamental negative backdrop for bonds.

As we move ahead into the new year, we expect inflation to remain above the upper end of the 3% - 6% target range during the course of 2012. The main drivers appear to be a combination of rising food prices and the currency depreciation experienced last year. The maize price again reached new highs in December, with the year-on-year percentage change at 99% for the last 12 months. This has a direct and negative impact on inflation.

The next move in short-term interest rates is likely to be up. However, given the relatively dovish stance of the Monetary Policy Committee, this will most likely only take place towards the second half of the year, thereby keeping real returns on money market investments in negative territory. Should the Reserve Bank wait to take action against the rising inflation trend there could be major ramifications for fixed interest markets - the longer they wait, the more entrenched higher inflation expectations become. This is a dangerous scenario as it leads to higher wage settlements which then fuels inflation even further.

The fund's objective is to maximise yield in this very low yielding environment, where base rates are at an all time low and as inflation rises, real money market rates continue to be severely threatened

The fund is fully invested in a series of liquid, good quality floating rate investments for up to one year term to maturity, short dated corporate bonds and Government Treasury Bills. Money market rates were largely unchanged for the quarter, except for one year NCDs which moved higher to 6.17% from 5.75% in September. This move is due to inflation concerns, a weaker currency and the banks' ongoing need to fund in the one year area of the yield curve. Treasury Bills (TB) continued to outperform NCDs for most of the quarter, but their better value subsided towards the end of the year. Government's weekly TB auctions have been sizeable; the last weekly auction was for R6.5 billion. The fund's current yield is approximately 5.5%, net of fees.

The philosophy of this fund is to seek the best yields available in the money market, providing good credit diversification whilst maintaining the lowest risk possible.

Portfolio manager
Tania Miglietta