The fund generated a total return of 5.11% over the last 12 months, which is 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 to reach 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 at quarter end. Three month JIBAR followed suit, peaking at 5.15% to end the quarter at 5.142% (versus the repo rate of 5%). Commercial paper issuance continues to increase; in particular, issuance by property companies which have found money markets to be a good source of cheap funding. 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. For the fund, we continue to prefer South African Government 3-month Treasury Bills, which is both liquid, government guaranteed and yields more than a bank NCD. These currently form a meaningful part of the fund. We also prefer floating rate instruments which, apart from the credit spread, provide interest risk protection in a rising interest rate environment. As at quarter end, the fund yielded an annual effective rate of 5.16% (net of annual management fee). The fund continues to seek good yielding opportunities but with the key objective of capital preservation and liquidity.

The fund generated a money market return of 5.15% over the last 12-month period, which is ahead of the 3-month STeFI benchmark return of 5.08%. In June, the US Federal Reserve announced their intention to withdraw monetary policy support via a reduction in quantitative easing. The market responded with a bond and equity market sell-off which extended into emerging markets, impacting the local money market too. 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. Money market interest rates rose for the first time in months, with 12 month interest rates rising to 6.025% at their peak. However, bank spreads for floating-rate notes (FRNs) continued to fall at the short end of the yield curve as banks have limited appetite for short dated funding. The FRA curve moved higher to eventually price in four 0.5% repo rate hikes over the next 2 years. Three-month JIBAR followed suit, peaking at 5.15% but closing the quarter at 5.142% (versus the repo rate of 5%). It's worth delving a bit further into the speech delivered by South African Reserve Bank (SARB) governor, Gill Marcus, on the 26th of June. Specifically, we note the comments that point out the SARB 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 preempt 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. For the fund, we continue to prefer the South African government's 3-month Treasury Bills, which are government guaranteed, liquid and continue to yield more than a bank NCD. We also prefer floating rate instruments which, apart from the credit spread, provide interest rate risk protection in a rising interest rate environment. As at quarter-end the fund yielded an annual effective rate of 5.29% net of an annual management fee. The fund continues to seek good yield opportunities with the key objective being capital preservation.
Portfolio manager
Tania Miglietta Client

The fund has generated a competitive money market return over the last 12-month period of 5.4%, ahead of the 3-month STeFI benchmark return of 5.20%. Money market interest rates remain low at between 5.0% and 5.5% across the 0 - 13 month yield curve. Bank spreads for floating-rate notes (FRNs) continue to fall at the short end of the yield curve as banks have very little appetite for short dated funding. We note that as the FRA curve has risen, fixed-rate NCDs have started to tick slightly higher, as has the 3-month JIBAR now at 5.125% (versus the repo rate of 5%). This indicates that the downward pressure on interest rates appears to have abated. Commercial paper issuance has escalated during the quarter, with certain companies accessing the market for funding a few times in one month. This signals that local companies have spotted a cheap deal via the money market, compared to a more expensive option from the banks. We are of the view that these lending spreads are too tight to offer good value to investors. We have instead identified a better value deal in the South African Government's 3-month Treasury Bill, which is both liquid and government guaranteed. This yields more than a bank NCD and is fully secure. These currently form a meaningful part of the fund. 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 fund is well positioned to maximise yield, while maintaining a suitable level of liquidity and minimising risk.

Portfolio manager
Tania Miglietta Please

The fund generated a return of 5.5% for 2012, which was ahead of the benchmark return. Money market yields have remained very low during the quarter, with banks looking for longerdated funding in line with the requirements of Basel III targets. Given this preference for longer-dated funding, the short end of the yield curve (less than 12 months) has remained particularly low. 12 month funding spreads over JIBAR have remained fairly stable, but with the repo rate declining over the last couple of years, the overall yield has fallen in line with this (see chart below). Current 12 month floating rate notes pay 3-month JIBAR + 0.4%, which amounts to 5.5% yield at the current JIBAR rate. The repo rate is currently 5%. 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 last year. The global search for yield saw large inflows, despite bouts of risk aversion. 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. Short-dated South African corporate bonds benefited from low yields domestically and the ongoing search for yield. The yields on these bonds have declined to levels close to NCD rates, generating favourable returns for investors. The fund holds 4% in shorter-dated corporate bonds with terms of less than 13 months, all of which yield substantially more than vanilla NCDs. This explains why they are tightly held. Term and duration restrictions prohibit the fund from holding many more. Looking ahead, the crystal ball remains murky. 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 repo rate cut in 2013, as rising inflation offsets any worries about poor growth, especially while monetary policy already remains accommodative. The money market fund is run in a way that maximises yield but also liquidity, which we believe is fundamental to a money market fund. Risk is minimised as protecting capital remains a key focus. The fund is positioned to benefit from flat to rising interest rates and is set to continue to provide a competitive yield during 2013.

Portfolio manager
Tania Miglietta Please