Efficient Select has been calling for a downgrade of South Africa by the rating agencies for some time. Experience has taught us that bonds lose ground after quantitative easing in the United States. We have all expected that upon the inclusion of South Africa in the World Government Bond Index there would be a sell off of bonds. Finally, we have known that headed into the party conference there is a higher risk of political news negatively influencing the South African markets. Not in our worst of scenarios would we have expected all four of the major icebergs to strike the South African financial markets in the same calendar month. September will be remembered as the month where defensive strategies prospered.

It is therefore gratifying to report back to our investors that your Fixed Income Fund generated a return of 0.57% for the month of September. This is once again in excess of the benchmark and also ranks favourably against a number of competitors.

We believe that the world will continue in its low growth phase for a while. The United States has plunged into the third round of quantitative easing (which means inflation and dollar hedges are smart investments). We continue to hold our view that a further (and probably final) interest rate cut is warranted in South Africa. We have a rate cut 'penciled in' for November 2012 though there is a risk it will only arrive in early 2013.

Based on our expectations, we see value in longer dated inflation linked bonds and also shorter dated fixed rate bonds. We will start to reduce the size of our United States Dollar and British Pound positions if we see further rand weakness.

In the last month, we have seen a shift in the market towards trading and pricing assets on the hope of further stimulus. The United States Federal Reserve obliged with an extension (to December) of the Operation Twist program, whereby long dated bonds are bought back, financed by short-term debt. Unfortunately the markets saw this as a half measure and have already disregarded it.

Financial markets are demanding that the United States provide us with quantitative easing for the third time (QE3) by printing money. Unfortunately, this will both increase inflation and devalue the dollar, so the Federal Reserve is somewhat reluctant. Therefore we will be caught in this tug of war between the United States Federal Reserve and the financial markets until one side gives in. History has taught us that when a country goes to war with the financial markets the financial markets usually win. Therefore, we are positioning ourselves for further quantitative easing, although we acknowledge that this is not imminent. More likely, our portfolios will continue to benefit from the market rallies on the back of news that is perceived to advance the next dose of quantitative easing.

We have reacted to this environment by increasing the duration of the portfolio. The portfolio will now benefit from any news that is considered to increase the likelihood of QE3. We see this as a lower risk strategy in the current environment with foreign investors continuing to provide good price support for our market. This enabled us to provide a solid return in June and has provided us with a good start to July.

The portfolio forward yield is 8.25%