The Efficient Fixed Income Fund returned 1.23% for the month of September. The fund's benchmark (the SteFi index) returned 0.43% over the time frame in question.

Developments abroad continue to drive the performance of the domestic South African markets. September will be remembered as the month when the United States Federal Reserve Bank (the "Fed") surprised the market by deciding not to reduce the stimulus that it has been providing in the form of Quantitative Easing. Our interpretation of this surprise is twofold. Firstly, the Fed has reason to be concerned about the near term outlook for the US economy and secondly, the Fed was concerned about the extent of the increase in bond yields since its initial announcement in June. We therefore take comfort from the communication that the Fed is watching the US bond yields and that it will insulate the market against excessive shocks where possible.

September was also a month to remember for the stubbornness of politicians. At the time of writing, it looks increasingly likely that the government of the United States will be unable to reach agreement on a budget going forward. This increases the likelihood of a government shutdown, with non-essential services being shuttered for a while. Such a shuttering will create a significant drag on the economy and could result in weaker economic data for the fourth quarter of 2013 than we had anticipated. Such weak data might further reduce the propensity of the Fed to significantly taper their Quantitative Easing.

Both of the above events were significantly positive for the bond market. We are happy to have generated an attractive return on your portfolio within the context of mitigating the risk of a drawdown should the events have played out otherwise.

We wrote last month that we saw value in the short dated R157 bond that matures in September 2015. The market finally agreed with us and the bonds rallied significantly. We used this as an opportunity to exit the position and lock in the profits.

Looking forward, we are starting to see South African bonds as having moved to a fair value. On the back of the near term head winds to the US economy, the bonds are even moving towards being an attractive investment for the next few months. Our strategy is to increase our exposure to bonds, while remaining cautious in a very volatile market.

We have seen that the listed property sector has also now moved closer to fair value and we are selectively reducing our underweight position towards a more neutral stance. We also see the current developments as likely to be supportive of the South African Rand. Therefore, we are also trimming our holdings of United States Dollar denominated assets.

The fund has a forward yield (net of asset management fees) of 6.12%.

June was a poor month for Fixed Income generally and we are disappointed to report that your Fund returned a loss of 1.41% over the period. We acknowledge that the All Bond Index TR returned a loss of 1.56% over the period and that a number of peers will also be reporting losses this month.

The month was dominated by talk from the US Fed about the possibility of tapering the Quantitative Easing that has supported the market over the last year. This resulted in a sharp increase of real interest rates (the interest rates being offered by inflation linked bonds over inflation). All asset classes were caught in the market reaction. Unfortunately Inflation linked bonds (our large overweight position) were at the centre of the storm, with nominal bonds not far from ground zero. This meant that anything linked to a fixed interest rate lost last month. Unfortunately in the context of a sell-off of inflation linked bonds, nominal bonds and listed property there was limited space to hide. Cash and floating rate notes would have been the ideal asset class for the month.

The questions investors are wrestling with are firstly, when tapering is likely to start and secondly, whether the sell-off is overdone in this context. The US Federal Reserve seems to be indicating that if data is in line with their current forecasts then it will be appropriate to start tapering in September. We see little risk of the data being sufficiently poor between now and September to cause a material change in stance by the US Federal Reserve. There is, however, a risk that the tapering might be delayed for a short while.

In the context of the value of bonds through tapering, we look at the US ten year bond which currently yields 2.50%. Our view is that once tapering is complete (towards Q3 or Q4 2014) the yield will likely be closer to 3.25%. Therefore, we think that a sell-off of yields by a further 0.75% over the next twelve months is plausible.

Any further selloffs will not be smooth. We expect that bonds will show periods of stability and strength followed by flashes of weakness with the long term trend towards a rate of 3.25% in the United States. South Africa is likely to be a little more defensive than the United States. We expect volatility with real yields maybe pushing to about 0.50% above today's levels.

In such a world most of the correction has been priced in. While bonds will display periods of weakness, we expect further corrections to be far more muted than what we just experienced. In this context we see some value in shorter and medium dated nominal bonds. We expect that the inflation number for June will prove to be higher than many seem to be forecasting. While this might provide some short term relief for inflation linked bonds, we are concerned about the scope for further increases in real yields and are neutral to underweight these bonds in favour of short dated nominal bonds.

At the time of writing, the portfolio forward yield is 6.05%.

We are pleased to inform you that the Efficient Fixed Income Fund returned 0.92% for the month. This compares favourably against the benchmark return of 0.39% and also that of the All Bond Index of 0.20%

March will go down as the month of Cyprus. The inevitable failure of its banking system followed by an ill-planned rescue attempt, and a two week closure of its banks while things were dealt with, has put the market on edge. Cyprus represented 0.2% of the Eurozone GDP and therefore the numbers are insignificant. What is of more importance is the message that politicians are sending.

Bear in mind that the Cyprus banks lost a significant amount of money on the Greek default. That was over a year ago and therefore the fact that the banks were in trouble was hardly news. With this in mind, we point out that the banks were known to be in trouble for over a year and the only way that they could attract deposits was to pay significantly more in interest than healthier banks. A basic tenant of the free market system is that stupidity hurts. In other words, depositing 100 000 000-00 Euro in a bank which is widely known to be insolvent just is not that smart and could end up hurting. Another tenant of the free market is that the average person does not have 100 000 000-00 Euros to invest. Smaller depositors are not reasonably expected to investigate the standing of a bank to the same extent as professionals and therefore should be protected. Considering the first attempted bailout of the banks, the idea was that all depositors, including the smaller ones, would lose money. This is simply a terrible idea and fortunately was abandoned, but only after the announcement had caused inappropriate angst.

The second bailout was a little better, but suffers from drawbacks that will become evident over the next while;

- A significant effort was made to maintain Cyprus' status as an international banking destination. We ask why? No sensible person is going to rush to deposit money in Cyprus again and the cost of creating this illusion is actually quite high.

- Cyprus has instituted exchange controls. This means that the value of one Euro elsewhere is now different to that of one Euro in Cyprus. Thus, Cyprus has effectively exited the Euro and created its own Cypriot Euro that will be used within the country. This goes against the idea of a single Europe and more importantly has, for the first time in history, created an exit mechanism from Europe. We are waiting with bated breath to see if these exchange controls are relaxed in short order as is currently promised.

We are afraid that cracks in the seams of Europe will become more problematic as the year progresses. We remain of the view that in the long term, a single Europe makes sense in today's globalized world. We are however more cautious than before. A weaker Europe is bad for South Africa as a whole, but as long as it is a gradual degradation this will be bond positive. We have accordingly been increasing our exposure to bonds throughout the crises and will also continue to hold our inflation linked position. The weaker rand makes it increasingly difficult for the central bank to even consider a rate cut. Therefore, we continue to hold an overweight exposure to inflation linked bonds. In the short term the rand weakness is probably a little overdone and we would expect some near term strength before the weakening trend resumes. The portfolio forward yield is 6.50% at the time of writing.

We are pleased to report back that the Efficient Fixed Income Fund generated a positive return of 0.51% for the month of December. This is ahead of the benchmark of 0.43% for the month.

December was characterized by exuberance of the markets in anticipation of the resolution of the Fiscal Cliff. In line with our view, an agreement was reached to mitigate the impact on the economic recovery. Politicians have become adept at kicking difficult decisions down the road and the current "solution" epitomizes this approach. The difficult decision related to the US debt ceiling was pushed out from December to February 2013. In some respects, that means the New Year is likely to bring 'more of the same' from the politicians.

Negative economic surprises in the US are looking more probable and the Debt Ceiling debate is probably going to be hard fought between the Republican and Democrats with little common ground being evident.

The South African reality of redundancies in the mining and agricultural sectors and certain categories of consumers with reduced financial flexibility are likely to come to the fore. Inflation may spike in the first quarter due to the structural changes in the inflation basket, but factors such as a lower oil price, a stronger rand and moderate demand pressures should lead to inflation hovering around the 6% level for the rest of the year. The SARB is likely to be confronted by the dilemma of the inflation rate exceeding the upper targeted range of the band and mediocre growth. Under these circumstances rates are likely to be kept on hold.

With this in mind, we have been increasing our exposure to the listed property sector and duration assets. We continue to be positive on inflation linked bonds.

The forward yield on the Efficient Fixed Income Fund (net of management fees) is approximately 6.60% at the time of writing.