Market review
Local economic activity moderated, with GDP expanding by 3.2% in the second quarter, down from 4.6% in the first quarter. Concerns about the global economic recovery and subdued demand locally, coupled with the favourable inflation outlook, motivated the South African Reserve Bank to further reduce the repo rate to 6% in the third quarter. The August inflation number of 3.5% was the lowest since-mid 2005. The rand was one of the strongest emerging market currencies over the review period, gaining more than 10% against a weak US dollar. Bond yields fell sharply, boosted by foreign investor demand and continued downward pressure on inflation. The All Bond Index ended the quarter 8% higher, behind listed property (13.7%), but well ahead of cash which returned 1.7% over the period.

Portfolio review
The bond market had an exceptionally strong third quarter as risk appetite returned with a vengeance, expressed largely by huge inflows into local emerging market bonds across the globe. The lacklustre growth in developed markets and concomitant 'very low rates for longer' outlook, continued to underpin the good long-term emerging market story, pushing currencies higher and flattening yield curves. In South Africa, this bond positive story was helped further by the cut in the repo rate. Cash rates fell by between 60 and 80 basis points across the curve, while long-bond yields rallied by a full percentage point. The strong performance from bonds and longer dated cash meant that the fund had a good quarter, outperforming its cash benchmark.

Portfolio activity
We maintained a constructive view on bonds for most of the quarter, but reduced the bond exposure during the strong rally in August. The yield correction in September provided us with an opportunity to buy bonds back at more favourable yields. We also continued to selectively add credit exposure to the portfolio, favouring new issuance in medium-dated floating rate notes and longer dated bank floating rate notes as the spreads in the one-year area collapsed.

Portfolio positioning
The fundamentals for the bond market remain sound. Inflation has surprised on the downside and the fiscal picture is improving. Economic releases point to a continuing recovery, albeit a rather subdued one. The main domestic themes for the bond market are unchanged. Growth will be lacklustre, inflation contained and rates will remain low, or perhaps see a further decline. The global environment also points to continued support for bonds. The slowing recovery in developed markets, close to zero interest rates and the global investor search for higher returns and diversification still underpin large flows into emerging market assets. Yields on South African bonds continue to stand out as attractive when compared to other emerging markets of a similar credit rating, ensuring that South Africa should still attract its fair share of portfolio flows. The portfolio remains well positioned to take advantage of the high yields offered in the credit markets. We will also maintain some exposure to the bond market, as we expect bonds to continue outperforming cash into year-end. Although the duration risk for the portfolio remains small, a sell-off in the bond market would hurt performance as would a significant widening of credit spreads.

Market review
In May the markets were spooked by the possibility of sovereign default by the one of the PIIGS (Portugal, Ireland, Italy, Greece and Spain). The ensuing risk aversion led to a sharp sell-off in the euro and other risky assets. Governments in Europe responded by promising to cut deficits, which would further jeopardise the recovery. The local bond market sold off on the back of the softer currency and weak emerging markets in general, but by the end of the month bonds had bounced off their worst levels. Over the quarter, longerdated bonds underperformed cash, while shorter-dated bonds fared better, matching cash returns. The All Bond Index returned 1.1% over the quarter, while cash gained 1.7%. Listed property rose 0.6% over this period. Year to date, listed property remains the best performing asset class (10.6%).

Portfolio review
The Investec Cash Plus Fund gained 1.7% over the quarter, matching cash returns. We maintained our strategy of holding some bond exposure in the 3-7 year area of the curve, which performed largely in line with cash. The higher yield of the credit portion of the portfolio also added to the overall performance of the fund. Money market yields edged lower during the quarter and the money market curve flattened a little. Funding spreads have narrowed slightly over the period, but still offer an attractive pick-up over three-month Jibar and this continues to add to performance.

Portfolio activity
Three-month cash yields edged lower to 6.59%, while one-year rates fell to 7.15%, causing the cash curve to flatten slightly. We kept our overall positioning largely unchanged through the quarter, as we continued to look for bond outperformance. Although constrained by credit limits, we still expect credit to outperform and look to maximise the credit spread on the portfolio. We purchased some medium-dated high quality floating rate notes.

Portfolio positioning
Economic data released at the beginning of the quarter pointed to a strong recovery, with the Purchasing Managers Index well above 50 and vehicle sales growing at a +30% rate on a year-on-year basis. However, as time passed activity data started to moderate. Credit growth has stabilised but remains relatively weak, raising concerns about the sustainability of the recovery. The South African Reserve Bank kept interest rates at record lows, signalling that it is more concerned about the strength of economic growth than any upside risk to inflation posed by wages or administered prices. Fundamentals for the bond market remain sound. Inflation is surprising on the downside and the fiscal picture is improving with expenditure coming in below budget. The release of the South African Reserve Bank Quarterly Bulletin revealed a strong bounce in household consumption, underpinned by robust real income growth. Fixed investment was weak, but the economy is forecast to grow by around 3.2%. The theme for the bond market remains unchanged; rates will stay lower for longer. Not only are local fundamentals supportive, but the shaky fiscal position of developed markets is resulting in large flows into emerging market assets. Yields on South African bonds stand out as being particularly high when compared to other emerging markets of a similar credit rating. This should help South Africa attract its fair share of portfolio flows. We will continue to keep the portfolio relatively conservatively positioned, while still looking to benefit from movements in the bond yield curve and the wide credit spreads on offer.

Market review
The South African economy is showing signs of recovery. Year-onyear comparisons indicate strong gains across most categories, boosted by very weak economic activity at the start of 2009 when the recession was in full swing. Large-scale job losses have abated, while manufacturing activity has recovered strongly off a low base. The current quarter's growth rate should further support the view that the local economy remains on the recovery track. With leading indicators at or near their peak, pointing to a more moderate second half, growth estimates for the year as a whole remain below 3%. The National Treasury will continue to focus on fiscal restraint. The collapse in tax receipts, coupled with the high public spending bill on existing projects, has placed substantial pressure on government's funding requirement. The budget deficit of just below 7% of GDP for this past fiscal year is estimated to fall to less than 4% by the 2012/2013 financial year. The South African Reserve Bank's monetary policy committee's decision to cut the repo rate to 6.5% provided a welcome boost to indebted consumers in March. Greater certainty about electricity tariff increases, slowing inflation and the negative impact of a strong rand on the economy's competitiveness were all cited as factors warranting a further cut in rates. The All Bond Index (ALBI) returned 4.4% over the quarter, well ahead of cash. The listed property sector added nearly 10% over this period.

Portfolio review
It was a very good quarter for bonds which easily outperformed cash. For the three months to the end of March, your portfolio returned 2%, outperforming its cash benchmark. Over a full year the portfolio gained 8%. We maintained our strategy of holding some bond exposure in the 3-7 year area of the curve. The higher yield of the credit portion of the portfolio contributed to the overall performance of the fund. The bond exposure added to the fund's returns over the quarter as bonds outperformed cash. Money market yields, which had been largely unchanged for most of the quarter, dropped sharply in March to reflect the unexpected rate cut. Funding spreads remained wide, giving an attractive pick-up over three-month Jibar and this also added to returns.

Portfolio activity
Three-month cash yields dropped from 7.30% at the end of last year to finish the quarter at 6.67%, reflecting the 50 basis point cut in the repo rate. One-year cash rates dropped to 7.48% from 8.20%, and the cash curve flattened somewhat. Although bonds outperformed cash, the bond curve steepened a little. We maintained the overall duration for most of the review period, before taking some profits in the final week or two. Although we remain constrained by limits, we are still looking to maximise the credit spread on the portfolio yield, purchasing medium-dated credit-linked notes and bank paper with attractive spreads over three-month Jibar.

Portfolio positioning
Our below consensus inflation view is beginning to play out and we expect inflation to continue to surprise on the downside over the next couple of months. We anticipate that inflation will fall to the middle of the band by mid-year and then remain well behaved for the remainder of the year. Although it is not our central case, this benign inflation outlook, combined with relatively modest growth prospects and a large output gap, means that a further surprise rate cut cannot be ruled out. There will be little pressure for the repo rate to rise until early 2011. The recent improvement in the mix between government revenues and expenditure has lifted some of the funding pressure on the market. However, issuance is still heavy and is likely to remain an impediment to any further significant bond rally. The global recovery continues to unfold in a benign manner, favouring risk assets, including broader emerging currency and asset markets. We expect the rand to remain relatively strong as flows to emerging markets continue to underpin the local currency. This further supports our view of lower inflation and modest growth. However, the volatility of the rand remains one of the biggest risks to our outlook on the fixed income markets. We will continue to keep the portfolio relatively conservatively positioned while still looking to benefit from movements in the bond yield curve and the wide credit spreads on offer.

Market review
In sync with other commodity currencies, the rand regained its composure in 2009. Record capital inflows and higher commodity prices fuelled a 28.7% gain against the US dollar. 2009 was not a good year for bond markets, reversing some of their gains of the previous year. Bond prices fell in 2009 as economies recovered and the cost of massive fiscal and monetary stimulus started to hit home. The increase in bond issuance over the next few years and large fiscal deficits will keep the pressure on bond markets. Offsetting this over the near term, will be the improved domestic inflation outlook and expectations of growth below the historical average. The All Bond Index lost 1% over the year, but marginally outperformed cash over the second half of 2009, gaining 4.1%. In the fourth quarter, the All Bond Index returned 1.1%, underperforming cash. The listed property sector showed some resilience in a very difficult trading environment, gaining 4% in the last quarter to finish the year 14.1% higher.

Portfolio review
2009 was a disappointing year for bonds. Short-dated bond yields were anchored by low cash rates, but the long end of the market sold off dramatically, steepening the curve by close to 200 basis points. Your portfolio performed in line with its cash benchmark over the quarter. We maintained our strategy of having some short-dated bond exposure and selectively switching and adding to credit exposure. The higher yield of the credit portion of the portfolio contributed to the overall performance of the fund, while some further tentative credit spread compression also helped. The duration added to the portfolio through its bond positions detracted slightly from performance over the quarter as cash outperformed even the very short end of the bond curve. Money market yields were largely unchanged to slightly higher over the quarter. However, funding spreads remained wide, giving an attractive pick-up over three-month Jibar, which also added to outperformance.

Portfolio activity
Three-month cash yields moved some 20 basis points higher to 7.22%, as the market discounted the end of the interest rate cutting cycle, while the one-year area of the curve stayed flat at around 8.20%. The bond market although largely range bound, steepened slightly with the short-dated bonds anchored by cash rates and the long end still concerned with increased government issuance. Overall duration remained unchanged throughout the quarter, and we continued to favour the 3-7 year area of the bond curve and attractively priced bank floating rate notes in the money market space. Although we remain constrained by limits, we continued to look to increase the credit spread on the portfolio yield, purchasing mediumdated credit-linked notes and bank paper with attractive spreads over three-month Jibar.

Portfolio positioning
Despite base effects that will push inflation higher over the next couple of months, we expect inflation to fall to the middle of the band by mid-year and to remain well-behaved for the remainder of the year. This together with a relatively modest growth outlook and a large output gap means that a further rate cut cannot be ruled out and that there will be little pressure for the repo rate to rise until early 2011. Increased government and parastatal issuance remains one of the biggest constraints on bond market performance. With budget day approaching, the market will remain focused on government finances and the size of the deficit. This is likely to keep the yield curve steep and limit the magnitude of any rally in bond yields. As the global recovery continues to unfold in a benign manner, it is likely to favour risk assets, including emerging markets and the rand. The local currency is likely to remain relatively strong as flows to emerging markets continue, albeit at a reduced pace to last year. This supports our view of lower inflation and modest growth, but as always, the volatility of the local currency remains one of the biggest risks to our outlook on the fixed income markets. We will continue to keep the portfolio relatively conservatively positioned while still looking to benefit from the positively sloped yield curve and the attractive credit spreads on offer.