The Investec Cash Plus Fund will change it's name to Investec Stefi Plus Fund, effective from 01 December 2011

Market review
The third quarter saw exceptionally volatile markets as risk aversion resurfaced on European debt woes and global slowdown concerns. Quarterly returns for the bond market were 2.8% and cash, as measured by the STeFI Index, returned 1.4%. While the yield curve was largely unchanged at the end of the quarter, it belied exceptional volatility. A range-bound July gave way to a massive August rally as emerging market local debt shrugged off currency weakness and traded like safe haven Treasuries. The rally, however, was short-lived as continued risk aversion weighed on currencies in September and emerging bond market yields rose aggressively. Huge inflows quickly turned to massive outflows as foreigners reduced holdings in South African bonds. The money markets started to discount a further rate cut and pushed the timing of the first expected hike out to 2013. While three-month cash rates remained anchored by the repo rate, one-year yields dropped over 50 basis points to 5.87%.

Portfolio review
Inflation moved higher during the quarter, and is now at 5.3%, with food inflation continuing to be the primary driver. Activity data continued to be weak, with strike action taking its toll on the purchasing managers index (PMI) which plummeted to 44.2, before recovering somewhat. The disappointing second quarter GDP number and increasingly difficult global environment show the challenges the South African economy faces, and growth for both this year and next has been revised lower. The combination of low growth and rising inflation poses a serious dilemma for the South African Reserve Bank, which opted to keep rates on hold. The Investec Cash Plus Fund returned 1.5% over the quarter, with exposure only to shorter-dated bonds. The fund was well positioned to take advantage of attractive credit spreads.

Portfolio activity
Given the inordinate volatility in the bond market, we maintained a cautious stance. We favoured the shorter end of the curve as local issuance remains concentrated in the long end. We also preferred highly-rated credit, particularly floating-rate notes, and added selectively to the portfolio where spreads on new issues looked attractive.

Portfolio positioning
Rand weakness, the volatility of the South African financial markets and the huge turnaround in fixed income investment flows seen in the third quarter are a stark reminder that global factors are important drivers of our markets. With the situation in Europe likely to flare up from time to time and deepening concerns about the extent of the global slowdown, caution continues to be warranted. We expect volatility and bouts of risk aversion to continue into year-end, providing policymakers with an exceptionally awkward backdrop against which to manage the economy.

The rand and the bond markets will continue to be at the mercy of global investment flows. The possibility of another interest rate cut has risen significantly. While the South African Reserve Bank will closely monitor the impact of the weaker rand on inflation, the Bank will carefully consider the country's growth prospects. With slowing growth and rising inflation, the yield curve will remain steep as investors demand a higher risk premium for holding longer-dated instruments. The portfolio will be positioned to take advantage of the attractive spreads offered in the credit markets. We will also maintain a relatively cautious position on duration, although we do believe that the steepness of the curve does warrant some exposure to longer-dated bonds. With only modest exposure to the bond market, the risk to the portfolio of a big sell-off in yields is limited. We remain positioned strategically and will be able to take advantage of opportunities that arise.

Market review
The second quarter saw a strong recovery in the bond market as risk appetite returned to global markets. Quarterly returns for the bond market were 3.9% while cash returned 1.4%. Emerging market debt attracted large inflows and South Africa was no different. Foreigners bought in excess of R35 billion of our local debt during this quarter and this was one of the main reasons for the rally. Money market yields were broadly unchanged during the review period.

Portfolio review
Domestic inflation surprised on the upside with food inflation being the primary driver. The South African Reserve Bank (SARB) seems to be leaning towards holding rates for longer, with the first hike being priced in for year-end. Growth in manufacturing production continues at a sluggish pace, with weak car production numbers probably linked to Japan-related supply disruptions. The manufacturing numbers will cause a drag on GDP figures. Globally, growth remains disappointing. The Investec Cash Plus Fund returned 1.5% over the quarter. Portfolio activity Due to the rallying of the bond market, we maintained a cautious stance and let duration on the bond portion dilute further. Local issuance remains concentrated in the long end of the curve. During the review period, we continued to favour highly rated credit, particularly floating rate notes, and added selectively to the portfolio where spreads looked attractive.

Portfolio positioning
Global market sentiment improved in the second quarter and investors had a greater appetite for risk. Going forward, debt problems in the euro zone and uncertainty about the debt ceiling issue in the US could affect local markets, as foreign capital could rapidly be withdrawn.

The rand remains overvalued due to the large inflows, and we are increasingly concerned that the local currency could depreciate into year-end. A weaker rand will add to the inflation woes and make the SARB increasingly worried about inflation. The Bank is equally concerned about the sluggish pace of growth in the SA economy and the absence of employment growth. The monetary authorities are thus likely to hold-off on interest rate hikes for as long as possible. This should result in steeper yield curves as investors demand a higher risk premium for holding these instruments.

We continue to position the portfolio to take advantage of the attractive spreads offered in the credit markets. We will maintain a cautious position on duration, although we believe that the steepness of the curve warrants some exposure to longer-dated bonds. With only modest exposure to the bond market, the risk to the portfolio of a big sell-off in yields is limited. We remain positioned strategically and will be able to take advantage of opportunities that arise.

Market review
Local bonds traded weaker over the quarter, with the All Bond Index losing 1.6%. The yield curve has continued to steepen, while inflation concerns both globally and at home have been more pervasive. The firm rand has offset gains in oil prices for now, while food prices, rising at producer level, have not been passed on to consumers. Listed property, highly sensitive to the bond market, also gave up some of its 2010 gains, closing 2.2% weaker. Commercial property fundamentals remain under pressure, though highly dissimilar across regions and asset type. A recovery in growth, coupled with a lagged onset of new supply, will lend support to the market over the next year. Cash, as measured by the STeFI, provided a steady 1.4% over the quarter.

Portfolio review
The political uprising in the Middle East and Africa pushed oil prices higher, compounding fears of rising inflation. A disappointing budget and foreign bond selling forced the yield curve even steeper. The South African Reserve Bank (SARB) left rates unchanged and revised its forecast upwards. The short end of the market moved from pricing in a possible further rate cut to expecting hikes from the second half of the year. The Investec Cash Plus Fund had a reasonable quarter, delivering 1.3%. Returns in the shorter end of the bond market were lower than cash, but much healthier than overall returns from bonds, which were negative as long-dated bonds sold off.

Portfolio activity
Although we continued to hold bond exposure throughout the quarter, we did let the duration on the bond portion dilute slightly, bringing down the overall interest rate exposure. We maintained our strategy of selectively adding credit exposure to the portfolio, favouring medium-dated floating rate notes from the banking sector.

Portfolio positioning
The global environment remains fluid as Europe considers rising inflation and the debt problems in the southern region. The US continues to keep policy hugely accommodative, which is weakening the US dollar and putting pressure on most emerging markets as their currencies strengthen. Various forms of intervention have been tried, with no success. The European Central Bank is expected to hike as early as April, followed by the Bank of England in May. The US Federal Reserve is likely to delay raising interest rates to the fourth quarter of 2011. This disparity has further weakened the US dollar and the rand has recovered its losses from earlier in the year. It is likely that the rand will remain strong. Foreigners are once again beginning to add exposure to our high yielding bond market. We will need to see these flows sustained in order to regain all the lost ground, as local fund managers remain negative on the market. The SARB has slowly started to prepare the market for a change in interest rates and we are likely to see the first hike in November, but it could be as early as September if global oil and food prices continue to move higher. Although risks for our markets have continued to rise, the very steep yield curve and the high bond yields in the long end still offer reasonable protection for the domestic bond investor. The market also retains its attractiveness from a global perspective and is likely to continue to be supported by international flows, although this carries the risk of increased intervention in the currency market to stem the rand's strength. We continue to position the portfolio to take advantage of the attractive spreads offered in the credit markets. We will maintain a cautious position on duration, although we do believe that the steepness of the curve does warrant some exposure to longer dated bonds. With only modest exposure to the bond market, the risk to the portfolio of a big sell-off in yields is limited. However, the portfolio is exposed to the credit markets where a significant widening of credit spreads would lead to underperformance.

Market review
The South African Reserve Bank's (SARB) monetary policy committee cut the repo rate by another 50 basis points over the quarter to an all time low of 5.5%, as inflation continued its downward slide. Furthermore, the SARB revised down its already benign inflation estimates, now comfortably within the target band over the full forecast period. The Bank also expressed concern about the sustainability of the local recovery and sovereign debt problems in peripheral Europe.

Despite positive domestic inflation fundamentals, local bonds could not shrug off the global bond sell-off, ending up only 0.7% over the quarter. Cash, as measured by the STeFI, returned 1.6% for the three months to the end of December. The best performing asset class over the past year was the listed property sector. The sector continued to show strong returns, despite weak property fundamentals. Listed property gained 3.1% in the fourth quarter to rise by 29.6% for the year.

Portfolio review
Local yields rallied early in the quarter ahead of the November rate cut, before correcting sharply into month end. Late December saw the market start to strengthen again, but not enough for longer dated bonds to outperform cash over the period. The curve steepened as monetary policy helped shorter dated bonds rally, while the yield on those with a maturity of longer than five years rose. Overall the strategy had a reasonable quarter, performing in line with its STeFI cash benchmark. Short bonds were in the sweet spot on the curve, beating both falling cash rates and medium- to long-dated bonds.

Portfolio activity
We maintained a constructive view on bonds over the quarter and 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. Longer dated money market exposure was increased ahead of the interest rate cut, locking into longer term fixed exposures at higher yields.

Portfolio positioning
Global growth picked up again in the fourth quarter, and this has started to manifest itself in higher US treasury and bond yields. Short rates in South Africa are unlikely to move any lower this cycle. Our central case remains one where rates stay low for a prolonged period. The very steep yield curve and the high bond yields at the long end offer reasonable protection for the domestic investor. We will gradually decrease bond exposure and look to invest in the shorter end of the cash curve. The market also retains its attractiveness from a global perspective and is likely to continue to be supported by international flows, although this in itself carries the risk of increased intervention in the currency market to stem the rand's strength. We remain well positioned to take advantage of the attractive spreads offered in the credit markets. Although we are becoming cautious, we are keeping some exposure to the bond market, looking to benefit from the steepness of the curve. The duration risk for the portfolio remains small, but a sell-off in the bond market would hurt performance as would a significant widening of credit spreads.