Market review and fund performance
Tight liquidity conditions continued to plague global money markets during the third quarter, causing central banks to inject liquidity in an attempt to restore confidence in money markets. Issuance of asset-backed commercial paper declined significantly as banks struggled to roll maturities in the market. The US Federal Reserve took action by first cutting the discount rate (the rate at which it lends to commercial banks) and then the federal funds rate by 0.5%. The Bank of England's slow reaction to the liquidity crisis resulted in the bail out of a UK mortgage lender, Northern Rock.

In contrast to global markets, domestic liquidity remained in abundance with the South African Reserve Bank (SARB) continuing to drain liquidity out of the market on a daily basis. Yields sold off during the third quarter with the 12-month Jibar ending the quarter 0.27% higher and the yield curve flattened somewhat. The market was not surprised by the SARB hiking interest rates at the August monetary policy committee meeting with a full 0.5% already priced in the long end of the yield curve.

Over the quarter cash (as measured by the STeFI Index) earned a return of 2.3%. The Investec Money Market Fund also returned 2.3%, in line with the benchmark. The All Bond Index gave a return of 3.4%.

Market outlook and portfolio positioning
Food inflation continues to be a concern, surprising to the upside in both consumer and producer inflation data released towards the end of the quarter. Elevated maize and wheat futures could mean further pipeline pressures to retail food inflation going forward. However, as evidenced by producer price inflation data, it is encouraging to see a broad based moderation in inflation with the exception of food. We see CPIX inflation peaking towards the end of the year before falling sharply in the first half of 2008. With the short end of the yield curve pricing in a 70% chance of a further interest rate hike in October, we believe the money market is reasonably priced. We will continue to look for opportunities to add duration into weakness.

Market review and fund performance
Money market yields sold off aggressively in the second quarter, driven by the long end of the yield curve, which kicked up 0.88% during the period. With the deterioration in the inflation data over the quarter, the market had priced in a full 0.70% of further interest rate hikes prior to the June Monetary Policy Committee meeting. Therefore, the market was not surprised by the South African Reserve Bank's 0.50% increase in the repo rate at the beginning of the month.

Sentiment remained negative through most of the quarter helped by hawkish rhetoric from the South African Reserve Bank (SARB), domestic inflation data surprising on the upside as well as increased global inflationary concerns. Rising global yields coupled with a rise in volatility put pressure on riskier emerging market assets as investors demanded to be compensated for the uncertainty.

Over the quarter cash (as measured by the STeFI Index) earned a return of 2.2%, against the All Bond Index return of -1.7%. The Investec Money Market Fund performed well over the quarter. The fund returned 2.2% in line with the benchmark.

Market outlook and portfolio positioning
With CPIX now firmly above the three percent to six percent target band, it is possible that we may see further interest rate hikes going forward. The SARB will likely be monitoring data releases closely to weigh up the effect of inflation concerns versus the impact of cumulative tightening and the implementation of the National Credit Act.

Given our belief that the SARB would be forced to hike interest rates in June, we reduced the duration of the fund during the quarter. Going forward, we believe that the long end of the yield curve is now starting to offer value with the market pricing in a further 0.60% in interest rate tightening by the end of the year. We remain cautious in this environment, but will continue to look for opportunities to selectively add duration into weakness.

Market review and fund performance
Money market yields were volatile in the first quarter of the year. The one year Jibar rallied strongly into February only to sell-off again during March, ending the quarter at a level not far off from the start of the year. A dovish February monetary policy committee statement and positive budget gave rise to the rally into February. However, global risk aversion coupled with domestic factors started to weigh on the market towards the end of March. With the release of a large current account deficit at 7.8% of GDP, strong retail sales and hawkish comments from the Reserve Bank Governor, the market started to price in a 60% chance of a further rate hike. A higher oil price with an underrecovery of more than 60 cents a litre as well as maize futures reaching R2000 a ton added impetus to rate hike concerns. Over the quarter cash (as measured by the STeFi index) earned a return of 2.1%, against the All Bond Index return of 1.6%. The Investec Money Market Fund performed well over the quarter. The fund returned 2.1% in line with the benchmark

Market outlook
We believe that the South African Reserve Bank (SARB) will continue to weigh up the relatively benign inflation outlook versus the longer term risks. Our view is that the current account remains a significant risk going forward. Although the SARB could take some comfort in the shift from individual to corporate borrowing, the overall level of credit extension remains a concern. A higher oil price will likely be further cause for concern and could lead to some upward revision of the SARB's forecasts. Your fund's duration remained broadly unchanged during the quarter. Going forward, we will start to selectively look for opportunities to take the fund longer. With a 60% chance of a further rate hike priced into the market we believe that the long end of the yield curve offers some value.

Market Highlights
The SA Reserve Bank (SARB) hiked interest rates twice more over the three month period, 0.50% at each meeting, while we saw a significant Rand recovery and a further inversion of longer dated cash yields and the bond curve. The short end of the money market curve however moved up sharply with 3 month Jibar 0.87% higher over the quarter and 1 year up 0.29%. We remained cautious and kept to the shorter end of the money market curve.

The local currency again lived up to its reputation as the most volatile currency in the world as we saw the Rand/USD reverse most of its second quarter depreciation and rally back below R7.00/$ at year end from close to R8.00/$ in early October, buoying sentiment in the local market. Oil prices reversed the big gains from earlier in the year in the last month of the third quarter and then traded largely sideways into the end of November. This together with the stronger Rand, meant a sharp reversal of the big petrol price increases seen previously and lower inflation into year end than initially forecast by the market. Although inflation will still be pressurised by high food prices and some of the lagged effects of the weaker Rand earlier in the year on tradable goods, the outlook improved markedly into the end of the year, although a test close to the upper end of the band by mid-2007 is still likely.

Outlook
The Rand is expected to remain largely range-bound between R7.00-R7.50 in the coming months and inflation should rise close to the upper band in the second quarter. The SARB may well hike rates by another 0.50% at the MPC meeting in February, but this would probably be the final one in the cycle and the longer end of the money market will start to look through the peak in both interest rates and inflation. With a likely top of the interest rate cycle sometime within the first half of 2007, the curve out to 1 year should also start to invert in the coming months and the risk reward profile will favour moving further out along that curve and increasing duration. We will thus look to selectively increase duration through purchasing the longer end of the cash curve to take advantage of the changing shape of the curve.