Economic overview
On the international front, Eurozone concerns remain. Doubts around the austerity strategy continue to dominate markets and remain a key driver of risk appetite. The probability of a successful fiscal consolidation has improved compared to the first quarter of 2012 and a more pragmatic approach to budget deficit reduction seems to have taken hold with Spain being granted more time to reduce its budget deficit. Final resolution remains highly elusive and we can expect more uncertainty from this area, translating into continued rand and equity volatility. US 10-year bond yields rallied from 2.03% to 1.64% over the quarter on the back of continued risk aversion in equity markets, the threat of stagflation and a flight to quality. Global PMIs remain a concern. A progressively bleak global growth outlook is witnessed in lower base and precious metal commodity prices; although unfavourable climatic drivers in the US continue to push maize prices higher and threaten hitherto moderating food price inflation. Emerging market sovereign bonds lost ground over the period, due largely to rotation back to US Treasuries. This has, however, reversed somewhat in the latter part of the quarter. On the local side, attention has been focused on the government bond switch auctions as National Treasury rolls some debt into longer-dated issuances. The curve steepness was reflective of the supply dynamics and presented a good entry opportunity into longer-dated bonds. Foreign appetite for local bonds gained further momentum as the search for global yield continues. Given the international backdrop of lower policy rates with further monetary stimulation likely out of the US, one could see local rates continuing to move lower although, in the short term, we view domestic rates as expensive.

Market and portfolio overview
The All Bond Index produced 5.20% for the quarter, the majority of which was achieved over the past month with RSA sovereign bonds outperforming local credit significantly. May inflation printed at 5.7%, within the policy target band, and inflation-linked bonds underperformed nominal bonds over the period. We expect cash rates to be stable over the next six months with the improved short-term inflation outlook. The fund returned 1.72% for the quarter, taking the rolling one-year return to 7.52% and outperforming the STeFI Cash Index by 1.85% for the period.

Fund positioning
The fund increased its exposure to short/medium-dated domestic corporate credit over the period. Whilst we do not see value in long-dated credit, given the backdrop of low/lower global and domestic policy rates, global demand for yield and the improved position of the aggregate company balance sheet, we do not expect a worsening in credit spreads in the short/medium term. There continues to be intermittent opportunities in this asset class, although we shall retain our low credit duration bias. Short-lived pockets of volatility in derivative markets also presented opportunities and we expect these periodic opportunities to continue through 2012.

We continue to seek value opportunities that, on a risk-adjusted basis, will achieve our objective of Cash (STeFI)+2%.

Economic overview
By far the dominant event of the first quarter of 2012 has been the relief rally in European sovereign bonds following the ECB's massive €1 trillion LTRO liquidity injection support for Euro-area banks. This, in turn, instigated a global risk asset rally. However, by quarter-end, investors appeared weighed down by a sense of 'what's next?' Euroland yields have drifted higher, adding to concerns about a partly geopolitically-motivated rise in the global oil price and whether China can engineer a 'soft landing'. Some of these concerns may be overstated: a higher oil price, coupled with a rising US 10-year Treasury yield, point to stronger US growth, as unemployment and housing vacancies decline. Moreover, the copper price, a proxy for 'core' China growth, has also held up well, while the Chinese authorities are under less pressure to appreciate the renminbi. As with other big emerging markets, where inflation has eased back, China should be able to embark on further monetary easing.

Locally, even allowing for the negative impact of a higher oil price on the trade balance, the pick-up in capital goods imports is mirrored in an acceleration of investment demand that is now beginning to outpace - off a high base - consumer-led demand. That overall domestic demand is spurring higher investment is also apparent in strengthening credit growth. Specifically, growth in 'unsecured credit' has likely been exaggerated somewhat, being heavily driven by the down-stream effects of higher government employment and more social welfare spending. These effects should taper off given government's intention to reduce the budget deficit over the next three years. Rising inflation is also a consumer headwind and is likely to rise further, before peaking at 7%. In the event, this may well trigger the start of a modest tightening round by year-end. Even so, the current forward economic dynamic suggests to us that another year of c.3% growth is quite likely.

Portfolio overview
The SA Reserve Bank kept the repo rate on hold at 5.50% at its March Monetary Policy Committee (MPC) meeting. The market was positioned for rising inflationary pressures and was expecting a rate increase later in the year. Inflationary concerns have subsequently reversed and expected policy rate increases have been moved back to the medium term, while our view is for flat rates for calendar 2012. In the international credit market, sovereign and corporate spreads compressed from their January highs as risk appetite improved.

Equity volatility continued to be muted over the quarter, driven mainly by the Greek on-again off-again debt crisis and Chinese growth expectations. The rand was reasonably stable over the quarter, but continued to lack lustre against its peers. The fund produced 1.69% for the first quarter of 2012, taking the one-year return to 7.61% and exceeding the STeFi Index by 1.93%. On a rolling 12-month basis, the fund outperformed the February published year-on-year Headline Inflation rate of 6.10%, giving a real return of 1.51%.

Fund positioning
The fund has continued to be positioned with a low duration bias, focusing on short-term value opportunities as they present.