The fund returned 1.55% for the third quarter of 2013 (previous two quarters 2.55% and 2.24% respectively), taking the rolling one year return to 7.75% (8.51% at the previous quarterly report) and outperforming the STEFI cash index by 2.57% over a rolling one year period (previous quarters 3.24% and 2.99%). On the global front, the possible tapering off of Quantitative Easing by the US Federal Reserve was the main driver of rate and equity price volatility over the quarter. Its failure to materialise was met by wide market surprise and served to force the interest rate bears on to the backfoot, albeit temporarily. Expectations of QE tapering drove US 10Y yield higher which in turn eroded confidence in emerging market currencies and rates. Whilst South Africans sovereign debt moved a meagre 4BP over the quarter, the true trading range was a significant 80BP within a market characterised by poor liquidity. Similarly, the Rand depreciated a misleading 15c over the quarter, masking the 80c true range for the period. Foreign owners continue to play a significant role in our domestic bond market and despite prevailing negative sentiment and significant selling of our government bonds, remain net purchasers for the year. In commodity markets, energy prices moved higher on the back of an expected improvement in global growth and Middle East geo-political uncertainty. The price per barrel of Brent crude increased by 6.2% over the quarter with the currency effect of the Rand taking it to 7.7%. In precious metals, Silver was the clear outperformer, rising 10.34%, followed by palladium (+9.87), copper (+8.31%), gold (+7.64%) and platinum (+5.77%). The price increase in those metals extracted domestically served at least to support the rand to some extent against a backdrop of lacklustre trade and fiscal balances. With a disappointing domestic growth backdrop, negative sentiment in the manufacturing and mining sectors, lagging job creation, favourable inflation base effects and input prices, makes the likelihood of policy rate increases unlikely in the near term, despite inflation having moved above the target band. Barring the metals component, food, livestock and textile components of the CRB Commodity Index were negative for the quarter. The inflation outlook however, remains significantly currency dependent. Over the last quarter the fund tactically reduced duration into recovering rate markets after accumulating longer maturity assets into previous weakness. The fund remains focussed on the short end of the yield curve, maintaining our preference for a strategic duration of below 6 months. We see specific opportunity in short-dated credit and the opportunities created by an overall increase in market volatility. We continue to seek value opportunities that on a risk-adjusted basis will achieve our objective of Cash (STEFI) +2%.

Market and portfolio overview
The fund returned 1.88% for the quarter (previous quarter 1.72%), taking the one-year calendar return to 7.79% (previously 7.52%) and outperforming the STeFI cash index by 2.25% for the period (previously 1.85%).

Internationally, credit spreads compressed on the back of an improved European outlook. Over the quarter, the ITRAX indices, measuring Western European sovereign spreads, compressed 35 basis points, while emerging market sovereign spreads compressed 50 basis points. On the corporate side, European financial sector senior debt spreads compressed 60 basis points, while higher risk subordinated debt compressed a significant 105 basis points. The JP Morgan Emerging Market Bond Index declined by 26 basis points for the period.

In the US, however, Treasuries sold off slightly from 1.63% to 1.70% over the quarter on the back of improved risk sentiment. Domestically, credit spreads narrowed slightly, driven mainly by lower financial services spreads. As a result of stronger long bonds and a flattening in the yield curve, the ALBI produced 2.62% for the quarter. The inclusion of South African sovereign debt into the City Bank Global Bond Index and the unabated global search for yield resulted in foreign inflows into the South African bond market reaching new highs in 2012. Foreign ownership of South African nominal and inflation-linked bonds is now in excess of 35%, making foreigners the single largest owner of domestic bonds. Deterioration in the South African current account (deficit 6.4%) and fiscal deficit may, however, discourage further foreign accumulation of South African debt at their recently observed pace.

On the policy level, the SARB has maintained its policy rate at 5% since the cut in July 2012. Low economic growth (12Q3 GDP 1.2%) is likely to keep short-term rates anchored. There remains the threat of inflation emerging in the medium term, although rand strength over the quarter has created some breathing room. With continued government and corporate bond issuance in the long end of the yield curve, further flattening from the long end will be discouraged.

Portfolio positioning
Over the last quarter, the fund again increased its exposure to short/medium-dated domestic corporate credit. We continue to avoid long-dated credit, which we view as expensive. We remain focused on value opportunities in the short end of the yield curve, maintaining the fund duration at below six months. The fund continues to seek value opportunities that, on a risk adjusted basis, will achieve our objective of cash (STeFI plus 2%).

The fund switched Management Company from Momentum Collective Investments Limited to MET Collective Investments Ltd. on 01 Jan 2013

The Momentum Opportunity Income Fund changed to the Saffron MET Opportunity Income Fund on the 01/01/2013.