The fund returned 2.60% and 10.20% for the quarter and year respectively, exceeding the benchmark (STeFI Call Deposit +2.0%) which returned 2.14% and 8.75% respectively. On a rolling one-year period, the fund beat the enhanced cash benchmark by 1.45%.

All SA asset classes returned positive returns in the first two quarters of 2019. The top-performing asset class for the quarter was Property (+4.52%), followed by Equities (ALSI Total Return) at 3.92%, Bonds (All Bond Total Return Index) at 3.70%, Inflation-linked bonds (+2.76%) and Cash (+1.80%). Over a rolling 12-month basis, Bonds were the top performer (+11.48%), with Property posting the lowest return (+0.79%).

The US Fed announced an unchanged Fed Funds Rate on the 19th of June. The Fed now seems to be supporting market expectations of a July rate cut. The next FOMC meeting will be held on the 31st of July. Personal Consumption Expenditure (PCE) is now expected to print at 1.5% in 2019, previously estimated at 1.8%. Core PCE, the Fed's preferred measure of inflation, is also seen moderating to 1.8% in 2019, from 2.0% previously. The GDP forecast was left unchanged at 2.1% for 2019 and 2.0% for 2020.

In the recent risk-on environment, the US 10-year Treasury yield traded 40 bps lower (2.41% to 2.01%) at quarter end, while the Dollar Index weakened to 96.1, down 1.2% over the quarter. 3-Month USD Libor decreased materially to 2.32%, down 28 bps and 49 bps QTD and YTD respectively. The US curve remains negatively sloped, traditionally signalling imminent recessionary conditions.

As expected, the European Central Bank (ECB) kept policy rates unchanged. The growth outlook was revised upwards to 1.2% for 2019 and downwards to 1.4% for 2020 and 2021 respectively. Inflation is expected to remain below the bank's 2.0% target over the forecast horizon. Mario Draghi, President of the ECB, stated that an accommodative monetary policy remains necessary and that key policy rates will remain unchanged, until at least the first half of 2020 (previously end of 2019). He further signalled that the next policy rate move would more likely be down than up.

The German 10-year generic yield was down another 13bps, ending the month deeper in negative territory, at -0.33%, while the French 10-year yield was down 22bps, closing the month at -0.01% and slipping into the negative for a first time over the last year.

The Bank of England (BOE) unanimously voted to maintain the Bank rate at 0.75% at its June meeting. All members also voted to maintain the stock of gilts at GBP435bn and corporate bonds at GBP10bn. The MPC acknowledged that the perceived likelihood of a no-deal Brexit had risen. Rates are expected to remain unchanged this year.

Commodity returns were reversed during the second quarter of 2019. The CRB Commodities Index returned -4.3% (+4.2% in the previous quarter), with the CRB Metals Index as the biggest loser at -13.3% (up 8.0% in 1Q19). The CRB Livestock Index returned -7.6% (previously +8.9%). Brent crude oil traded at USD66.55 at quarter-end (down -2.7%). Oil jumped to a five-week high after Saudi and Russia signalled their support for an extension of OPEC+ output cuts couple with a USChina agreement to restart trade talks that improved the demand outlook. The rand price per barrel was ZAR943.72, down -4.4% over the quarter as the rand appreciated by 2.9% against the dollar. Palladium (+11.0%) and gold (+9.07%) performed strongly, with copper (-7.8%) and platinum (-1.7%) losing.

In the global credit space, the Markit iBoxx USD Liquid High Yield Index gained 1.54 % over the period. The VIX Index, which measures risk sentiment, traded slightly higher at the end of the quarter at 15.08 from 13.71.

On balance, Emerging Markets credit experienced a strong 2Q19. The J.P. Morgan Emerging Market Bond Spread was flat at 405 bps over the period. 5-Year Credit Default Spreads compressed, including South Africa (-17bps), Russia (-16bps), Brazil (-16bps), China (-13bps), Mexico (-11bps) and Turkey (-10bps).

Over the quarter, the rand appreciated against most of the major currencies, including the British pound (+5.4%), the Australian dollar (+3.9%), the US dollar (+2.86%), the Euro (+1.5%) and the Japanese yen (+0.15%).

SA headline inflation for May printed slightly higher at 4.5% (previously 4.4%), mainly due to the effect of higher food and non-alcoholic beverages (NAB) inflation. Food and NAB inflation rose to 3.2% y/y in May from 2.9% in April. Meat prices continued to normalise slowly, printing at -0.9% y/y (previously -1.2%). Fuel price inflation was down to 11.6% y/y (previously 12.0%). The base effects from the large fuel price hikes last year are strong enough to deliver lower year-on-year fuel inflation in the coming months. Core inflation remained unchanged at 4.1%. Headline inflation is expected to remain within the 3 - 6% target range.

The South African Reserve Bank (SARB) kept rates on hold at 6.75% as expected. Two MPC members preferred an interest rate cut, while three voted to keep the rate on hold. The QPM now projects one interest rate cut during 1Q20 (previously a hike in 4Q19). The inflation projection was decreased to 4.5% in 2019 (from 4.8%), 5.1% in 2020 (from 5.3%) and 4.6% in 2021 (from 4.7%). The growth expectations for 2019 was lowered to 1.0%, with 2020 and 2021 stable at 1.8% and 2.0% respectively. The probability of an interest rate cut over the next 12 months has consequently increased meaningfully.

S&P kept SA's local and foreign currency rating at sub-investment grade and maintained the outlook as stable on the 24th of May. The agency however stated that "overall reform efforts are likely to be lacklustre and unlikely to be significant enough to drive strong GDP growth." This announcement was shortly followed by the news that Eskom's CEO Phakamani Hadebe has resigned, citing health reasons, as investors await the announcement of a balance sheet restructuring and the release of the FY18/19 financial results.

The SA trade balance surprised to the upside by posting a surplus of R1.7bn (from R3.5bn deficit in April), better than consensus of R0.7bn. The surplus was driven by an increase in exports, specifically metals and stones, machinery and electronics, and chemicals. The deterioration in the SA budget partially reversed as the budget deficit shrank to -R17.5bn from -R63.5bn in April. Despite the uptick in the figure, the underlying detail is still concerning: total revenue collection YTD was 12.17% of February Budget estimates, compared to 12.20% the previous year. Total expenditure incurred YTD was 15.20%, compared to just 14.40% the previous year. Financially distressed SOEs will continue to put pressure on the budget, holding fiscal expenditure at elevated levels.

The first quarter GDP contracted 3.2% q/q (consensus expected -1.6% q/q) seasonally adjusted and annualised, from 1.4% q/q in 4Q18, due to a surprising decline in the agricultural output (-13.2%) as well as a broad-based weakness in the economy. Most of the weakness is believed to be from power cuts in the first quarter. Consensus and the World Bank's 2019 growth forecast for SA is at 1.1%. The quarter presented opportunities for tactical duration positioning which contributed positively to the fund's performance. The fund maintained duration at 0.37 years (from 0.39 years) over the quarter, whilst increasing the gross running yield to 9.38% from 9.29%.

The fund aims to enhance total return through value opportunities that, on a riskadjusted basis, achieve or exceed our objective of Cash (STeFI Call Deposit) +2.0%.