We have been concerned about the duration of our income portfolio given declining bond yields. The decline in US bond yields has driven down yields worldwide. Emerging markes have benefited but the risks to inflation have increased.

To reduce duration in our fund, we have switched money from Investec Opportunity Income to Coronation Strategic Income because the Coronation fund has managed to reduce duration efficiently bringing it in line with the needs of our fund of funds.

Bond yields rallied significantly after the surprise rate cut in August but have been mixed ever since, reflecting uncertainty over the direction of interest rates which depend on inflation and the impending pressure from oil prices and a burgeoning trade deficit.

Local bond yields continued declining in the first half of September in tandem with US yields. Inflation locally and abroad has declined despite the high cost of oil, but by the end of September both local and US yields had begun a significant spike on perceived inflationary pressures. The SA yield curve flattened during September but still remains steep. The ALBI returned 1.28% for the month gaining more from the longer end of the yield curve, although declines in shorter-term yields also contributed positively.

We have been concerned about the duration of our income portfolio given declining bond yields. The decline in US bond yields has driven down yields worldwide. Emerging markes have benefited but the risks to inflation have increased.

To reduce duration in our fund, we have switched money from Investec Opportunity Income to Coronation Strategic Income because the Coronation fund has managed to reduce duration efficiently bringing it in line with the needs of our fund of funds.

Bond yields rallied significantly after the surprise rate cut in August but have been mixed ever since, reflecting uncertainty over the direction of interest rates which depend on inflation and the impending pressure from oil prices and a burgeoning trade deficit.

Local bond yields continued declining in the first half of September in tandem with US yields. Inflation locally and abroad has declined despite the high cost of oil, but by the end of September both local and US yields had begun a significant spike on perceived inflationary pressures. The SA yield curve flattened during September but still remains steep. The ALBI returned 1.28% for the month gaining more from the longer end of the yield curve, although declines in shorter-term yields also contributed positively.

Fund restructuring: The current sustained low interest rate environment has been a catalyst for restructuring the fund. Both the Prescient Cash QuantPlus and the Old Mutual Income funds have been sold. The fund now holds four fixed income funds equally. With interest rates remaining ever unpredictable, we took the decision to retain funds with more flexible duration. The managers we hold are able to adapt and react efficiently to a changing interest rate environment.

August market overview: The unexpected 50bp cut in the Repo rate dictated interest rate market movements in August. Rates declined across the yield curve with longer dated bonds being the best performers. The concomitant move in the rand was one of weakness (R6.2 - R6.6). Inflation and Producer Price Inflation come in lower than expected, and this has fuelled speculation that there may be another rate cut. High oil prices remain a threat to low inflation. Nevertheless, most economists feel a rate hike has been delayed to 2005.

To achieve the portfolio's objective, the portfolio will invest in the "best of breed" property, target return, bonds- and money-market unit trust funds in order to optimise the returns from these funds. Global fixed income markets recovered in June following the sell-offs seen in May. As the certainty of a late June rate hike in the US fed through to investors, inflation expectations were tempered and yields receded. SA Markets reacted similarly with yields declining across the board. The ALBI returned just over 1% for the month, with the short and longer ends of the yield curve contributing equally.

The Metropolitan Select Manager Income Plus Fund of Funds continue to have a low duration position, with relatively limited exposure to interest rates, whether through long dated bonds or property.