Market review
Foreign flows remained the dominant driver for the quarter as investors continued their global search for yield. The South African Reserve Bank (SARB) surprised the market in September with another interest rate cut as the Bank remained concerned about lacklustre local growth prospects. This is a direct result of the continued problems in Europe as well as the below par growth emanating from both the US and Asia. The global policy response came in the form of a third round of quantitative easing from the US Federal Reserve and the announcement from the European Central Bank that it would buy sovereign debt in the region under certain conditions. These measures are aimed at keeping rates as low as possible to encourage growth. China has also been stimulating its economy as growth numbers continue to disappoint. These actions have prompted further investments into higher-yielding emerging markets and South Africa has seen its fair share. Net inflows into the bond market were close to R30 billion for the quarter. Further impetus for flows was also provided by South African government bonds' anticipated inclusion in Citigroup's World Government Bond Index. We have seen record year-to-date inflows of close to R80 billion. With South African inflation subdued for now, the relatively high yields are attracting foreign investors who face near-zero yields in their home markets. These foreign flows are dominating the market and local data has been largely ignored. Bonds added 5% in the quarter to record gains of 13.1% for the year to date. Longer-dated bond yields fell by 50 basis points over the quarter. Cash, as measured by the STeFI Composite Index, added a marginal 1.4% over the quarter and 4.2% for the year to date. There are a number of risks on the horizon. The rand has been sluggish, despite the record inflows into our market and may well be reflecting some of the local risks. Slowing growth could put further pressure on the national budget and an already widening current account deficit. This is not sustainable in the long run. Political uncertainty around nationalisation and the direction of economic policy is also weighing heavily on the outlook. It was thus not surprising that rating agency Moody's decided to downgrade the country's credit rating. Another concern is that we remain on negative watch with all three major rating agencies. Bonds could weaken from here as investors demand a higher premium to hold South African bonds in this environment. Cash yields are very low relative to inflation. The one bright spot remains credit where additional yield is available from high quality local companies and banks due to a tougher regulatory environment for banks. The credit market seems to have shrugged off the growing unrest in the labour market during the annual wage settlement cycle, with the strikes spreading from mining to other sectors of the economy. The tragic events that occurred at Marikana did not dampen local appetite, with the market absorbing the bond of Northam Platinum in September at levels that we viewed as expensive. The solid demand for credit assets is being met by a steady supply of new issues, with significant volumes of corporate and financial issuance.

Portfolio review
The portfolio continued to perform well, delivering a return of 1.8% during the quarter versus cash of 1.4%. This was primarily thanks to the high running yield on our investments. The fund was conservatively positioned with very limited exposure to long-duration assets. During the quarter we continued to switch out of short-dated, low-yielding assets into longer-dated, high-yielding assets but in the form of floating-rate notes that are much less volatile than bonds. Banks in particular are paying up for longer-term funding due to a more onerous regulatory environment that requires them to match their long-dated assets with longer-term funding. This allows us to get far higher returns for the same credit risk.

Portfolio positioning
Our strategy is to maintain the high running yield of the portfolio. We forecast additional issuance from companies and banks in the final quarter, and will continue to look for attractively priced opportunities. The fund retains a core holding in relatively liquid instruments, which allows for participation in new issuances, as well as other market opportunities. While we have extended maturities, these instruments are almost exclusively floating-rate notes, thus minimising any sensitivity to changes in bond yields. The dislocation in offshore markets is being captured through JSE inward-listed instruments that offer additional credit spreads to cash in rands.

Market review
The second quarter of 2012 was very volatile as the world continued to worry about the woes of Europe and faltering global economic growth. Cash, as measured by the STeFI Index, delivered 1.4% for the quarter. With the sharp pullback in the oil price and a decent moderation in food prices, we have seen consumer inflation drop back inside the official target band. This is broadly in line with our forecast that rates will remain on hold well into next year. Due to the sharp slowdown in global growth, the risk is now that the South African Reserve Bank will cut the repo rate later this year. Bonds were further buoyed after foreigners bought R21.3 billion worth of bonds in June, a new monthly record. These flows were driven in part by the confirmation that South Africa would form part of the Citibank World Government Bond Index in October. The market received a further lift, thanks to the belief that European leaders will finally show some leadership and implement concrete steps to help solve the banking and debt crisis in that region. The rand also benefited from these flows and we saw the local currency closing below R8.20 against the US dollar. The euro region remains the biggest concern going forward as growth has stalled and political uncertainty could easily trigger another bout of asset selling. It is thus important to keep abreast of euro-zone developments. China is also showing signs of slowing down, which adds to the probability of another soggy growth patch. On the local front, the economic data was more mixed. Good inflation numbers were offset by a higher than expected current account deficit. In the credit market it was a busy quarter, with significant volumes of corporate and financial issuance. The introduction of Basel 3 is driving bank issuance, as banks look to lengthen the term of their funding, and making debt capital markets more attractive to corporate treasurers. This trend is likely to continue for the remainder of the year, which should lead to record corporate issuance. There could be some upward pressure on credit spreads, although this is likely to be moderate.

Portfolio review
The Investec High Income Fund had a good quarter with a return of 2%, driven largely by the attractive running yield on the fund assets. The fund remained short duration to minimise volatility of returns versus cash. During the quarter, we continued to switch out of shorter, low-yielding assets into long-dated assets with a higher yield. We also continued to add offshore exposure where credit spreads for similar levels of risk are markedly higher. This exposure is through JSE-listed, rand instruments to mitigate currency risk.

Portfolio positioning
The strategy is to continue to increase the running yield on the portfolio through the careful sourcing and selection of term assets. In the current environment banks and corporates pay a significant premium for the certainty of longer maturity borrowing and this is reflected in the pricing. The fund has a core holding in relatively liquid instruments, which allows for participating in new issuances and other market opportunities. While we have extended maturities, these instruments are almost exclusively floating-rate notes, thus minimising any sensitivity to changes in bond yields. The dislocation in offshore markets is being captured through the JSE inward-listed instruments, which offer the additional credit spread to cash in rands.

Market review
The bond market started the year on a strong note as yields rallied across emerging markets. Economic data indicated that global growth was starting to show signs of a sustained recovery. This saw risk assets performing well as investors started searching for yield. The rand appreciated as foreign inflows into South Africa increased. The European crisis, while not yet averted, diminished slightly as Greece finally settled on a deal to reduce its debt levels. This gave bond investors further encouragement to invest in emerging markets again. Sentiment was further helped by the European Central Bank's assistance to European banks by lending them money through the long-term refinancing operation (LTRO) programme, aimed at increasing liquidity and encouraging the buying of government debt. This led to aggressive rallies in yields across the 'troubled' European bond markets like Italy and Spain. The momentum added to the goodwill towards emerging markets.

On the local front, the All Bond and Listed Property indices returned 2.4% and 8% respectively over the quarter. The rand gained more than 5% against the US dollar, reflecting the broader rotation into riskier assets. Cash, as measured by the STeFI, returned 1.4% over the review period. The minister of finance delivered a much improved budget, demonstrating his commitment to tight fiscal management. The South African Reserve Bank (SARB) remains concerned with the twin dilemmas of rising inflation and sluggish growth. While inflation is nearing its peak, it is still outside the target band and a stubbornly high oil price is ensuring that inflation remains elevated. Some good news was the announcement by Eskom that this year's price increase will be reduced from 26% to 16%. While we are seeing small gains in the employment numbers, these are still below the required level. Growth in the economy is showing signs of improving, but is still lagging levels seen before the global credit crisis and we will be lucky to achieve growth of 3% over 2012. This is keeping cash rates at multi-decade lows, translating into negative real returns for investors.

Portfolio review
The Investec High Income Fund had a good quarter with a return of 2%, helped by relatively stable credit spreads throughout the period. During the quarter, we continued to switch out of shorter, low-yielding assets into long-dated assets with a higher yield. However, from an overall duration perspective, we have maintained a very conservative portfolio due to the global uncertainty.

Portfolio positioning
We expect the SARB to keep interest rates on hold for the remainder of the year, which should anchor rates across the curve. Bonds recently sold off and are getting close to levels seen in January. At these higher yields, bonds are offering value and we will look to add some duration to the portfolio.

The fund changed sectors from Domestic--Fixed Interest--Income to Domestic--Fixed Interest--Varied Specialist on 01 Mar 2012, fund keeps its history.

Market review

In the final quarter of the year, markets continued to be dominated by global events. The European sovereign debt crisis remained the main focus internationally, as markets priced in a mild recession in the region and Italian and Spanish bond yields surged. Better than expected data in the US provided a bright spot, despite the continuing effects of the political stalemate on the fiscal side there.

Quarterly returns for the bond market were a healthy 3.5% while cash, as measured by the STeFI Index, returned 1.4%. Yields ended the quarter modestly lower, after a largely range-bound period, with the rally into early November quickly dissipating as the market priced out any likelihood of further interest rate cuts. The huge outflows seen in the bond market in the third quarter turned more mixed in the fourth. With 3-month money market rates anchored around the repo rate at 5.5%, 1-year yields crept higher as anticipated cuts turned into anticipated hikes. The market has now fully priced in a first hike in early 2013.

Portfolio review

As expected, inflation continued to move higher through the quarter, breaching the top of the South African Reserve Bank's 3%-6% band with the November release at 6.1%. Food and transport costs were the primary drivers of inflation and we expect the headline number to top out in the next month or two. Activity data was generally mixed during the quarter. The Purchasing Managers Index rebounded quite strongly after the strike-related action earlier in the year and retail sales were higher than expected. However, the recovery is not a particularly strong one, as evidenced by the disappointing third quarter GDP number. This combination of lackluster growth and high inflation, against the backdrop of global uncertainty continues to pose a serious dilemma for the Reserve Bank. For the moment, however, it appears that keeping rates on hold is the likely course.

The Investec High Income Fund returned 1.9% over the quarter and 6.8% over the full year, compared to cash benchmark returns of 1.4% and 5.7% respectively.

Portfolio activity

Given the very high levels of uncertainty in markets, we have maintained a very cautious stance. The portfolio's duration has been kept well under 1 year for now as we expect continued pressure in the long end from government funding. We still favour highly rated credit, particularly floating-rate notes and will continue to selectively add them to the portfolio where spreads look attractive.

Portfolio positioning

The crisis in Europe is likely to continue to weigh on global risk appetite well into 2012, although concerns over the extent of the global slowdown have eased a little in recent weeks. The backdrop remains one of heightened uncertainty; however, the market has now priced in a fair amount of bad news.

The Rand and the bond markets will continue to take their cue from the broader global environment. Although the possibility of another interest rate cut has receded, the South African Reserve Bank will remain acutely conscious of both global and local growth trajectories. The Bank is likely to respond to any further deterioration, despite the impact that a weaker Rand will have on inflation. Slowing growth, high inflation and hefty issuance will combine to keep the yield curve steep over the medium term.

We will continue to position the portfolio to take advantage of the attractive spreads offered in the credit markets. We are also likely to maintain a relatively cautious position on duration, although we do believe that further weakness in the long end will start to make it look attractive. With only modest duration and conservative credit exposure, the risks to the portfolio remain limited.