Market review
The rand lost ground on the back of market panic, sparked by the prospect of the US Federal Reserve (Fed) scaling back its quantitative easing programme. Towards the end of the quarter, the Fed reassured global markets that such tapering would have to be supported by strong economic data, which restored calm to emerging markets. The effect of rand weakness has not yet filtered through to the inflation numbers. Domestic inflation has remained stable. The monetary policy committee's decision to leave the repo rate unchanged was mostly in line with expectations. It indicates a level of comfort with inflation at the upper end of the inflation band and confirms the central bank's commitment to growth. Consequently, markets are not expecting a hike in rates in the foreseeable future. Inflation-linked bonds had a poor quarter, returning -5%. Cash, as measured by the SteFI Composite Index, returned 1.3%. Bonds also delivered a negative return during the quarter, returning -2.3%. Local credit market issuance for the second quarter was down 13.4% on the previous year; however, it is important to remember that 2012 was a record year for issuance. A weaker set of interim results from African Bank appears to have unsettled the market, signalling that the rally in credit spreads could be over. The market is digesting the realities of tepid GDP growth and a more indebted consumer. The vulnerable mining sector is also on investors' radar; ongoing wage negotiations are providing additional headwinds for the sector.

Portfolio review
The Investec High Income Fund returned 1.7% over the second quarter of 2013. During the quarter we added banks, securitisations and unlisted corporate exposure to the portfolio, as we continue to see value in these areas. Despite the entrance of new corporates into the listed credit market, we did not add any of this paper, as we thought the levels were too expensive. We continue to look for value and are willing to wait for more attractive levels that we foresee being offered through refinancing opportunities in the second half of the year.

Portfolio positioning
The portfolio is defensively positioned from an interest rate perspective, and we continue to maintain a high running yield. Overall credit spread changes remain muted. Spreads are beginning to look more attractive after the May sell-off and we are well positioned to take advantage of this after declining less attractive offers in the preceding quarter. The portfolio 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, which offer additional credit spreads to cash in rands.

Market review
The rand weakened due to negative international and domestic factors during the first quarter of 2013. Renewed euro-zone stresses coupled with evidence that South Africa's external imbalances remain high, work stoppages and the risk of power cuts put constant pressure on the currency. We have also started to see evidence that the currency weakness over the past few months is feeding into inflation. The monetary policy committee's decision to leave the repo rate unchanged so far this year was mostly in line with expectations. However, the underlying dovish bias was probably stronger than anticipated, given the upside surprises in the monthly CPI numbers. The CPI profile and exchange rate risks suggest upward pressure on government bond yields, and higher issuance in the next fiscal year should result in the bond curve steepening. Inflation-linked bonds had a strong quarter, posting a return of 1.8% in rands. Cash, as measured by the STeFI Composite Index, returned 1.2%. Bonds were the worst performing asset class during the quarter, returning 1%. Local credit market issuance for the first quarter was down 24% on the previous year, though it is important to remember that 2012 was a record year for issuance. It is interesting to note that in March, issuance was double that of the same month in 2012. After its rating downgrade (from A+ to A), African Bank had a successful issue at competitive levels. This was followed by several issues by PPC, Netcare, Mercedes, Vukile and Redefine - all at levels that we view as very expensive and hence we were not successful in these auctions. We continue to look for counterparties that offer value.

Portfolio review
The Investec High Income Fund returned 1.6% over the first quarter of 2013. During the review period, we added banks, securitisations and unlisted corporate exposure to the portfolio, as we continued to see value in these areas. Despite the entrance of new corporates into the listed credit market, we did not add any of this paper, as we thought the levels were too expensive. Moody's downgraded African Bank from A+ to A, citing the bank's reliance on wholesale funding and heightened risk in the unsecured credit market as reasons for the downgrade. We are still constructive on African Bank and believe the bank is appropriately capitalised to weather headwinds in the unsecured space, which we still view as likely to be muted.

Portfolio positioning
The portfolio is defensively positioned from a duration perspective, and we continue to maintain a high running yield. Overall credit spread changes remain muted. However, the first signs of potential spread compression on the back of aggressive investor appetite are beginning to emerge. This provides an opportunity to realise capital gains on some of the portfolio's holdings. The portfolio retains a core holding in relatively liquid instruments, which allows for participation in new issuance 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, which offer additional credit spreads to cash in rands.

Market review
The South African fixed income market was a tale of two halves in the final quarter of 2012. The first half of the quarter was characterised by market weakness, as strikes and political uncertainty heading into the ANC conference, continued to impact local and offshore sentiment. The unfavourable macro environment saw exports falling sharply, worsening an already problematic current account deficit of 6.4% of GDP. This put pressure on the rand, which spilled over into our bond market. Inflation remained within the target band, and ended the year with CPI at 5.6%. We expect inflation to rise slightly from here, but it should remain subdued in 2013. The fortunes of our bond market changed rapidly, as labour market tensions eased and the ANC conference allayed investors' fears of any radical policy shifts. An improvement in European and US sentiment also supported the local market. Consequently, the second half of the quarter saw all of the first half losses erased, with the All Bond Index gaining 2.6% over the 3-month period and 16% for the year. Cash, as measured by the STeFI Composite Index, returned 1.3% over the quarter and 5.5% for the year. In the local credit market, issuance volumes were robust in the fourth quarter with over R40 billion raised across corporates, state-owned enterprises (SEOs), securitisations and banks. There were quite a few notable issues during the quarter: JD Group issued a debut R1 billion bond; the Republic of Namibia accessed the local market for the first time, issuing a 10-year note; and FirstRand issued South Africa's first fully Basel III-compliant subordinated debt.

Portfolio review
The Investec High Income Fund returned 1.8% over the fourth quarter, and 7.8% for the year. The fund was defensively positioned from a duration perspective, given bond market valuations and labour unrest. During the quarter we were able to add numerous high quality, high yielding credit assets including banks, corporates and securitisations.

Portfolio positioning
The risks on the horizon include a failure by US politicians to agree to lift the debt "ceiling", thus inhibiting the ability of the United States to fund itself and pay its bills. Locally, the risks include a slowdown in flows into South African bonds, due to deteriorating labour unrest, further political uncertainty and unfavourable fiscal developments. Such a slowdown in flows would put pressure on bonds to weaken. Our strategy is to maintain the high running yield of the portfolio. We expect robust issuance in 2013 on the back of attractive credit spreads for issuers, as well as buoyant investor demand and further bank disintermediation. This should provide good opportunities to further enhance the running yield of the portfolio. 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, thus minimising any sensitivity to changes in bond yields. The dislocation in offshore markets is being captured through JSE inward-listed instruments, which offer additional credit spreads to cash in rands.