The Active Income Fund had a very satisfactory third quarter of 2007. After a very volatile second quarter, the domestic fixed-interest market stabilised in the third quarter and showed signs of recovery during September. In the USA the Fed funds rate was lowered by 50 bps in September. This action supported and stabilised international equity and fixed-interest markets. On the domestic front the August Producer Price Inflation (PPI) surprised on the downside. This, together with a downward bias to international short-term rates, led to significant market strength in September. During September the R157 strengthened from 8.61% to 8.26%.

During the third quarter the yield curve inverted even more, with longerdated bonds strengthening, while short-term interest rates edged higher. The All Bond Index returned 3.4% for the quarter, with cash at 2.3% and inflation-linked bonds at 1.4%. The Property Index returned 9.4% for the third quarter, 7.3% of which was in September. This performance was mainly driven by a stronger bond market. Income growth of approximately 10% over the next few years is still on the cards for listed property.

During the quarter the only significant change was an increase in nominal bond exposure by 11% to 22% and a reduction in cash exposure of 11%. This increase in bond exposure, together with the listed property exposure of 10.4%, contributed to the overall performance of 3.3% for the quarter. Currently we are increasing our bond exposure into weakness, while also adding longer-dated moneymarket exposure to the cash holdings of the fund.

The SIM Active Income fund had a very satisfactory quarter despite the quarter being a generally weak one for both domestic and international fixed-interest markets. Investors became concerned about the outlook for higher global growth and consequently also higher global inflation expectations. The domestic market weakened towards the middle of May in sympathy with international markets. The higher-than-anticipated April CPIX number led to a significantly weaker bond market. The R157 weakened from about 7.70% to about 8.50% towards the end of June. The All Bond Index returned -1.65% for the quarter, with cash at a decent 2.2% and inflation-linked bonds at 1.2%. The Property Index ended flat at 0.3% for the quarter.

After the weaker-than-expected CPIX number the exposure to nominal bonds was reduced significantly by 16.8% to 10.5% at quarter end. As a hedge against further rising inflation we increased our inflation-linked bond exposure to 8.4% while earning a real yield close to 4%. As mentioned last quarter, the fund reduced its property exposure in the latter stages of the first quarter to 5%. After some weakness in May and June we increased the property exposure again to 9.2% mainly through value opportunities like SA Corporate and Emira.

The general defensive stance of the portfolio during the second quarter led to very satisfactory performance in May and June relative to the peer portfolios. In the short term we will remain defensive while actively looking for opportunities to increase our nominal bond exposure as soon as the inflation outlook stabilises.

The first quarter of 2007 was a mixed bag for the local fixed interest market. The bond market had a strong start to the year, with the All Bond Index up 2% by the end of February. This was on the back of the Reserve Bank keeping rates on hold in February and the positive budget announcement at the end of February. The projected budget surplus will lead to lower government-funding requirements and hence lower nominal and inflation-linked bond issuances. Conditions and sentiment changed during March and factors like the current account deficit, higher international oil prices and domestic food inflation led to a weaker bond market during March (ALBI returned -0.44% for March). Over the quarter the yield curve flattened slightly with the longer-dated R186 weakening by 12.5 bps to 7.56%.

Over the quarter the shorter-dated R153 (1.90%) outperformed the longer-dated R186 (0.61%). For the period the All Bond Index returned 1.6%, with cash at 2.0% and the Inflation-linked Bond Index at 1.0%. Property had an exceptional quarter, with local listed property gaining 15.7%. High distribution growth from the property sector underpinned this performance.

The quarter presented opportunities to make tactical switches between the different income-generating asset classes. During January we increased our property exposure to approximately 15% and the nominal bond exposure to over 60%. After the significant market strength towards the end of February the property and bond exposures were reduced to 5% and 31% respectively with the balance invested in cash. These active changes contributed to an exceptional quarter for the SIM Active Income Fund.

Currently the approach is to be more conservative overall until valuations are more compelling. In the property sector we see stock selection playing an increasingly important role as the current sector valuation is starting to look pricey.

Sanlam Investment Management launched the SIM Active Income Fund during November 2006. The fund aims to provide a high level of income and maximise returns by actively positioning the portfolio between different income-yielding securities, e.g. cash, nominal bonds, property stocks and international incomegenerating securities. The benchmark for the fund is the BEASSA ALBI (1-3 year) Index.

The domestic bond market ended the quarter on a high note and traded significantly stronger over the last three months of 2006. The benchmark R157 strengthened by 78bps over the quarter and closed at a yield of 7.85%. The currency continued its recent stronger bias and ended the quarter at 6.97 R/$ - 76c stronger over the three-month period. Over the period the All Bond Index returned 5.6%, cash 2.0% and the Inflation-linked Bond Index 2.5%. Property had a very strong quarter with a gain of 16.1%.

Currently the outlook for nominal bonds remains positive and we will increase the fund's exposure into significant market weakness. We still see some select opportunities in local property stocks even though some stocks appear expensive on a relative yield basis. The fund aims to exploit opportunities in the market more aggressively than a 'normal' income fund and aims to maximise capital appreciation and income generation, and hence should be considered more risky.