The third quarter of 2008 proved to be an extremely volatile quarter, dominated by the global credit crisis and volatile equity markets. Generally speaking, the global credit crisis proved to be positive for developed fixed-income markets, with central banks lowering interest rates late in the third quarter (the opposite was true for most risky asset classes). The focus shifted away from inflation towards a lower global growth scenario. The domestic fixed-interest market had a major recovery during the quarter; the R157 benchmark bond yield decreased from 10.72% on 30 June to 8.86% at quarter end. The return of positive sentiment was on the back of a re-weighting of the inflation basket for 2009, which will see inflation 1% - 1.5% lower that anticipated. Slowing economic growth and softening commodity prices also led to a more positive inflation outlook. The All Bond Index returned 12.6% for the quarter, with cash at 2.9% and inflation-linked bonds at -1.4%. The expected lower future inflation had a negative impact on inflation-linked bonds with real yields increasing by an average 70bps.Property stocks clawed back some of the losses earlier in the year and returned 23.1% for the quarter, but are still negative for the year at -11.9%. During the quarter we increased the nominal bond exposure by 11.6% to 31.8%; this switch was done out of cash. The property exposure was also increased slightly. Currently we prefer a barbell strategy where the portfolio invests in longer-dated (one- and two-year) cash instruments and longer-dated nominal bonds. We expect an improved inflation outlook for next year with rate cuts early in 2009. This should be supportive of the bond and property market over the next six months.

If investors thought the first quarter of 2008 was volatile, the second quarter was even more so. Investment markets started focusing of rising global inflation fuelled by higher oil prices and a general softer global growth outlook. In our domestic market inflation maintained its upward momentum, while consumers were dealt another blow with interest rates rising by 0.50% in April and by another 0.50% in June. The rand recovered some lost ground over the quarter to close at 7.83 R/$, although this still seems undervalued from a fundamental perspective.

The domestic bond market had the worst quarter in quite a few years. The R157 traded 1.5% weaker over the quarter to close at 10.72%. Needless to say this was on the back of poor inflation data and general negative market sentiment. The All Bond Index returned -4.9% for the quarter, with cash at 2.7% and inflation-linked bonds at 6.1%. Inflation linked bonds were in high demand and the yield on the R189 decreased by 0.8% to below 2%, a new all-time low. This demand is due to high current inflation, with ILBs providing the only true hedge against short-term high inflation. The property market also has a terrible quarter and was down -19.6%.

During the quarter the fund's nominal bond position was reduced by a further 3% and switched into cash. The bond exposure is currently about20%, which is quite conservative. Cash exposure is high at 68% and offers very attractive risk-adjusted returns. We do see some value in selected property stocks and bonds in general. While the fund is currently conservatively positioned, we will use opportunities over the next few months to increase exposure to riskier assets with longer duration, i.e. property stocks and nominal bonds.

The first quarter of 2008 was very eventful and volatile. International markets experienced headwinds due to US recession fears, while the US banking sector was still caught up in the consequences of the subprime loan crisis. This led to increased global risk aversion, which had a knock-on effect worldwide, especially on emerging markets. Domestic issues like rising inflation, lower expected growth and the electricity crisis compounded the problem and this led to a substantially weaker currency over the quarter. The rand weakened from 6.81 R/USD to 8.08 R/USD over the quarter.

Against this backdrop the domestic bond market weakened substantially - the R157 weakened by 0.73% to 9.23% at the end of March. The All Bond Index returned -1.88% for the quarter, with the longer-dated bonds underperforming the shorter-dated bonds. Rising inflation fears were good news for inflation-linked bonds; the ILB Index returned 5.40% for the quarter, with real yields down approximately 0.30%. Cash returned 2.6% while property stocks were down -10.9% over the period.

During the quarter the fund's nominal bond position was decreased by 9.6% and switched into inflation-linked bonds (+2.5%) and cash (+6.7%). With increased inflation pressures and current negative market sentiment, it was decided to adapt a more conservative approach until there is more clarity on inflation and other issues e.g. Eskom tariff increases. This is reflected in the high overall cash exposure of 60% where yields of over 12% can be earned on one-year investments.

The SIM Active Income Fund & the Sanlam Income Fund merged to form the SIM Active Income Fund on the 1st of April 2008. The history of the SIM Active Income Fund is retained.

The SIM Active Income Fund had a very satisfactory 2007. The fund returned just over 11% for the year with the benchmark (ALBI: 1 - 3 years) just over 7%. The final quarter of 2007 was quite volatile overall. On the domestic front high inflation remained a concern, while in international markets the sub-prime debt crisis and weak US housing market left investors nervous heading into 2008. Domestic inflation remained high, with the November CPI reading coming in at 8.4%. During 2007 the repo rate was increased by 2% from 9% at the end of 2006 to 11% by the end of 2007.

During the fourth quarter the bond market weakened, with the R157 yield moving 0.24% higher to 8.5%. As expected under these conditions, the 0-3-year area of the yield curve outperformed all other areas of the domestic yield curve. During the quarter inflation-linked bonds strengthened, especially the longer-dated R197 and R202, which moved down about 0.3% in real terms. For the quarter, cash returned 2.5%, ILBs 5.4% and bonds 0.9%. For the calendar year 2007 cash returned 9.4%, ILBs 9.2% and bonds 4.2%. After a strong third quarter, property returned -0.4% for the fourth quarter with a total return of 26.5% for 2007.

During the quarter, bond exposure was increased by 12.6% to 34.4% on market weakness. Cash and property exposure were reduced by 7.5% and 3.1% respectively. Profit was taken on some of the property holdings during the quarter. Although market volatility remains high we expect the bond market to look through the peak in inflation, with lower inflation expected in the second half of 2008. This should support bonds over the next six months.