Market review

The third quarter of 2010 was again characterised by volatile markets, returning risk appetite and a global 'search' for yield. After a dismal array of second quarter economic data, third quarter data provided markets with some surprises to the upside. There was a general acceptance of a lower inflation environment and lower-economic-growth-for-longer scenario, which led to a rally in global bond yields, while the lower probability of a doubledip recession resulted in significantly stronger equity markets, especially during September.

The yield on the 10-year US benchmark bond fell to 2.56% at the end of September from 2.96% at the start of the quarter. Foreign purchases of domestic nominal bonds and lower-than-expected inflation meant bonds had a phenomenal quarter, with the R186 yield decreasing by more than 1% to 7.98% at the end of September. Domestic inflation continued its downward trend and came in at 3.5% for August. For the quarter, nominal bonds were the best performing fixed interest asset class, delivering a return of 8.04%. Inflation-linked bonds generated 4.64%, with the R197 inflation-linked bond yield decreasing from 2.98% to 2.61%, and cash 1.68%. Property stocks followed nominal bonds higher and delivered an impressive return of 13.7% for the quarter.

What SIM did
We reduced our nominal bond exposure during the quarter. In hindsight, this was too early because bond yields continued strengthening above our long-term estimate of fair value of about 8.3%. The overall fund's duration is now the lowest it has been for a while.

We increased our floating-rate credit exposure during the quarter at fairly attractive credit spreads. It is, however, increasingly difficult to find value in the credit market. This is a function of improved company fundamentals, credit demand and the 'search' for yield in the current low interest rate environment. SIM Strategy We don't see any significant value in the fixed interest asset classes. Some selective value might still be available in the credit market and, while inflation-linked bonds are trading close to fair value, they are currently marginally attractive relative to nominal bonds. We will maintain a well-diversified portfolio that is conservatively positioned given current valuations.

Market review
The second quarter of 2010 was characterised by general risk aversion and the accompanied market volatility. The European sovereign debt crisis had many investors worried, with general market consensus that the austerity measures would negatively impact growth over the medium term. Economic indicators were also slightly weaker than anticipated, which resulted in global and domestic equity markets trading weaker during the quarter. The yield on the 10-year US benchmark bond fell from 3.86% at the end of March to 2.96% at the end of June on the back of global risk aversion. Domestic nominal bonds, however, weakened with the R157 government bond weakening 8 basis points (bps) from 7.95% to 8.03% at the end of June. Domestic inflation continued its downward trend and came in at 4.6% in May.

For the quarter, inflation-linked bonds were the best performing fixed interest asset class, delivering a return of 5.1%, with the yield on the R197 yield decreasing by 31bps to 2.98%. Cash returned 1.7% and the All Bond Index 1.1%. The yield curve steepened further, with some of this steepening attributable to the introduction of two new long-dated nominal bonds, i.e. R213 and the R214. Property stocks edged up 0.6% during the quarter and the asset class, which has gained 10.5% year to date, remained the best performing asset class.

What SIM did
General risk aversion resulted in domestic bond yields rising, especially on the long-dated bonds, with the R186 trading as high as 9.10%. We used this opportunity to add to our nominal bond position. The implied real return from long-dated nominal bonds is between 3.5% and 3.9%. Although credit spreads continued narrowing, we increased our exposure to floating rate debt. We still see marginal value in selected debt issues, although less so than six months ago. We reduced our property exposure marginally during the quarter.

SIM Strategy
Although we added to the Fund's nominal bond exposure over the quarter, we will increase our exposure further should bond yields weaken from current levels. Inflation-linked bonds are attractively priced above 3% but we do see slightly better relative value in nominal bonds at the moment. We will continue to look for attractively priced credit in the primary debt market and will use strength in the property market to reduce exposure because we see diminishing relative value in property stocks.

Market Review
The global economic recovery continued during the first quarter, with emerging markets growing more quickly than the developed economies. Equity markets continued their upward trajectory, while developed market long-bond yields weakened towards their long-run normalised levels of 4% in the US.

SA headline inflation continue to come in below expectations and is now well entrenched in the 3% to 6% range. As a result, the nominal bond market experienced a good quarter, with the yield on the benchmark bond (R157) falling 45 basis points (bps). The yield curve steepened further to the point where the gap between the R157 and R186 was 84 bps. For the quarter, the All Bond Index returned 4.45%, cash 1.78% and inflation-linked bonds fell 0.2%. Long-dated inflation-linked bond (ILB) yields continued creeping upwards. The R202 ILB ended March 25 bps weaker at 3.45%. Listed property outperformed all asset classes, delivering returns of 9.9% for the quarter.

What SIM did
During the quarter, we marginally reduced our listed property exposure while increasing our inflation-linked bond exposure through a combination of credit and sovereign inflation-linked bonds. Towards the end of the quarter, we reduced our nominal bond exposure into market strength - mostly post the rate cut in March. We also increased our exposure to longer-dated floating rate notes through primary placements.

SIM Strategy
Although credit is still fairly attractively priced, we will probably exit some of our fixed credit exposures if spreads decline significantly from current levels. With market valuations now only at fair value, we are unlikely to increase the fund's nominal bond exposure further but will rather look for exit points. Property is probably fairly priced, but we remain cautious on the asset class given the weakness in the real economy. The longer-dated R197 is still our preferred stock in the inflation-linked bond market and we will be adding to our position into market weakness.

Market Review
The global economic recovery continued during the fourth quarter of 2009, with the mayhem of nine months earlier nearly forgotten. Equity markets continued their upward trajectory, while developed market long-bond yields weakened towards their long-term normalised levels. SA headline inflation dipped inside the target range of 3% to 6% during the fourth quarter, the first time in nearly three years. During the quarter, the bond market was fairly stable, with the R157 weakening by only 10 bps. The yield curve steepened further to the point where the gap between the R157 and R186 was 63 bps. For the quarter, the All Bond Index returned 1.08%, cash 1.85% and inflation-linked bonds 0.2%. Long-dated inflation-linked bond yields continued creeping upwards. The R197 ended December 21 bps weaker at 3.20%. Property stocks returned 4.05% for the quarter. The All Bond Index recorded a negative return of 0.99%, while cash added 9.13%, inflation-linked bonds 7.66% and property 14.07%.

What SIM did
During the quarter, we reduced our nominal bond exposure by 7% at lower levels after increasing it the previous quarter. The fund's property exposure declined by about 1%. The inflation-linked bond holdings were increased by about 3% via corporate paper. Inflation-linked bonds remain an attractive diversifier within the portfolio.

SIM Strategy
Although credit is still fairly attractively priced, we are unlikely to see the opportunities of 2009 repeated in 2010. With market valuations becoming cheap, we are likely to increase the fund's nominal bond exposure into market weakness. Property is probably fairly priced, but we remain cautious on the asset class given the weakness in the real economy. The longer-dated R197 is still our preferred stock in the inflation-linked bond market and we will be adding to our position into market weakness.