Market review
This quarter saw heightened volatility across most asset classes, but especially in global equity markets. Emerging markets experienced significant portfolio outflows and their currencies weakened, particularly in September. At the time of writing this report, it seemed more and more likely there would be orderly default of Greece's debt, which added to uncertainty yet again. Generally markets were still spooked by the high sovereign debt levels and the possibility of renewed economic recession. Investor concerns about losing capital were evident in the flight to US Treasuries. The 10-year Treasury, which traded at 3.14% at the end of June, ended the quarter at 1.93%, a new multi-decade low. The rand weakened to its worst levels in two years (R8.09/$) in September, partly due to a significant sell off in local bonds and equities during the month. The weaker rand and risk of higher inflation gave the Reserve Bank little option but to keep the Repo rate on hold in September. As mentioned, the South African bond market experienced significant foreign investor disinvestment in September, a sudden turnaround from the significant inflows we experienced the previous couple of months. This, and a weaker rand (which fuels inflation expectations), led to significantly higher nominal bond yields in September. Although the All Bond Index returned -2.1% for the month, it still managed +2.8% for the quarter. Inflationlinked bonds returned 3.0%, cash 1.4% and property a respectable 2.2% for the quarter. Inflation-linked bond yields declined slightly during the quarter in what can be described as the quarter of two halves. Long dated real yields initially declined to about 2.25% in August before weakening to about 2.5% at the end of the quarter.

What SIM did
During the first half of the quarter, we reduced our bond exposure into strength. This served the fund well when yields kicked up towards the end of the quarter. In September, we started to increase our exposure to bonds again; nominal bonds were trading slightly above our long-term fair value of about 8.3%. We also used the strength in inflation-linked bonds to reduce our exposure to the longer dated R210 and R197 below 2.5%. As stated previously, we still like the defensive and diversification properties of inflation-linked bonds and will continue to hold some exposure to them. We continued to enhance the money market yield by investing in longer dated bank paper and selective primary credit placements.

SIM Strategy
The overall portfolio remained relatively defensive, with lower exposure to property and nominal bonds compared to our typical longer-term asset allocation. We will, however, increase nominal bonds further into weakness. At current valuations we prefer nominal bonds to property. This is purely based on the risk characteristics of property relative to nominal bonds rather than a return consideration. As stated previously, we will maintain a well diversified portfolio and will continue to maximise yield in the current environment

Market review
The excessive levels of developed market sovereign debt continued to plague international financial markets. Towards the end of the quarter the possibility of Greece defaulting on their debt caused another bout of the 'risk-off' trade in financial markets. While that possibility has been averted for now, the problem has in fact only been deferred to later this year. It does, however, seem that the uncertainty surrounding sovereign debt levels (and the refinancing thereof) is here to stay for the foreseeable future. The US 10 year Treasuries traded as low as 2.87% during June, before closing at 3.14% by the end of the quarter - still 28 basis points (bps) lower than at the end of March. On the domestic front inflation is creeping higher as expected. The rand/dollar exchange rate was fairly stable over the quarter - keeping inflation expectations in check for now. We expect the repo rate to increase by 150-200bps over the next 18 months. The South African bond market experienced significant offshore portfolio inflows, which supported yields during the quarter and saw the 10-year bond yield decrease from 8.76% to 8.39%. The All Bond Index returned 3.89% for the quarter, followed by inflation-linked bonds with 3.79% and cash at 1.40%. Inflation-linked bond yields declined about 10bps during the quarter, with the R197 ending the quarter at a yield of 2.57%, close to our long-term fair value of 2.5%. Property stocks gained an impressive 5.03%.

What SIM did
At the end of Q1, bond yields were attractive from a longer-term perspective and thus we added to our nominal bond exposure at these higher levels. However, during the second quarter bonds yields decreased and we used this market strength to reduce our nominal bond exposure as bonds are now trading close to their long-term fair value target of about 8.25%. Inflation-linked bonds also traded lower over the quarter, approaching our fair value target of 2.5%. We reduced our longer-dated R197 position slightly when the yield moved closer to 2.5%. We still like the defensive and diversification properties of inflation-linked bonds and will continue to hold a significant exposure to them. We continued to add cautiously to credit although the credit market appears expensive at the moment as the general search for yield continues. We added to our property exposure via an investment in Rebosis, a new listing in the property sector.

SIM Strategy
As we pointed out in the previous section, most asset classes are trading at or close to fair value with no glaring opportunities available to investors. Our general preference is still for maintaining capital stability over maximising returns at this point in time, as stated in the previous quarter. Thus we will maintain a well diversified portfolio, while also maximising yield in the current environment.

Market review
The first quarter of 2011 will be remembered for the tragic tsunami in Japan and continued political unrest in North Africa. Despite these factors putting a temporary dampener on markets, the global economic recovery seemed to be well on its way. As could be expected, the high levels of sovereign debt remained a concern, especially in Greece, Portugal and Ireland. The local fixed interest market focused its attention on the National Budget in March, with a higher-than-expected budget deficit putting pressure on longer-dated bonds, which resulted in the bond curve steepening significantly. The rand started the year on the front foot and opened at R6.62 to the dollar and weakened slightly to R6.75 by quarter end. The South African 10-year bond yield increased from 8.15% to 8.76% during the quarter. The All Bond Index returned -1.57%, followed by inflation-linked bonds at 1.19% and cash the best performing fixed interest asset class at 1.42%. Inflation-linked bond yields were mostly unchanged for the quarter, with the R197 ending the quarter at a yield of 2.66%, close to our long-term fair value of 2.5%. Property stocks lost -2.16% for the quarter, but still delivered a healthy 15.43% over the past year.

What SIM did
During the first few weeks of the quarter, we tactically reduced our bond position after bond yields decreased to below 8.1%, with the rand at R6.62 to the dollar. We started adding to our positions again when the 10-year bond yield moved above 8.5%, which meant nominal bonds were discounting inflation of more than 5.8% in the longer-term. We believe that is too pessimistic. The breakeven inflation calculation assumes inflation-linked bonds trading at 2.7%. We also increased our inflation-linked bond exposure slightly at real yields of 2.7%. As in the previous quarter, we participated in selected floating-rate credit issues in the primary market.

SIM Strategy
Over the quarter, nominal bond yields increased sharply and now appear undervalued from a long-term perspective as well from a yield perspective relative to cash. We will be increasing our nominal bond exposure cautiously at current levels. The overall portfolio is still defensively positioned. Property stocks and inflation-linked bonds are fairly valued at current levels. As stated the previous quarter, our general preference is still for capital stability over maximising returns at this point in time.

Market review
Last year will be remembered for, among other things, the sovereign debt crisis (especially in Europe); a slow recovery from the global credit crisis and a general flow of funds into emerging/developing markets in the global 'search for yield'. The South African market, particularly the bond market, benefitted significantly from these foreign investment inflows, which also contributed to the rand strengthening from R7.40 to the dollar to R6.62 over the year. Inflation surprised to the downside although the last two readings in 2010 were slightly higher than expected. We expect inflation to reach about 5% by the end of 2011. Within this environment, bonds and property stocks performed exceptionally well. The South African 10-year bond yield declined from 9.08% at the beginning of 2010 to 8.15% by end of the year. The 10-year bond did, however, weaken by about 25 basis points (bps) during the last quarter. Nominal bonds returned 0.8% for the quarter and 15% for the year. Inflation-linked bonds weakened slightly during the period, but real yields declined by about 0.5% over the year. Inflation-linked bonds returned 0.9% for the quarter and 11% for the year. Cash delivered a return of 1.6% for the quarter and 6.9% for the year. Property had another phenomenal year, generating performance of 29.6% during the year and 3.1% for the quarter.

What SIM did
During the last quarter of 2010, we initially reduced our bond exposure as nominal bonds reached expensive levels. During November, nominal bonds weakened significantly, with yields increasing by 50 bps. We used this opportunity to increase the exposure (duration) of the fund again. Increasing nominal bond exposure when 10-year bonds were trading at 8.3% made sense from a longer-term perspective as well as a shorter term perspective because cash was yielding a less attractive 5.5%. As in the previous quarter, we again participated in selected floating-rate credit issues in the primary market. We slightly reduced our exposure to property stocks because the risk of capital loss from property has increased and we prefer to be slightly more cautious at this point in time.

SIM Strategy
Asset classes in the fixed income space are at, or close to, our calculated fair value. Our preference is for capital stability at this point in the interest rate cycle and therefore we prefer to have a slightly more conservatively positioned portfolio. We will continue to consider fairly priced credit opportunities in the primary market. Generally the 'search for yield' will also continue over the next few months, with money market yields at decade lows.