Market review
In 2012, the financial markets survived, amongst other events, the potential breakup of the European Union and the looming 'fiscal cliff' in the US. Equity markets began the year on a strong note but the Italian election results and the Cyprus banking crisis reminded investors that we are not out of the woods yet. Although general economic data out of the US was mostly positive, we did see some softer employment data towards the latter part of the first quarter. The broad feeling (also reflected in stock markets) was that the global recovery, especially in the US, is gaining traction. With central banks reiterating their accommodative monetary policy stances during the quarter, a normalisation in global interest rates is still many quarters away. The rand weakened significantly during the quarter, losing more than 70c to end at R9.23 to the dollar. On balance, inflation surprised to the upside, with a breach of the upper inflation target band of 6% a certainty. Currently the Reserve Bank Monetary Policy Committee (MPC) is still concerned about the anemic domestic growth outlook and favours an accommodative monetary policy, not unlike most other central banks in the world at this point. The SA bond market is still receiving robust foreign portfolio inflows, although not at the same pace as last year. The 10-year SA government bond yield increased slightly during the quarter from 6.76% to 6.91%. Inflation-linked bond (ILB) yields were mixed, with the R197 yields slipping from 0.91% to 0.77%. The All Bond Index returned 1.0%, inflation-linked bonds 1.8%, while cash yielded 1.3% for the quarter. Property stocks gained an impressive 9.1% for the quarter. The SA yield curve remains very steep and is discounting increased Treasury bond issuance over the medium term. At the end of March, the yield difference between R186 (2026) and R157 (2015) was 1.9%.

What SIM did
The R197 (2023 maturity) ILB reached another new low during the quarter and ended the quarter at a real yield of 0.77%. We further reduced our ILB exposure as we see this as expensive from a long-term perspective. Nominal bonds are also expensive given our required yield of about 7.25% from the 10-year bond. The longer-end of the yield curve shows relative value compared to the shorter end of the curve - but the risk of capital loss in longer duration assets has increased. We continue to find selected opportunities to enhance the yield of the Fund's money market assets. The focus is still on enhancing the general yield of the fund against the backdrop of expensive inflation-linked and nominal bonds. The yield from money market assets in the Fund is well over 6%. This yield enhancement has been achieved by taking on some credit and term risk.

SIM strategy
We reiterate our stance of the past couple of quarters, namely nominal and inflation-linked bonds are expensive from a longerterm perspective. A premium is being paid for instruments delivering the certainty that capital will be safe and cash flows secure. Our focus in the Fund remains one of yield enhancement in the current accommodative policy environment. The general portfolio positioning remains defensive from a duration point of view, with the aim to protect investors against potential capital losses, while outperforming cash.