Market review
Local bonds continued to deliver strong performances during the second quarter, with the market rallying significantly towards the end of the quarter. Citigroup announced in April that South Africa was earmarked for inclusion in the World Government Bond Index which caused the market to rally as a result of strong buying of local bonds by foreign investors. Global sentiment turned negative during May, driven by increased concerns around Greece exiting the Euro as well as fears of the Spanish banking system collapsing. Adding fuel to the fire was a deterioration in the growth outlook for China and India coupled with a collapse in the oil price during the quarter. The SA Reserve Bank Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.5% at its scheduled meeting in May. Although the market was expecting and pricing in for rates to be kept unchanged, the statement of the MPC was much more dovish than anticipated. It has become apparent that the SARB's focus has shifted more towards growth concerns rather than inflation risks stemming from second round inflation and exchange rate effects. Local bond yields trended downwards during the second quarter. An initial rerating during April was followed by some sideways volatility and a subsequent sustained rally during June on a more optimistic outlook for inflation over the next 12 months. The money market curve flattened during the quarter. The three-month money market rate increased marginally from 5.60% to 5.605%, while the 12-month rate decreased from 6.29% to 5.95%. The R157 (three-year bond) traded at 6.00% at the end of the quarter versus 6.69% at the end of March. The long end of the yield curve steepened to record levels during the quarter. The spread between the R186 (12-year bond) and the R157 (three-year bond) increased from 168 basis points (bps) to 192 bps during the quarter. The momentum in real yields finally eased, with the real yield on the R211 (five-year inflation-linked bond) decreasing from 0.69% at the start of the quarter to 0.65% at the end of the quarter. The 10-year implied inflation breakeven yield decreased from 5.9% at the end of March to 5.2% at the end of December. Nominal bonds delivered a return of 5.2% for the quarter, outperforming cash and inflation-linked bonds, which delivered 1.3% and 1.7% respectively. Credit spreads remained stable amid the change in the level and curvature of the yield curve.

SIM strategy
We used the volatility in the market, liquidity opportunities as well as attractive valuations of selective counters to restructure the portfolio during the quarter. We increased the allocation to quality corporate credit. Assets were invested in all maturities across the money market yield curve during the quarter, increasing the diversification and enhancing the maturity profile of the fund. The allocations proved to be well-timed and, together with the change in the level and shape of the yield curve and a higher exposure to credit bonds with their associated higher yields, contributed to the Fund outperforming its benchmark.

Market review
Financial markets started the year on a strong footing with most asset classes posting good returns during the first two months. Greece reached an agreement with the majority of private holders of Greek government bonds which resulted in the biggest sovereign default in history on 9 March, however financial markets seemed little deterred by the much anticipated default. Rather, market sentiment started to turn based on concerns over a European recession, high oil prices and softer growth expected from China this year, which overshadowed the positive economic news flow coming from the USA earlier in the year. The SA Reserve Bank Monetary Policy Committee kept the repo rate unchanged at 5.5% at its scheduled meetings in January and March, with the statement being less hawkish towards the end of the quarter. The SARB revised its CPI forecast marginally downwards in March, while revising the growth forecast upwards. The downward revision to the CPI forecast opens up some room for negative surprises if inflation comes in above expectations. Inflation continued to stay marginally above the upper end of the target 3% to 6% band during the beginning of the year.

Local bond yield volatility trended downwards during the first quarter of the year after trading at elevated levels of volatility towards the end of 2011. Yields came down sharply during January and then trended upwards during February and March. The money market curve steepened during the quarter. The three -month money market rate increased marginally from 5.595% to 5.60%, while the twelve-month rate increased from 6.12% to 6.29%. The R157 (four-year bond) traded at 6.79% at the end of the quarter versus 6.72% at the end of December. The long end of the yield curve retraced some of the steepening seen in the last half of 2011. The spread between the R186 (14-year bond) and the R157 (four-year bond) decreased 175 bps to 168 bps during the quarter. Real yields continued to trend downward during the quarter with the real yield on the R211 (five-year inflation-linked bond) decreasing from 0.86% at the start of the quarter to 0.69% at the end of the quarter. The ten-year implied inflation breakeven yield increased from 5.7% at the end of December to 5.9% at the end of March. Nominal bonds delivered a return of 2.2% for the quarter, outperforming cash but underperforming inflation-linked bonds, which delivered 1.3% and 2.9% respectively. Credit spreads remained stable amid the change in the level and curvature of the yield curve.

SIM strategy
We used the volatility in the market as well as attractive valuations of selective counters to restructure the portfolio during the quarter. We increased the allocation to quality corporate credit. Assets were invested in all maturities across the money market yield curve during the quarter, increasing diversification and enhancing the maturity profile of the fund. The allocations proved to be well-timed, and together with the change in the level and shape of the yield curve and a higher exposure to credit bonds with their associated higher yields, contributed to the outperformance of the benchmark.

Market Review
Financial markets remained range bound during the fourth quarter, trading mostly sideways albeit at elevated levels of volatility. Global growth concerns and sovereign debt problems continued to fuel negative news flow. The European debt crisis made fresh inroads as Italian funding costs rose to new highs and both the Italian and Greek Prime Ministers succumbed to market and political pressures and were subsequently replaced in November. Multiple global central banks announced on November 30 that they would employ a coordinated easing effort by reducing the spread paid on US dollar swap lines by 50 basis points (bps). This serves to alleviate liquidity and funding issues for banks but does not help solve the problems of European sovereigns.

Locally, the SA Reserve Bank Monetary Policy Committee kept the repo rate unchanged at 5.5% at its scheduled November meeting, in line with market expectations. Although global growth concerns gave the Bank leeway to ease rates, domestic data has started to improve and inflation is ticking upwards and is expected to remain above the upper band for an extended period. Inflation breached the upper end of the target 3% to 6% range in October and November, coming in at 6.0% and 6.1% respectively. Foreigners were net buyers of SA bonds during the quarter following a significant sell off towards the end of the third quarter.

Against this backdrop, the market continued to trade at elevated levels of volatility in local yields relative to long-term averages but at more subdued levels than in the third quarter. The money market curve steepened during the quarter. The three-month money market rate increased from 5.58% to 5.60%, while the 12- month rate increased from 5.87% to 6.12%. Treasury bills in the 91-day area of the curve traded below bank rates and selected credit spreads on short-term corporate credit decreased during the quarter. The R157 (four-year bond) traded at 6.72% at the end of the quarter versus 6.99% at the end of September. The long end of the yield curve steepened further, as evidenced by the increase in the spread between the R186 (14-year bond) and the R157 (four-year bond) from 161 basis points (bps) to 175 bps during the quarter. Real yields were somewhat volatile during the quarter but ended stronger, with the real yield on the R211 (five-year inflation-linked bond) decreasing from 1.43% at the start of the quarter to 0.86% at the end of the quarter. The 10-year implied inflation breakeven yield decreased from 5.8% at the end of September to 5.7% at the end of December. Nominal bonds delivered a return of 3.5% for the quarter, outperforming cash but underperforming inflation-linked bonds, which delivered 1.3% and 4.3% respectively. The one- to threeyear area of the yield curve realised a 2.2% return for the quarter. Credit spreads remained stable amid the change in the level and curvature of the yield curve.

SIM Strategy
We used the volatility in the market as well as the attractive valuations of certain counters to restructure the portfolio during the quarter. We increased the Fund's allocation to quality corporate credit - mostly short-dated vanilla, as well as inflationlinked, corporate counters. Assets were invested in all maturities across the money market yield curve during the quarter, increasing the diversification and enhancing the maturity profile of increasing the diversification and enhancing the maturity profile of the fund. The allocations proved to be well-timed and, together with the change in the level and shape of the yield curve and a higher exposure to credit bonds with their associated higher yields, contributed to the outperformance of the benchmark.