The fund did well in the quarter in rand terms and the rand return for the year was also pleasing. In dollar terms, the fund was up 1.2% in the quarter and for the year was up 3.7%, which we're happy about in the circumstances (very low interest rates and inflation).

While the dollar was weakening we had kept 25% in euro cash as a hedge and we eliminated that hedge early in the quarter and switched those funds into dollar cash. Why dollar cash and not bonds? Because of a view that bond yields seem to be threatening to rise and have in fact done so to some extent (causing bond values to fall), so we're keeping a defensive position in the short-term.

During the quarter US 10 year bond yields initially tumbled from 4.5% down to 3.9% and have since retraced upwards to 4.25%. Technical analysis (charting) is warning of further rises in yield. Nevertheless, so far bonds have continued to do quite well, especially in that yields are much lower (values much higher) than was predicted one or two years ago. We have kept 11.4% in US high yield bonds. These bonds took a bit of a hit in April when General Motors and Ford bonds were downgraded to "junk" status, but have since bounced back sharply by 5% to another high for the last few years. It would be nice to have more in this fund but one is concerned about possible downside as risk parameters are currently stretched.

Finally the fund delivered a good positive rand return for the quarter, which return came almost entirely from the depreciation of the rand against the dollar (10%), although we have kept 24% of the fund in an institutional euro money market during the period, earning 1.8% in euros. Global government bonds lost 2% during the quarter (US dollars), partly because of the depreciation of all other currencies relative to the dollar (dollar gained 4.6% against the euro). US government bonds gained slightly, however, with a return of 0.8%, slightly ahead of high grade corporate bonds (0.6%), much the same as the 3 month US Treasury Bill (0.6%). The fund is predominantly invested in Fidelity's US Dollar Bond fund (65% of assets), a $361 million fund which combines government (55% of portfolio), quasi-government and corporate bonds in one portfolio. This fund is in the 2nd quartile relative to other fixed income funds in the US over one year and in the top quartile over 3 years. The fund has a modified duration of 5 (sensitivity ratio to a 1%rise or fall in bond yields) and a current income yield of 3.5%. The balance of the fund (11%) is invested in US high yield bonds via the Fidelity US High Yield Fund, which is in the top quartile relative to competitor funds over one and three years and returned over 11% in dollars over the past year (the US Dollar Bond fund by comparison returned 2.4%). However, the fund invests in higher yielding bonds which have a higher risk profile and so the holding is kept to 11% of total fund. The Fidelity fund has $410 million of investor funds and yields 6% currently. It is interesting to see a bond issued by Sol Kerzner's Sun International Holdings as its 8th biggest holding (0.9% of total fund). This bond has a coupon of 8.875% and matures in 2020.

The fund has faced a huge headwind over the past year and three years in that it is centred on US Dollar bonds and the dollar itself has taken such a beating. This has clearly affected rand returns dramatically on the negative side. During the year we did hold some European bonds and cash to lessen the impact of the weak dollar, although the fund's mandate intends for the fund to be predominantly invested in the US.

The currency issue is a pity because the bond market did much better than expected in the US and in most countries. The US 10 year government bond remained more or less around the 4.2% level for most of the quarter and year.

We are exploring converting this fund into a global bond fund, which would make a lot more sense than the current restrictive situation.