The anxiety about economic growth led to sharp declines in government bonds. Spreads remained tight and yields on corporate bonds followed suit. In light of the developments which drove the US Dollar lower, we increased our non-US Dollar exposure through purchases of more of the peripheral high beta European currencies such as the Hungarian forint, where guidelines allowed, and took hedges off our Australian US Dollar position. Nonetheless, the incremental contribution of currency gains was slightly negative due mainly to the relentless upward tendency of the Japanese Yen, which we continue to avoid. Looking into the future, we think that price risk continues to build up in U.S. and European low-yielding government debt. Nominal bond yields are significantly below levels of nominal GDP growth which we regard as sustainable. At the moment, reduced expectations of the economy in combination with perceptions of massive purchases of government securities by the Fed, Bank of England and the Bank of Japan act to keep yields down. If the economic scenario we envision comes to pass, central banks will not have a reason to intervene in public bond markets as aggressively as currently expected. We ended the third quarter with portfolios reflecting less duration than when the quarter started. We expect to continue reducing duration gradually during the current quarter.
The currency outlook will be particularly sensitive to the economic scenario. At the end of the quarter, expectations of an aggressive second round of quantitative easing by the Fed sent the US Dollar sliding. The Euro has become expensive once more and the US Dollar is looking well valued based on its real-effective value. In addition, our economic scenario implies that the Fed will not have cause to continue purchasing Treasury securities, or at least not as aggressively as expected at the moment. The implication is a potential swing back to the US Dollar later this quarter or beyond. Finally, we continue to pursue a strategy of investing in currencies and countries outside of the developed world (subject to investment guidelines). Capital is ultimately attracted to areas where there is a highest return on investment. It is very clear that the emerging area of the world offers growth while many areas of the developed world continue to struggle with fiscal consolidation and the aftermath of the financial crisis.

The STANLIB US Dollar Bond Fund of Funds will change it's name to STANLIB Global Bond Feeder Fund, effective from 30 June 2010

Fund Review
The fund had a quiet quarter after an impressive dollar return of 30% between March and September. The US Dollar return during the 4th quarter of 2009 was a still positive, +0.5% in US Dollar terms, or -1 % in rand terms. For the calendar year the fund returned 24.8% in UD Dollar terms, or -3% in Rand terms because of the very strong Rand (up 28.7% for the year against the US Dollar). Since the low in March, the fund is up an impressive 137% in US Dollar terms. This compares favourably with the 69% return on the MSCI World Index So it was an excellent year for the fund, which is at an all-time record high in US Dollar terms. The fund came 2nd out of eight funds in its sector during 2009 and is 2nd over five years. During the quarter we stayed overweight the Euro currency via bond funds favouring the Euro which included the Fidelity Euro High Yield Bond Fund until early December. At that stage it appeared that the US Dollar may be recovering against major currencies and thus we switched more into US Dollar-based bonds. To our advantage the dollar appreciated from around $1.51 to the euro to $1.43. At the end of the year the fund had 30% in the Fidelity US High Yield Bond Fund, followed by 26.5% in the Fidelity US Dollar Bond Fund. The US High Yield Bond Fund has an income yield of 6%, which compares well with the ten year US Government Bond yield of 3.8%. Naturally the High Yield Fund carries higher risk compared to government bonds, because it carries the risk of corporate failures. However, it is very well diversified, with its largest holding representing just 1.4% of total assets. This fund produced a return of over 50% in 2009 in US Dollar terms.

Looking Forward
The STANLIB US Dollar Bond Fund has an income yield of 2.9%, with 35% in US government bonds. Other holdings in the fund include the Euro High Yield Fund (yielding 6.2%), the Asian High Yield Fund (yielding 7%), the Emerging Markets Fund (yielding 5.5%), the Euro Corporate Bond Fund (yielding 3.4%) and the International Bond Fund (yielding 2.8%). The year 201 0 should see far more moderate returns achieved by the fund, compared with those of 2009. At this stage, there is some risk of capital loss in government bonds, but corporate bonds in our view, continue to offer some value. And so we remain Overweight corporate bonds. There is a possibility of the Rand weakening by the end of 20 1 0, which would enhance the Rand returns of the fund.