The performance of the Liberty Income Fund was maintained in an environment of rising interest rates. The fund returned 9.7% for the one year period to 30 September 2002. Over all important longer term measurement periods the fund remained the top performing Income Fund.

The modified duration of the fund was reduced marginally from 0.9% to 0.8% over the third quarter 2002. During the quarter, short dated assets to the value of around R500m were switched out, and the proceeds were invested in R75m Jibar linked notes, some R150m short dated high yielding bonds and the balance in long term money market instruments. The fund remains defensive in its current positioning, due to likely further upward pressure on short rates during the fourth quarter.

The outlook is for CPIX to peak during the fourth quarter of 2002. Given the current high level of wage settlements and administered price increases, a large positive turnaround on food prices and the dollar oil price is required to see the 6% to 3% inflation target range reached in 2003.

Modified Duration: 0.8%

During the second quarter of 2002 the modified duration of the fund was lengthened from 0.8%to 1.0%. This was achieved by reinvesting maturing money market assets in medium dated assets issued by Sasol, BOE Bank and secondary capital issued by Standard Bank.
If the Rand exchange rate can maintain current levels for a sustainable period of time, inflation should fall sharply during 2003/2004.However, monetary policy is likely to remain tight until there is certainty regarding the achievement of inflation targets. Furthermore, the inverse shape of the yield curve does not offer sufficient yield reward for extending the modified duration of the Liberty Income Fund.
Currently money market rates remain under pressure, however, the likely point to lengthen the maturity profile of the Fund is expected to happen during the third quarter when inflation is likely to peak. A further investment of R50m in a Jibar linked instrument was also made during the quarter.

Building up capital is the desire of most investors. But there are times when protecting existing capital takes precedence over making more. "In this uncertain world, there's nothing wrong with having 50% in cash at present," says Liberty Income Fund manager Henk Viljoen.

Not advice investors often hear from dyed-in-the-wool equity fund managers. But then equity-only managers seldom mention that fixed-interest funds have given them a run for their money over the past decade.

The fund has led the income fund pack all the way with its conservative portfolio mix of fixed-interest bonds, money-market assets and cash. As with all income funds, the fund is restricted to a two-year "duration", meaning the average maturity dates of all assets in the portfolio cannot exceed two years.

This limits the Liberty Income Fund's ability to benefit from the maximum capital appreciation of falling bond yields. But it also limits risk during periods of rising bond yields. Bear in mind that with any bond investment, when interest rate yields fall, bond prices appreciate. Similarly, when interest rates rise, bond prices fall.

But the fund's low-risk profile has not prevented it from producing total returns of 314% after costs over 10 years and 109% over five years. There are equity funds that can boast higher returns - eight over 10 years and 17 over five years, which is not that many, considering that for much of this time equities were performing far better than they are now.

Pure bond funds have also outperformed the Liberty Income Fund, but by a surprisingly low margin. On average, bond funds have outperformed the fund by about 2% per year over five and three years. But Viljoen, who also heads Liberty's fixed-interest operations, cautions that potential for higher returns in bond funds may not compensate for the added risk at present. A shortage of bonds in the market has produced an "inverse yield curve" anomaly where long-term bond yields are, uncharacteristically, below yields on shorter-term instruments, he says. This creates uncertainty, making bond investment "dicey" and income funds a safer bet right now.

The Liberty Income Fund (R) has won two S&P 2002 awards within the Domestic Fixed Interest Income sector. One award based over a three year period and the other based over a five year period.

At the AUT/Personal Finance Raging Bull awards held in Johannesburg on the 28 January 2002 Liberty Income Fund won several awards. The fund was awarded the Raging Bull Award for top performance on a risk-adjusted basis. The Liberty Income Fund also received an award for the top-performing fund on a Sortino risk-adjusted basis in the Domestic Fixed Interest category as well as the top performance award for Domestic Fixed Interest Funds. All the awards were based on performance for the three-year period to end of December 2001. The Liberty Income Fund is managed by Henk Viljoen of Liberty Asset Management.