The STANLlB Income Fund retumed 10.59% vs. the benchmark retum of 8.91 %. The Fund received inflows of R689 during the third quarter which, together with the sale of shorter dated instruments was used to invest in higher yielding corporate bonds with slightly longer maturities. The Fund's modified duration position was also increased through the purchase of RSA R 157 2015 govemment paper. Medium dated floating rate notes were added to the portfolio to benefit from yield enhancement and spread compression. Purchases of floating rate notes consisted of Absa, Imperial Group, Nedbank, and Investee paper. The exposure to parastatals was increased through the purchase of Development Bank of SA bonds.

Looking Ahead
The bond market extended the gains achieved in the first half of the year into the 3rd quarter with the All Bond Index producing a very solid 8.04% return for the three months ended 30 September 2010. The yield on the RSA 2015 government paper ended the third quarter at 7.30%, a full 73 basis points lower than the level at which it traded at the end of June. The 12 month NCD opened the quarter at a high of 7.20% and trended lower over the period to close at 6.30% primarily as a result of the South African Reserve Bank lowering the repo rate. The main driver for bond yields was the tremendous demand from foreign investors who were in search of high yielding emerging market assets. Interest rates in most of the developed world remain at very low levels and this made emerging market yields particularly attractive. As a result most emerging markets have seen their currencies appreciate substantially against the major currencies over the last year. During the third quarter consumer inflation (CPI) continued its downward momentum and surprised the market by repeatedly posting numbers that were lower than consensus estimates. This positive inflation trend, as well as the rampant Rand, prompted the SARB MPC committee to lower the Repo rate by a further 50 basis points in September. This brings the total reduction in the Repo rate to 600 basis points since December 2008. The market adjusted rather aggressively to this rate cut and bond yields at the short end of the yield curve saw the biggest moves. Global bond yields remain at historically low levels with further monetary quantitative easing expected from major central banks around the world. This should be supportive for domestic bond yields in the short term.

Fund Review
The STANLIB Income Fund returned 2.30% vs. the benchmark BEASSA 1 to 3 Year Index of 1.98% for the quarter. Trades for the fourth quarter included the sale of shorter dated money market instruments to purchase short dated bonds. The Fund's modified duration position was increased to benefit from higher yielding bonds. The modified duration position in government bonds was increased through the purchase of RSA 2015 R 157 paper and the purchase of RSA 2014 R206 and R201 bonds, increasing the exposure in the 3-7 year sector of the yield curve. Short dated corporate bonds were switched for longer dated corporate bonds to benefit from the spread enhancement. Purchases of corporate bonds consisted of Standard Bank, Absa, FirstRand, Nedbank, African Bank, Barloworld, Imperial Holdings, Bidvest, MTN and Toyota Financial Services at attractive spread levels. The exposure to floating rate notes was also increased due to the attractive levels being offered in the market and expectations of interest rates bottoming out. The exposure to securitisation paper was also increased due to the attractive current yield offered in the market.

Looking Ahead
There were a number of bond friendly fundamentals that were able to outweigh the supply concerns during the fourth quarter, namely: positive comments from the Reserve Bank about the inflation outlook given weaker real economic growth and the widening output gap, with most forecasts now indicating that inflation should fall within the 3% to 6% target band in the second quarter of 201 O. The continued strength in the Rand will have a beneficial effect on inflation and inflation expectations. The market is pricing for short interest rates to remain on hold for most of 2010. Shorter dated bond yields remained fairly unchanged during the quarter as the market priced for the SARB to leave the repo rate unchanged for the remainder of 2009. The RSA 2015 R 157 started the quarter at 8.29%, touched its worst level of 8.70%, before ending the quarter at 8.39%. The 12 month NCD rate traded from 8.08% to a high of 8.25%, before ending the quarter back at 8.08%. Domestic corporate bond spreads have continued to narrow against the government curve as the appetite for risk continues. The SARB forecasts a more normalised environment in 2010 and have subsequently reverted back to bimonthly MPC meetings. The interest rate markets are not pricing any further rate cuts at the moment, but the headline fundamental numbers as well as the level of the Rand will be the key drivers for any further action by the SARB.