During the quarter, the South African Reserve Bank decided to increase the Repo rate on the 16th of August from 9.50% to 10% mainly due to concerns about inflation i.e. that it is breaching the upper target band of 6%.

Jibar rates in the 3 months increased from 9.77 % to 10.21% while the 12-month increased from 10.65% to 10.91%. This was mainly due to the increase in the Repo rate. As in the previous quarter the marginal movement was much bigger at the shorter end of the money market curve.

The money market remains concerned about Money Supply, Private Sector Credit Extension, and CPIX during the quarter. In terms of inflation major contributors to the higher inflation (like oil and maize prices) remain a concern.

Looking forward, the money market curve has priced in some risk of another Repo rate increase. The next MPC meeting decision will take place on 11th of October and our expectation is for the Repo rate to increase with another 50 basis points.

We invested a portion of the cash in our portfolios at the long end of the money market curve at the higher levels and continued to invest in yield enhancing Jibar-linked instruments at the shorter end, while keeping a minimum balance in the current account.

Local fundamentals were the primary driver off the fixed income markets for the second quarter of 2007. All the recent measures of inflation surprised on the negative and, with CPIX decidedly above the inflation target band, the MPC increased the repo-rate by 50 basis points in June 2007. The outlook for inflation over the medium term also deteriorated mainly due to higher international oil prices. The secondary driver for the quarter was international conditions. International yield-curves generally sold off on an improving outlook for growth.

These adverse conditions impacted negatively across the local yield-curve. The yield-curve sold of substantially and the money market outperformed the capital-market over the quarter. The money-market yield-curve steepened in the sell-off. The 3 months J-BAR closed the quarter 60 basis points higher at 9.78% while the 12 months J-BAR closed 89 basis points higher at 10.65%. It is clear from these movements that the market expects further tightening in the repo-rate over the medium term.

The shorter end of the capital-market yield-curve sold of in a parallel fashion. The R196 (benchmark-bond in the 1-3 year area of the yield-curve) closed 87 basis points higher at 9.45%. The R153 (benchmark-bond in the 3-7 area of the yield-curve) closed 89 basis points higher at 9.08%.

The SIM view is for the repo-rate to remain at the current level for the remainder of 2007 and for the capital-market yield-curve to stay inverted over the medium term. Our current view is for inflation to stay at elevated levels until the first quarter of 2008 (we do expect inflation to moderate somewhat in the second half of 2007). Our strategy going forward will be to increase the market-risk of the Fund, but given our view on inflation, we have time on our side. We will continue to monitor all relevant drivers of the yield-curve closely.

During the quarter, the South African Reserve Bank decided to leave the repo rate unchanged at 9%. Prior to the MPC meeting the 3 month and 12 month Jibar rates increased from 9.17% to 9.32% and 9.66% to 9.87% respectively. After the announcement the 3 and 12 month Jibar rates came down to 9.03% and 9.50% respectively. Coming closer to another MPC decision money market rates steadily increased from the lows to end the quarter at 9.17% and 9.75%. The money market remains concerned about Money Supply and Private Sector Credit Extension although it seems to have subsided slightly while food prices, oil and the current account deficit remain problematic. The Rand depreciated against the dollar during the quarter from 6.99 to a close of 7.31. Looking forward the money market curve expects no further increases in the Repo rate although the risks are increasing. The next MPC meeting decision will take place on 12th of April and our expectation is for the Repo to stay unchanged. We invested a portion of the cash in our portfolios in the long end of the money market curve at the higher levels and continued to invest in yield enhancing Jibar linked instruments in the shorter end of the curve while keeping a minimum balance in the current account.

Over the fourth quarter of 2006 the MPC continue to manage the risks in a prudent and consistent manner by increasing the Repo rate by 50 basis points in October 2006 and 50 basis points in December 2006. The local currency rallied strongly over the quarter while the EMBI-spread, a measure of risk-appetite towards emerging markets, also rallied over the quarter. The Minister of Finance tabled a supportive medium-term budget policy statement for fixed-income investors, again highlighting South Africa's sound fiscal position. These conditions were in line with SIM's fundamental outlook.

The money-market yield-curve shifted higher and flattened over the quarter with the above-mentioned increases in the Repo rate. The 3 months Jibar rate closed 86 basis points higher at 9.18%, while the 12 months Jibar closed 29 basis points higher at 9.67%. SIM regards the flattening of the yield-curve as very positive and the Fund's exposure to the 12 months area was increased over the quarter. The medium to longer area of the capital-market performed well over the fourth quarter. The R194, the benchmark-bond in the 1 - 3 year area of the yield-curve, strengthened marginally (by 12 basis points) over the fourth quarter with the above-mentioned increases in the Repo rate already discounted in the yield-curve. The R153, the benchmark bond in the 3 - 7 year area of the yield-curve, rallied over the quarter and closed 47 basis points lower at 8.16%.

The yield-curve continued to invert with the spread between the R194 and R153 at minus 62 basis points at the end of the fourth quarter. SIM regards the inversion of the capital-market yield-curve as very positive. The Fund's exposure to the longer end was increased within the limitations of the mandate to capitalize on the rally and the inversion of the yield-curve.