Fund review
US interest rates remained near zero and the Rand continued to strengthen this quarter. The local unit gained 2.7% against the greenback and has been the 2nd best performing emerging market currency relative to the US Dollar YTD (unlike the situation a year ago where it was the worst). Much of the Rand strength has been attributable to a weak US Dollar. The greenback is generally regarded as a safe haven so an increase in risk appetite has resulted in it selling off against other major currencies. The fund has remained focused on only approved investment quality issues and has not experienced a default in any of its holdings since the subprime crises erupted. As such the fund is rated Aaa by Moody's. The maturity profile is also conservative - 77% of the fund may be liquidated in less than sixty days.

Looking ahead
Central bankers across the world have kept interest rates low and agreed to keep the purse strings loose for as long as it takes for economic growth to gain traction. Whilst the worst of the economic crisis seems to be mostly behind us, the economy remains fragile and the Fed may not raise its lending rate for some time to come. Domestically, the Rand has been driven by a confluence of positive forces of late. These range from a weak Dollar to the first trade surplus since 2004. On a fundamental basis however, we believe that the Rand is somewhat overvalued and expect this strength to last a while longer making it the ideal time to gather offshore exposure.

The Rand appreciated 19% against the Dollar during the second quarter. This was attributable to the greenbacks weakness and a sign investors are venturing into emerging market currencies once again. Trade has been volatile, averaging 8.5 for the quarter, with a high and low of 7.7 and 9.5 respectively.

The slower rate of economic decline would suggest global markets are stabilizing, but there is still some uncertainty about the immediate outlook. The mass of stimulus that has been offered to the market would appear to be working. It is however, likely the Fed Fund rate will remain on hold for some time with the market pricing in a rate hike in early 2010.

The underlying portfolio manager remains on a cautious footing, particularly around the profitability and capital positions of major global banks. The fund is positioned accordingly. No securities in the portfolio have a rating lower than A 1 and 26% of the assets are rated Aaa by Moody's. The maturity profile of the fund remains conservative with 66% of the fund available within 33 days and 28% of the funds available within 7 days. The portfolio remains unexposed to any securities that have defaulted and is positioned in the top quartile in its category over a one year period.

After being the worst performing primary currency last year with a 28% fall against the dollar, the rand rebounded by 5.2% during the first quarter. This does however, need to be seen in context as volatility within FX markets remained high during the period under review. In this regard the first two months saw the local unit lose a further 13% before rebounding strongly to end the quarter in positive territory. Despite this, the one year return on the fund remains a very respectable 17.3%.

Money markets have also been affected by risk aversion, driven by concerns over the health of the financial system. More restrictive credit conditions have fed into the real economy and the Fed has enacted measures to stimulate growth and restore confidence. Considerable funding has also been made available to free up credit markets. Against this backdrop the underlying manager strategy has continued to focus on liquidity and maintained the weighted average maturity of the portfolio at around 30 days. The building block funds are still rated AAA by Moody's and we have had no exposure to any security that has defaulted!

The final quarter of 2008 was characterized by uncertainty and panic accompanied with the highest levels of FX volatility in years. Money markets were also affected, driven by concerns over the health of the financial system, causing inter-bank lending to drop significantly. More restrictive credit conditions have fed into the real economy and the Fed has enacted measures to stimulate growth and restore confidence in the financial system. Of particular importance to this fund was the Federal Reserve cutting its target rate to 0% - 0.25%. Considerable funding has also been made available to free up credit markets. Against this backdrop the underlying manager strategy has continued to focus on increasing liquidity and reducing the weighted average to maturity of the portfolio (now 24 days). Despite the grim economic climate, our building block funds are still rated AAA by Moodys, nor have we been exposed to any security that has defaulted and assets remain fully liquid! In rand terms the fund had a particularly good year as the Dollar strengthened against most currencies in the quarter, however its biggest gains were against the local unit resulting in the ZAR finishing the year as the worst performing primary currency in the world - down a massive 28% for the year.