It was a relatively uninspiring quarter for income assets, with the benchmark BEASSA 1-3 year index producing a 1.2% return. This was lower than the return from cash (+1.8%) reflecting the current uncertainties in the bond and income markets. Inflation ticked up to 4.8% (y-o-y) in August, but remains within the official range of between 3% and 6%. There was no change to official interest rates during the quarter, however the Reserve Bank has become increasing hawkish citing higher global inflation an oil prices as key risks. The Fund outperformed the benchmark during the quarter with a return of 1.47% thanks to strong performances from both managers.

Manager performance was pleasing with both African Harvest and STANLIB producing above benchmark returns. African Harvest, with its shorter duration position, marginally outperformed STANLIB - a reversal from previous quarters. Both managers generated out performance from holding higher yielding corporate bonds. Overall, the fund remains well diversified and conservatively positioned with 51% of the portfolio in 1-3 year assets and 17% in near cash instruments. Credit quality is excellent with 70% of the portfolio in AAA and the rest in A-grade paper or better.Given the short-term rise in inflation, it is unlikely that interest rates will be cut further, resulting in a change in sentiment. A greater probability of an increase in rates at the December Monetary Policy Committee meeting is now being factored in with the Reserve Bank highlighting that higher inflation cannot be ignored.

The Fund distributed 2.07c per unit in income to investors for the quarter relative to the previous quarter distribution of 1.93c per unit.

South African income assets performed well during the quarter driven by the surprise 0.5% cut in interest rates in April. As with the surprise cut in the 3rd quarter of 2004, all income managers under performed the benchmark because they were short duration in a downward rate revision. Underperformance was exaggerated this quarter because the BEASSA 1 - 3-year Index currently has a modified duration of 2.3 years whereas the maximum duration allowed for funds in the income sector is 2 years. To put this into perspective, the best performing income fund in the sector underperformed the benchmark by 0.75%. The portfolio produced a return of 2.21% for the quarter, in line with its peers and was ranked 4/10 over the past 12 months. Both managers produced positive returns however STANLIB Asset Management generated better returns because it had longer duration than African Harvest during the period. Whilst inflation is gradually starting to rise, we anticipate that the Monetary Policy Committee will keep interest rates unchanged until early next year. We expect income assets to produce returns of around 7% over the next 12 months. Bonds could produce a slightly higher return but carry significantly more risk, especially if rates do start to rise, and hence we recommend investors get their fixed interest exposure through income funds. The portfolio distributed 1.93c per unit in income to investors for the quarter relative to the previous quarter distribution of 2.08c per unit. There is always less income to distribute when interest rates drop and a lower distribution is to be expected.

Emerging market bond yields spiked in March following a further 0.25% increase in US interest rates. This contributed to higher than usual volatility in the bond and income markets of South Africa. Bonds with duration longer than 12 years were the hardest hit dropping 1.7% in the quarter. Shorter dated bonds fared better producing a positive 0.2% return. The Fund was protected from this volatility by being positioned at the short end of the curve. It strongly outperformed the benchmark for the quarter and ranked 3/10 in its sector for the year. Both managers produced positive returns however African Harvest produced the better performance, driven mainly be shorter duration and exposure to the higher yielding corporate sector. Both managers were invested in higher quality paper, which also protected the Fund. Although inflation data continues to come in at the low end of expectations, managers have become more risk averse, citing global pressure and higher US rates as the main negative factors. The Fund distributed 2.08c per unit in income to investors for the 3 months to 31 March 2005. This is very pleasing given that the Fund is now distributing quarterly as opposed to every 6 months. Post quarter end, in a surprise move, the Reserve Bank cut official interest rates by a further 0.5%. This sends a strong message to the market that the goal of conquering inflation has been achieved. This has breathed new life into the life of income producing asset classes.

Although income investments (+2.5%) lagged the returns of equities (+11.9%), bonds (+7.7%) and property (+23.2%), they still produced strong positive returns for the quarter with significantly lower levels of risk. The Fund (+2.9%) outperformed the benchmark for the quarter, driven by superior manager selection and was ranked 3/10 for the year.

STANLIB Asset Management, which manages 50% of the Fund, was the key driver of peer group out performance. African Harvest performed satisfactorily and in line with benchmark. The Fund produced a 3.38c per unit distribution for the 6 months to 31 December 2004, which was paid to investors (in cash or new units) on the 12 January 2005. This brings the total distribution for the year to 7.16c representing an after fees yield of 7.1% for 2004. The relative safety of this asset class has made this Fund an attractive proposition to investors. During the quarter, unit holders in the Fund were balloted to convert this Fund into a Feeder Fund. This ballot was successful and accordingly the Fund now invests directly into the income fund of our manager research and selection partner, namely the Investment Solutions Income Fund. The underlying managers are the same; the investment process for manager selection remains unchanged, as does the multi-manager investment philosophy. The Fund will now be distributing income quarterly.