The key investment theme driving South African markets during the third quarter was the dramatic shift in interest rate expectations. In June 2011, the Forward Rate Agreement market on fixed interest instruments was priced for hike certainty by Q1 2012. By September this year, the market was actually anticipating a 50% chance of a cut in interest rates within 6 months. Clearly this benefited interest rate sensitive assets, with bonds (+2.8%), income (+3.0%), property (+2.2%) and cash (+1.4%) continuing to provide protection relative to equity exposure, which dropped by 5.8% for the quarter. We suspect that the market has picked up on the SARB's subtle policy adjustment to focus on both price stability and employment (read: growth). This has made the SARB reluctant to raise interest rates in the face of rising inflation. Globally, weakness in the US growth outlook and no improvement in the employment picture forced the Fed to announce that US interest rates would stay low through mid 2013. The hunt for yield was therefore firmly back on, which encouraged foreign investors to flood into the SA bond market, driving the yield on the SA 10 Year bond down to 7.6% by late August. September would have seen more of the same except for sudden realisation that the European Debt Crisis was deeper, bigger and harder to solve than initially thought. The lack of political urgency in finding a solution to the Greek problem fanned fears of a European led global recession. Risk aversion quickly set in causing foreign bond investors to exit the SA bond market in September, depreciating the Rand by 15% in the process.

So it was an eventful quarter, which the portfolio handled rather well under the circumstances. It outperformed the average of its peer group and over the last 12 months has produced a return of 7.5%. There were no manager changes during the quarter, following the restructuring that took place in April 2011. Prescient was the primary driver of performance for the quarter, benefiting from a larger exposure to the 1-3 year and 3-7 year part of the curve, which outperformed the other areas where Prescient had no exposure. Exposure to ILB's also benefited Prescient's return. RMBAM performed well albeit that its long duration position hurt during September.

Looking forward, it is currently not our view that interest rates will be cut in the next 6 months. We believe that the market may have overly discounted this possibility. Yields did back up in sympathy with this view during September but not enough for us to get really excited about the fixed interest market in the face of rising inflation. As highlighted in the past, we believe that the fund is well placed to handle the type of volatility experienced by the market in the quarter and would expect returns of between 6-8% from income orientated assets over the next 12 months.

The fund changed sectors from Domestic--Fixed Interest--Income to Domestic--Fixed Interest--Varied Specialist on 11 March 2011. The fund lost its history.

The STANLIB Multi-Manager Absolute Income Fund enjoyed a strong debut in its new more flexible format. It produced a near 2% return, significantly ahead of cash (+1.3%), ahead of its peers, but marginally behind its income benchmark (+2.1 %). The transition to the new manager structure went relatively smoothly and the new managers (Investec, Prescient and RMBAM) are firmly up and running. We chose these managers because they all have significant experience in running fixed interest portfolios and each brings a different skill to the portfolio - a particular strategy which we think they are the best at exploiting. Their historic track records are impressive and the investment teams and processes they have in place demonstrate depth and thoroughness of detail. We particularly like the fact that each manager has great experience in managing flexible mandates within the scope of the available fixed interest assets / instruments, which was an important component of our research. Together, we believe that their combination in the Fund will allow it to exploit the various sources of alpha in the fixed interest market in a way that produces a smooth return and alpha profile for investors going forward.

Over time we would expect the Fund to deliver positive returns on an annualised basis, whilst accessing higher yielding assets (relative to cash) to provide compelling returns. Over the longer term the income market has produced returns of approximately 8.0% per annum, which we would see as an achievable mid-point of returns that are likely to be produced on a go-forward basis in the new structure. The range for individually good and bad years would likely be between 5% and 12% per annum in normal markets. This makes this Fund a compelling alternative to money market investors who are less concerned about short term liquidity requirements.

There were no changes to the manager weights during the quarter, however, following the transfer and transition of assets we removed the exposure to the SMM Flexible Property Fund, which was included during the transition as a risk management tool. This exposure contributed positively to returns during its time in the portfolio. Looking forward, it appears the market has revised its expectations for the first interest rate hike from Q4 2011 to Q1 2012 on the back of lower than expected growth expectations. This is likely to extend the positive environment for fixed interest asset for the next 6 months. Post that, we believe strongly that the selected managers will be able to successfully navigate the changing market environment.

The STANLIB Multi-Manager Income Feeder Fund will change it's name to STANLIB Multi-Manager Absolute Income Fund, effective from 11 March 2011 and loses its history.

The STANLIB Multi-Manager Bond Feeder Fund merged into the STANLIB Multi-Manager Absolute Income Fund effective from 11/03/2011 and the fund lost its history.

2010 was a great year for South Africa in many respects, positive for the country from successfully hosting the FIF A soccer world cup and very positive for South African investors with most asset classes, barring cash, all performing very well. While 2010 was a good year for asset classes it was by no means a year without its challenges, considering the quantum of jobs shed in the domestic economy as well the European Sovereign debt crisis that almost tipped the world back into recession and financial crisis. The key developments for fixed income assets over the fourth quarter of 2010 was the continued Rand strength specifically during December and more importantly the South African Reserve Bank's decision to reduce interest rates by a further 50 basis to 5.5%, this is the lowest that South African interest rates have been since 1974.

The ALBI 1 to 3 year Income benchmark retumed 1.8% over the quarter, outperforming bonds (ALBI) over the fourth quarter and beating cash by almost 2% over the 12 months ending December 2010. The Income Portfolio had a good quarter outperforming both the benchmark and the average of its unit trust peer group ending the quarter in 4th position out of 12 portfolios. At underlying portfolio level, Cadiz did very well, outperforming the benchmark comfortably. Prescient had only been recently included into the portfolio, does not have a full 3 month track record but has done well since inception with its defensive positioning. The Cadiz mandate has been enhanced, making the mandate more flexible, this strategy has already yielded good results in performance since the change was implemented. Cadiz cunrently holds approximately 10% in cash, no govemment debt exposure and a large exposure to credit.

Prescient have been concemed about the unprecedented level of foreign investment into the SA bond over 2010 and remain concemed about the potential of a spike in yields should foreign flows reverse dramatically. This is largely what transpired during the fourth quarter, handsomely rewarding Prescient's defensive positioning. Prescient remains defensively positioned with a large exposure to money market instruments with floating rate notes and credit being the preferred assets.