The fund finished a phenomenal one-year period to end September by producing a 12-month return of over 12% versus a cash return of around 7%.

Falling bond yields, tightening of corporate bond spreads and declining money market yields, coupled with decent performance from the property sector and preference shares, all helped to contribute to the fund's strong performance.

After moving sideways for over nine months of the year to end June 2010, the past 3 months have seen very strong performance from the SA bond market predominantly driven by foreign inflows and declining inflation. Over the past 12 months the All Bond Index (ALBI) has generated a return in excess of 15%, with inflation-linked bonds producing 10% and cash just over 7%.

Aggressive foreign buying of SA bonds continued during the month of September bringing the year-to-date foreign investment into bonds to around R70 billion. This flow appears to be on the back of large scale investment into emerging market bond funds by offshore investors in search of yield. These funds in turn invest in the individual underlying emerging markets of which SA is one. A further by-product of this foreign investment flow has been for the rand to strengthen, which has had the resultant effect of subduing inflation to most recently recorded levels of 3.5% year-on-year in August. Because the fall in inflation over the past few months significantly exceeded expectations, the result has been a bull market in local bonds over the past three months.

The global search for yield has its roots in very low US bond yields, which have fallen further over the past few weeks on rising expectations of another round of quantitative easing.

The positioning in the portfolio remains one of running a low duration. We have been accumulating a number of floating rate assets as well as holding approximately 16% in inflation-linked bonds. This view is predominately based on the fact that we are at or very near the bottom of the current inflation cycle and that inflation is likely to be closer to 5.5% one year out. Where we do hold bonds, it is in the corporate space and in the belly of the curve, namely the 5-year area. We continue to see value in good quality corporate bonds trading at what we believe to be very attractive spreads over government bonds. The preference share holding in the portfolio has been halved after their strong run and we continue to see pockets of value in the property sector where our holding currently sits just below 5%.

Portfolio managers
Mark le Roux and Tania Miglietta

Bonds returned 0.27% in June, short of the cash return of 0.56% and lagging well behind inflation-linked bonds which returned 1.3%. The fund returned 0.9% for the month.

The past quarter was largely dominated by a combination of global fears about sovereign debt (especially in the European peripheral countries), and domestic news that suggested a combination of the economic recovery taking hold, with CPI inflation coming in lower than forecasted.

Although the massive IMF/EU rescue package announced in May helped stem the spiral that had been seen in peripheral euro markets in general and Greece in particular, it is clear that these economies are by no means out of the woods. Bond yields remain at elevated levels historically.

Support for local bonds has come from a number of sources. As with other emerging markets, SA has also seen inflows. Foreigners bought a net R33 billion worth of local bonds in the first six months of 2010. This has clearly been a source of support for local bond yields, helping offset the increased supply associated with SA's currently large budget deficit.

Local news has generally been positive for bonds. The 'Goldilocks' outlook that we alluded to some time ago has materialised, with CPI inflation surprising most initial 2010 forecasts on the downside while growth has exceeded initial expectations. CPI printed at 4.6% in May, comfortably in the middle of the target range and GDP grew by 4.6% in the first quarter, with export sectors as well as domestic consumption showing a rebound. This in turn has been positive for the fiscus, and the indications so far this year are that the Budget deficit will come in significantly below the initial Treasury estimate of 6.2% of GDP. This should help relieve funding pressure.

While CPI is expected to still fall slightly from its current levels, we think the bottom is near. A potential rise in CPI (especially if the rand weakens) combined with stronger domestic demand and already very low real interest rates, leads us to think that further interest rate cuts are unlikely. Rather, the next move is deciding when factors will combine in such as way as to induce the SA Reserve Bank to start hiking rates (although such a move is probably a year away yet).

The 3-month JIBAR (Johannesburg Interbank Average Rate) rate remained at 6.6% during the quarter. There has been strong demand for floating rate investments given the current low point of the interest rate cycle. In response to this demand issuance in 2 - 4 year floating rate notes has been strong. The fund holds 35% in floating rate notes or bonds which in the current credit conditions pay an attractive average spread of 1.5% over the JIBAR reference rate. These act as a good interest rate hedge when interest rates rise.

Preference shares had a good start to the year, but after their early rally they have remained flat for the quarter. Clean yields range between 7.5% - 8.5%, attractive relative to money market yields. The fund continues to hold a core holding in these.

Listed property took a breather after a very strong start to the year, returning 0.6% for the quarter. Despite the general sense that vacancies and lease renewal rates are under pressure, signs of an improvement are gradually coming through. Property clean yields average around 8.9% and growth prospects for the sector remain positive although short-term volatility can be expected as macroeconomic variables remain uncertain. Inflation-linked bonds had a good quarter, returning 5.1% versus nominal bonds returning 1.1%. The fund holds 15% in these inflation-hedging investments as a core holding.

Portfolio managers
Mark le Roux & Tania Miglietta

The Coronation Strategic Income Fund returned 1.3% for month of March and 3.55% for the quarter.

Bond yields have been in a general downward trend since mid-January, a trend that was maintained in March and which gained in momentum following the SARB's decision to cut the repo rate by 50 basis points (to 6.5%) at the MPC meeting on 25 March. The SARB's move, which had not been fully discounted in the markets, was enabled by a combination of lower-than-expected inflation, and generally still soft economic data as well as continued rand strength which bode well for further disinflation. At this stage, we believe that most of the expected good news is factored in and our base case would be for rates to remain on hold for the remainder of this year.

Inflation re-entered the 3% - 6% target range in February at 5.7% (data released in March), which was sooner than many had expected. We think that underlying trends in consumer inflation look positive at the moment; there seems to be an absence of any significant demand-side pressure, while a broad number of categories continue to show beneficial influences from the currency. We think CPI could fall to around the mid-point of the target range during the course of this year. Movements in the rand will continue to be crucial and a reversal of rand strength remains a key risk.

Although growth has undoubtedly bottomed and is moving noticeably higher, this so far seems to be led principally by manufacturing (linked to exports and the global recovery) and domestic car sales (coming off an exceptionally battered base).

The generally positive domestic news was underpinned by a move lower in emerging market spreads over March as well. However, another latent risk for both SA and emerging market bond yields in general arises from the US bond market, where yields have recently moved higher on a combination of stronger growth data and large supply, even despite expectations of interest rate rises being pushed out as core inflation surprises on the downside. As quantitative easing programmes start being wound down, we expect that supply issues will continue to dominate US and other developed bond markets - and at some stage, though now it is looking more likely to be in 2011, major central banks will have to start reversing emergency low levels of interest rates as well. It is thus difficult to see an outcome where global bond yields do not continue rising into 2011, and this will almost certainly have an impact on SA yields as well.

We thus remain in a position of largely balanced risks, where shorter-term domestic outcomes have been positive for bonds (and may be so for some months yet), but where there are concerns about the longer term.

The property stock weighting has been maintained in line with our view that property would continue to perform well, and indeed it has during the quarter.

Preference shares also had a good run this quarter returning 7.75%. The fund holds a wide spread of bank and corporate preference shares which contributed positively to the fund's return.

Inflation-linked bonds (ILBs) were a little disappointing this quarter. Given that inflation is falling the full benefit of these is not being felt at the moment but ILBs provide long-term inflation protection which we seek as inflation is cyclical and will rise again over the longer term. The fund returned 3.55% for the quarter and 10.96% for the year whilst money market fund yields averaged 7 - 8%.

Portfolio managers
Mark le Roux and Tania Miglietta

Bonds, which returned 1.1% for the quarter, had a very disappointing year, achieving a paltry negative 1% and underperforming cash by close to 10%. Inflation-linked bonds, although having returned just less than cash for the year, had a positive quarter. The combination of an improved inflation outlook as well as continued significant supply of inflation-linked bonds weighed heavily on the asset class and real yields traded higher.

The proverbial 'elephant in the room' continues to be the extreme oversupply of bonds to the market as large auctions for new government debt are announced weekly. During November the National Treasury stepped up its nominal bond funding requirement to R2.1 billion, and its inflation-linked bond issuance to R600 million per week. This R600 million face value equates to a cash outlay of around double that of the nominal amount. The numbers add up to billions needed each month. Added to that is the continued state-owned enterprise (SOE) issuance such as Transnet, Eskom and the Development Bank of South Africa.

Balanced against the negative story from the supply side is the improving trend in the inflation outlook. We ended 2009 with a year-on-year CPI figure for November of 5.8% - now within the 3% - 6% target range for the second consecutive month. Continued rand strength coupled with weak money supply and negative private sector credit extension bodes well for the inflation outlook for 2010.

Despite the positive inflation story, the heavy bond supply has prevented the bond market from responding positively.

Risks to our relatively benign inflation outlook in 2010 come from a potential unwinding of the base effects of the lower food and fuel prices experienced in 2009, uncertainty over electricity price increases and the chance of a severe bout of global risk aversion which could result in a sharp retracement in the rand.

The portfolio holds around 15% in inflation-linked bonds, most of which were issued by corporate entities and provide additional yield which adds to the overall return during a time of flat to falling inflation. We will continue to hold these for the long term given the favourable yields at which they were issued.

During the quarter we continued to hold a relatively low weighting in property due to the lower relative yields available in these stocks. We kept the holding to preference shares stable. We see value in the preference share market which is yielding between 8% - 10%. This sector contributed favourably to the fund's return both for the quarter (6.1%) and for the year (14.9%).

The fund is currently yielding 8.9%.

Portfolio managers
Mark le Roux and Tania Miglietta