The fund returned 1.2% in June. This brings its third-quarter performance to 1.9% and its return for the 12-month period to 7.9%; still well ahead of cash. The fixed interest market reversed its losing streak of the previous few months in September, and recorded the first positive month since May of this year. The All Bond Index (ALBI) rose 3.90% in September, beating cash (+0.43%) and inflation-linked bonds (+2.91%). Long-dated bonds were the better performing area of the curve, running well ahead of the short end. Vanilla bonds were the superior performers for the quarter, returning 1.9%, compared to cash (+1.3%) and inflation linkers (+1.2%). This latest uptick improved the longer-term performance of vanilla bonds; however, the ALBI is still lagging inflation linkers and cash over the 12-month period. In line with the trend of the past few months, the local bond market took its cue from developments around quantitative easing (QE) in the US and its expected scaling back in the near future. After much talk of QE tapering since May, the market had largely expected that it would be announced at the September meeting of the US Federal Reserve (Fed). However, the Fed's decision to not start tapering as yet, prompted a rally in US Treasuries as well as in emerging market currencies and bond markets (including South Africa). Compared to the levels of US Treasuries before the Fed's initial tapering announcement in May, the US bond market still sold off aggressively; QE may not have been scaled back at the September meeting, but its reduction is still expected at some point down the road. Further to the delay in action by the Fed, gridlock in Washington DC returned as a focal point in the markets. The US government has (at the time of writing) gone into shutdown, as Republicans and Democrats failed to find common ground to pass a budget for the upcoming fiscal year. Implications for US growth stemming from this development risks having QE remain in place for some time still, possibly delaying the normalisation in yields across global bond markets. While the market has gyrated amidst the fanfare surrounding the prospects of QE tapering and its subsequent non-delivery at the September meeting, local fundamentals have either remained stuck in poor territory or worsened. The current account print for the second quarter registered 6.5% of GDP (from 5.8% in the first quarter). Furthermore, the trade deficit remained wide in the first two months of the third quarter; making prospects for the third-quarter current account number look bleak. This should continue to keep the rand under pressure, especially as South Africa has one of the widest current account deficits among emerging markets. Meanwhile, GDP is poised to remain soft this year and does not bode well for fiscal revenues. Against fiscal expenditure that remains sticky, prospects for the fiscal deficit are not promising. The latest monthly prints for the fiscal balance remain worrying. The upcoming Medium Term Budget Policy Statement (MTBPS) in October will likely reveal some deterioration in the fiscal metrics, implying that National Treasury's funding requirement will continue to be under pressure. Amidst the deterioration in the twin deficits, consumer inflation (CPI) rose during the third quarter. In July, CPI breached the upper end of the South African Reserve Bank's (SARB) target band, printing 6.3% year-on-year, and rose further to 6.4% in August. The SARB expects this inflation breach to be limited to the third quarter, but has increasingly struck a hawkish tone in response to inflation expectations lying at the upper end of the target band. The SARB has emphasised that it sees inflation risks biased to the upside and will react appropriately should the inflation outlook deteriorate further. We expect CPI to be around or over 6% for much of the next year and agree that risks remain tilted to the upside. With inflation ticking higher (leading to lower real interest rates), and with the generally weaker rand, the SARB's monetary policy stance is becoming more accommodative. While the market is pricing in some normalisation in policy - about 150 basis points of interest rate hikes are reflected in the FRA curve to the end of 2014 - the start of this policy normalisation is difficult to anticipate, especially in an environment where QE might still be in place for longer than expected. However, the SARB's recent statements provide some comfort that monetary policy will react appropriately if inflation outcomes increasingly print above 6%. In this muddied environment, with uncertainty around the end of QE (or the return of sustainable US growth), global factors are likely to continue to drive market direction. However, the market is not oblivious to the state of local fundamentals in emerging markets, as highlighted by the August selloff in emerging market currencies and bond markets with worrisome fiscal and/or balance of payments metrics (the 'fragile five'). Given that South Africa is part of this grouping, we remain cautious of a further sell-off, though the scale will likely not be as extreme as the rout seen in the second quarter. After lying in expensive territory for some time, local bonds have weakened aggressively in the second and third quarters of 2013. While current bond yields are closer to fair value than at the beginning of the year, there is probably room for further weakness. Fundamentals are still poor and the market remains vulnerable to global risk sentiment. What is more certain is that the eye-watering bond market returns of the cheap money era are behind us. The rising liquidity tide is no longer lifting all boats and South Africa's poor fundamentals in an emerging market context leave our bond market among the more exposed. The property market outperformed bonds as the sector registered a positive performance of 6.7% in September, but the yield gap between property stock yields and current 10-year government bond yields contracted due to the rally in government bonds in September. We continue to maintain a modest holding in property as overall yields in the sector are not as attractive as yields on other comparable assets; however, we will look to add to our current holdings in a yield or rand-led sell-off. We continue to favour preference shares for their steady dividend yield, and will continue to opportunistically increase our holdings in the fund. Preference shares are linked to the prime rate and currently yield between 7% and 9.5%, depending on the riskiness of the issuer (subject to a 15% Dividends Tax depending on the investor entity). The change in capital structure requirements as mandated by Basel III for many of the issuing banks will also lead to decreased issuance and preference share availability (and possible buy backs), which will increase their attractiveness. The recent spike in rates out to 5 years on bank funding curves presented an attractive opportunity to lock in high nominal rates for the fund. We used this opportunity to increase the fund's exposure to 3-year NCD's as we believe that the levels reflected correctly represent the risk premium required for holding such instruments, as well as having a sufficient buffer against any major inflation spike. Furthermore, in the short term, we believe that the market has priced a much too aggressive rate hiking cycle, especially given recent SARB rhetoric about requiring a much more significant breach of the upper end of the inflation target band before acting on rates. However, we remain wary of longer-dated bonds and as such continue to protect against the duration risk by holding hedges in place against our longer corporate bond holdings in the fund and opportunistically increasing these hedges as the valuation opportunities present themselves. We have been cautioning for some time that global fixed income assets were overvalued and that the rand was vulnerable, being buoyed by liquidity-related flows in the face of weak domestic fundamentals (including the twin deficits and the socio-political situation). Sentiment may well keep the currency relatively weak, especially against a backdrop where the current account deficit remains wide and general sentiment towards emerging market and commodity currencies appears to have turned. Under the combination of current domestic and global factors, we certainly expect the rand to remain relatively volatile and therefore remain vigilant on maintaining a decent portion of offshore exposure as and when the right opportunity presents itself. Our view to managing the portfolio remains cautious and we continue to invest in assets and instruments that we view to have the correct risk and term premium embedded in them so as to limit investor downside and enhance yield.

The fund had a testing month, returning -0.4% in June. This brings its second quarter performance to 0.9% and its return for the 12-month period to 9.4%, still well ahead of cash. The last couple of years has seen exceptional performance in global fixed interest and associated assets. Stimulus packages in the form of 'free money' from global central banks have fuelled investor appetite for riskier assets and contributed to the tightening of credit and sovereign spreads globally. The fund has endeavoured to ensure that investors benefited from the rising asset prices as is evident in the fund's exceptional performance over the last few years. However, we have been warning for some time that these were far above normal market returns and investors needed to moderate their future return expectations. In June we saw a continuation of the sell-off in fixed interest assets together with an onerous spike in asset price volatility. The further sell-off in bonds in June took place despite some stabilisation in the rand over the month (around the R/$ 10 level). The weakness came against the background of a rise in global bond yields. US 10-year treasury yields rose sharply from 2.17% to 2.49% over the month as the market's nervousness over the potential withdrawal of support from the US Federal Reserve became clear. The anxiety extended into emerging markets, which saw some significant redemption by foreigners. This was also the case in South Africa, with net foreign sales totalling R10.6 billion in June (following a R3.7 billion net outflow in May). This resulted in the first quarterly net outflow being recorded since the first quarter of 2011. Inflation-linked bonds (ILBs) were particularly hard hit during June. With the rand remaining weak (albeit stabilising) in June and the South African Reserve Bank (SARB) stating towards the end of the month that it would not act preemptively against inflation, it is hard to fathom that complacency about South African inflation was the primary reason behind the poor performance in domestic ILBs. Rather, we think a significant part of the move was due to the global back-up in real yields, and the chart below shows how real yields in South Africa have recently moved in tandem with that of the US. With breakeven inflation being below 6% in the belly of the curve, implying that the market is too optimistic on inflation versus our expectations, we think that ILBs continue to offer value and thus would not be sellers at current levels. We'd note that despite the sharp fall in June, leading to ILBs underperforming year to date, on a 12-month basis they still show significant outperformance versus both nominal bonds and cash. Since the inflection point in yields in mid-May, we have seen nominal bonds (as reflected in the performance of the All Bond Index) down 7.23%, while ILBss are down 10.11% (as reflected in the RMB Inflation Bond Index) despite a 6.7% weakening in the currency over the same period. This makes ILBs look very attractive from a valuation perspective as breakeven inflation (the difference between nominal and ILB bond curves) suggests inflation at or below 6%, which is marginally up from levels before the start of the weakening trend in the rand. The front end of the interest rate swap curve has remained extremely volatile as expectations on interest rate adjustments by the SARB have changed dramatically over the last two months. This volatility has been exacerbated by local and offshore fast money positioning in the FRA market. The market has gone from pricing a 50bps interest rate cut in mid-May to almost three interest hikes by mid-June, before settling (as at the end of June) at expectations for a single interest rate hike by the fourth quarter of 2013. Given the recent rhetoric from the SARB and sizable downside risks posed to global growth, we view this as slightly aggressive and do not expect the SARB to adjust the repo rate till 2014. We think there are a few points that need to be made with respect the SARB's current monetary policy rhetoric. The first is that as inflation rises, policy is already becoming more accommodative as real interest rates fall - in other words, if the SARB leaves the policy rate unchanged against rising inflation, it is in fact easing (not maintaining) policy. Secondly, inflation expectations (as per the Bureau for Economic Research survey) are nudging up, now between 6% - 6.1% for the next few years. If history is anything to go by, these will rise as inflation itself does. Thirdly, and possibly most importantly, is the clear implication that the SARB is more willing to make a policy error that results in higher inflation than one that results in lower growth (even though interest rates are not the factor inhibiting growth at present). The property market has outperformed bonds as the sector registered a positive performance of 4.4% in June, which further opened up the yield gap between property stock yields and current South African government bond 10-year yields. Foreign holdings in local property stocks remain quite low relative to government bonds (13% versus 38%), which helped the rerating between the two sectors. We have used the outperformance in June to reduce our holdings in property from 4.5% to 3.7% as we still view the sector to be overvalued and that the risks from a further sell-off in property has heightened due to the rise in government bond yields. We continue to maintain a modest holding in property as overall yields in the sector are not as attractive as yields on other comparable assets. We continue to favour preference shares for their steady dividend yield, and have increased this holding to around 4% of fund. Preference shares are linked to the prime rate and currently yield between 7% and 9.5%, depending on the riskiness of the issuer (subject to a 15% dividends tax depending on the investor entity). The change in capital structure requirements as mandated by Basel III for many of the issuing banks will also lead to decreased issuance and preference share availability (and possible buy backs), which will increase their attractiveness. The recent spike in rates out to the 5 year area of the bank funding curves, presented an attractive opportunity to lock in high nominal rates for the fund. We used this opportunity to increase the fund's exposure to 5-year NCDs (between 8% and 8.5%) as we believe that the levels reflected correctly represent the risk premium required for holding such instruments as well as having a sufficient buffer against any major inflation spike. Furthermore, in the short term, we believe that the market has priced a much too aggressive rate hiking cycle, especially given recent SARB rhetoric about being more tolerant of inflation breaching the top end of the target band. However, we remain wary of longer dated bonds and as such continue to protect against duration risk by holding hedges in place against our longer corporate bond holdings in the fund. We have been cautioning for some time that global asset markets were overvalued and that the rand was vulnerable, being buoyed by liquidity-related inflows in the face of weak domestic fundamentals (including the twin deficits and the socio-political situation). Sentiment may well keep the currency relatively weak, especially against a backdrop where the current account deficit remains wide and general sentiment towards emerging markets and commodity currencies appears to have turned. Under the combination of current domestic and global factors, we certainly expect the rand to remain relatively volatile and therefore remain vigilant on maintaining a decent portion of offshore exposure as and when the right opportunity presents itself. Our view to managing the portfolio remains cautious and we continue to invest in assets and instruments that we believe have the correct risk and term premium embedded in them so as to limit investor downside and enhance yield.
Portfolio managers
Mark le Roux and Tania Miglietta Client

The fund enjoyed another good month, returning 0.93% in March. This brings its first quarter performance to 2.13% and its return for the 12-month period to 11.98%, still well ahead of cash. The fund's performance was favourable compared to the All Bond Index (ALBI), which eked out a 0.24% return in March and a 1% return for the first quarter of the year (which lagged the cash return of 1.3%). Inflation-linked bonds (ILBs) delivered a better performance than bonds, returning 1.57% in March and 1.84% for the quarter. ILBs also remain the best performer in the South African fixed interest universe over longer time periods. South African bonds were quite resilient in a quarter that included mostly bad news for the bond market. As will be discussed later in this commentary, continued foreign inflows have been supporting the market, whereas local fundamentals presented a backdrop of overall negative news flow. The rand exhibited a significantly weaker tone over the quarter. It ended calendar 2012 at R/$ 8.40 and weakened to a worst level of around R/$ 9.32 during March before recovering slightly to close the quarter at R/$9.23. The revival of eurozone worries as a result of the problems in the Cypriot banking system did not help our currency, but the main reason for rand weakness lies with local fundamentals and in particular, the trade/current account deficit. The current account deficit totalled 6.3% of GDP in 2012, having respectively reached 6.8% and 6.5% in the third and fourth quarters of the year. The slight narrowing of the gap is not very comforting considering the size of the deficit. In January and February we were presented with particularly glum trade deficits, which are starting to be the worst on record. While the current account may be past its worst, the ongoing wide deficit will continue to leave the rand vulnerable. The rand was the worst performer among the major emerging market currencies in the first quarter of the year, a period marked by some significant divergence in currency performance and an indication that fundamentals (rather than global risk appetite) are becoming more important. Even before one could really expect to see any impact from the first quarter currency weakening, CPI has risen to just under the upper end of the target range at 5.9% in February, partly due to some passthrough from the rand depreciation seen last year. Notably, this rise in the overall CPI number has occurred despite recent softer to stable food and energy inflation - by contrast, core inflation has been rising. We maintain our view that CPI will breach the upper end of the target in the next month or two, and we expect it to remain above target for most of the rest of 2013 and into early 2014. The 2013 budget speech was delivered on 27 February, and the wider deficits budgeted for necessitated upward revisions to the bond market funding requirement, which put some pressure on bond yields, especially at the longer end. Weekly bond auctions (starting April) in the new fiscal year have been increased as a result of the higher funding requirement. Concern remains about the slow pace of fiscal consolidation in South Africa, especially compared to the progress that many other emerging markets have made on this. All the above notwithstanding, foreigners continued to buy South African bonds, in line with continued global flows into the emerging market bond asset class. We continue to believe that the South African bond market, like most bond markets around the world, is stretched in terms of fundamental valuation at present and that the risks are skewed towards a weakening. Global bond markets are being supported by the current 'ultra easy monetary policy', including quantitative easing, and the resultant flush of liquidity is buoying emerging markets too. However, when liquidity is the principal factor supporting markets then they are always vulnerable. A number of key factors for the South African market include US bonds, global risk appetite, the rand, the fiscus and inflation. Added to these factors is heightened political risk, shown more recently by labour market unrest (which in turn harms exports and also renders the rand more vulnerable as a result). We thus believe that the balance of risks is skewed towards higher yields. This may however continue to be mitigated in the shorter term by a continuing dovish stance by the South African Reserve Bank (which remains very concerned about growth) and foreign inflows. The fund is well positioned for this riskier scenario, with a large holding in instruments that benefit as inflation and ultimately interest rates rise. These instruments include floating-rate NCDs, floating-rate corporate bonds and inflation-linked bonds. The fund has held this position for some time, but the pressure for yields to rise is increasing and the fund will benefit if they do. With a duration of 1.2 years, excluding inflationlinked bonds which are long duration and thus increase it to 2.0 years if included, the portfolio has limited exposure to nominal fixed-rate assets. The FRA curve, which prices in short-term interest rate expectations over time, has for the first time in a while started to price out any further interest rate cuts, factoring in a greater probability of repo rate hikes down the track. The fund's property position continues to contribute positively to the fund as the sector has seen ongoing support. February saw an onslaught of company results releases with the sector delivering a pleasing 9.3% distribution growth. The results season pointed to a few noticeable trends such as vacancies having either stabilised or fallen due to the funds disposing of weaker properties, many to the smaller, competing funds. Retail and industrial vacancies remain the lowest within the sector and below their historical average. Overall the sector appears to be in good health and providing decent yields for investors. The sizeable corporate bond position has benefitted the fund as credit spreads have contracted enormously since they were bought. We continue to observe spread contraction as investors scramble for better yielding instruments and continue to pay up for this. After a quiet start to the year, March became busy with new corporate bond issuances when Investec Bank, Mercedes Benz, SABMiller, Vukile Property, Eskom and PPC all issued bonds, some for the first time. Bidto- cover ratios were high, indicating strong investor appetite, however, in most cases we viewed the pricing to be expensive and thus participated only in select names where we saw value. Money market interest rates remain low, but we note that as the FRA curve has risen, fixed-rate NCDs have started to tick slightly higher as has the 3-month JIBAR, now at 5.125% (versus the repo rate of 5%). This indicates that the downward pressure on interest rates appears to have abated. The fund has provided a total return (capital gain and yield) which has comfortably exceeded cash over the last number of years. For us the challenge going forward remains to try to maintain a favourable outperformance of cash in a world where interest rates are suppressed and overall yields remain low.

Portfolio managers
Mark le Roux and Tania Miglietta

Please note that under a new fund classification system for the unit trust industry, effective 1 January 2013, the fund has been included in a new category, South African - Multi Asset - Income (previously Domestic - Fixed Interest - Varied Specialist) to better reflect the nature of the underlying assets. Client Service: 0800 22 11 77 Fax: (021) 680 2500 Email: [email protected]

The fund had a particularly good year, returning 11.9% for the 12-month period and 2.8% for the quarter. Given the fund's target of cash plus 2% we were pleased with this year's return, which was double the return generated by cash. Bonds delivered an impressive performance this year, with the All Bond Index returning 16% and inflation-linked bonds an even better 19.4%. Money market rates, now at a historic low, returned 5.6% for the year. The annual bond market return is particularly good if one considers the less than impressive domestic fundamental backdrop in 2012: inflation averaging in the higher end of the target range; wider than budgeted fiscal deficits and an increase in the funding requirement as a result; credit rating downgrades; and the significantly weaker rand in the final quarter of the year. However, the global environment came to the rescue in 2012. Despite the bouts of risk aversion, the global search for yield - also underpinned by South Africa's inclusion in the Citigroup World Government Bond Index in October 2012 - saw large flows into the local bond market. Net foreign purchases of local bonds totalled a record R85 billion for the year. And as elsewhere, the market benefited from accommodative monetary policy, which anchored the short end of the curve and incentivised investors to increase their risk in order to gain more yield. The outperformance of inflation-linked bonds seemed to stem both from understandable inflation concerns (given accommodative policy and the weaker rand later in the year), as well as a positive global environment for these bonds (the chart below shows real yields in South Africa closely shadowing trends in the US). In a world where real cash rates are negative, guaranteed real returns are prized to such an extent that in South Africa, the two shortest-dated inflationlinked bonds were both trading at negative real yields by year-end. Looking ahead, the crystal ball remains murky. We are of the view that the domestic fundamentals for South African bonds remain somewhat negative. The government bond funding requirement remains large: a net R136 billion for 2013/14 fiscal year. The inflation outlook is not encouraging, where pass through from rand weakness will put pressure on CPI and we expect there will be a net upward effect from recent changes to the reweighting of the CPI index. All in all, we expect to see CPI breaching the upper band of the target range this year. We do not see much scope for another rate cut in 2013, as rising inflation offset any worries about poor growth, especially while policy already remains accommodative. The fund continued to attract large inflows during the quarter, which were largely invested in bank floating rate notes; an area of the curve that still provides good value to investors. The outlook going forward is for diminishing returns as we face a low interest rate environment with prospects of it remaining low for some time to come. South African government bond yields to maturity range between 5.3% and 8%, but to earn 8% p.a. investors would be stretching out term to maturity to 2041, thus taking on substantial interest rate risk. Longer-dated floating rate notes currently yield 6.1% with preference shares 6.8%, and listed property at around 6.8%. The picture therefore is for lower yields and reduced overall returns. The fund continues to hold significant exposure to non-rand assets. This part of the fund offers protection against a weaker bond market and comes through as a capital gain should the rand weaken. The fund's strong past performance can be attributed to ongoing positive outcomes in nearly all of the assets classes in which we participate, most of which is unlikely to be repeated going forward. In 2012 we saw a surprise repo rate cut in July, further inflationlinked bond real yield compression, further corporate bond spread compression, overall bond market strength, rand weakness off a low base and a soaring property market - all of which contributed positively to overall fund performance. Going forward we maintain the current fund duration of 1 year, appropriate for this point of the interest rate cycle. We continue to position the fund in a conservative way, focusing on protecting capital, taking profits where appropriate and seeking to maximise yield in a challenging market where yields are very low.

Portfolio managers
Mark le Roux and Tania Miglietta Please