The size of the Fund at just more than R700m remained relatively unchanged during the past quarter. The duration of the Fund was shortened towards the end of the quarter as oil prices started increasing sharply. The MPC surprised the market by cutting the Repo rate by 50bp. The Money Market yield curve went inverse as the market discounted further interest rate cuts. At one stage the long end of the curve discounted a further 0.5% cut in interest rates. At that point fundamentals were sound, with CPIX at a record low, the PPI barely positive, the Rand remaining strong and the oil price of no concern to Governor Mboweni. All these factors contributed to the bullishness in the market.

Duration in the Fund was kept below benchmark due to our concern on the oil price going forward, as well as the weakness in the current account. STANLIB is expecting interest rates to move sideways to slightly up over the next quarter. This is the weakness in the oil price and its possible effect on CPIX becomes more of a concern.

The Fund was perfectly positioned for what happened during the last quarter. At the beginning of the quarter the Fund had a weighted average duration of approximately 120 days. The Rand came under pressure along with an oil price of over $40 a barrel, which sparked some inflationary fears that led to a steepening of the yield curve. As rates increased and peaked the Fund's duration was lengthened which resulted in an increase of the yield. Towards the end of the quarter the Rand started strengthening from its lows to close below the R6.15 level against the US Dollar at quarter end.

The duration of the Fund will be kept relatively long as there is scope for the yield curve to flatten more, should the Rand continue to strengthen. With call rates at 7.50% and 12 month rates close to 9.00% the long end of the curve is offering value, even if the Repo rate increased by 50 to 100 basis points, which at this point looks unlikely.

The fund's performance for the 12 months to June 2004 was 8.5%.

The liquidity in the market improved during the last quarter, mainly as a result of the coupon receipts and a bond maturity that was paid by the Government on 28 February 2004. This liquidity kept rates at the short end of the market relatively low. Rates at the long end of the market kept on rising as the sentiment in the market changed after the Repo rate was left unchanged during the January MPC Meeting. The fact that Banks are looking to lengthen their funding also contributed to the steepening of the money market yield curve.
The Fund had a weighted average duration of 148 days at the end of the quarter. Factors such as a steepening money market yield curve during the past quarter as well as in the bond market prompted the fund manager to shorten duration. This was done in the view that should rates continue to rise the duration would be lengthened at a later stage at higher levels than what is currently available. The size of the Fund grew to 8.4bn.
The Fund's return for the 12 months to March 2004 was 10.2%.
Duration: 148 days

Due to the STANLIB amalgamation (27 Feb 2004), the Standard Bank Extra Income Fund will be renamed to the STANLIB Extra Income Fund.

The duration of the fund was run down towards year-end on expectations that we were nearing the bottom of the interest rate cycle. Rand weakness was also expected towards year-end that would put pressure on short-term interest rates and the SARB surprised the market by cutting the repo rate by only 50 basis points versus consensus expectations of 100 basis points. Other factors that were considered negative for short-term interest rates was the lack of liquidity over the December month end as well as various banks having their year-ends. The short duration position improved performance as call rates increased to above the Repo rate at the end of December and one year rates went up to 8.05% at year end from a low of 7.15% early December.
Short- term interest rates are expected to move sideways for most of 2004. It is expected to be a volatile year with elections in April and short-term interest rates is expected to be driven by the rand. The fund will be actively managed to make use of the opportunities that may occur in the market over the year.