Fund Review
The second quarter of 2012 saw bond yields disconnect with the Rand and trade lower, with the short end of the yield curve touching all-time lows. The BEASSA ALBI benchmark returned 3.3% for the quarter. The yield on the 2015 R157 government bond opened the quarter at 6.67% and closed the quarter at 6.00%. The 12 month NCD opening the quarter at 6.23% and closing the quarter at 5.90%. Meanwhile, the Rand weakened during the quarter to a three year low of R8.70 as volatility in the market briefly returned before the risk on trade resumed again. The sovereign debt crisis in Europe spread from Greece, Ireland and Portugal to Spain and Italy, placing severe strain on market yields in Spain and Italy, forcing the European government to support Spanish and Italian bonds. The increased demand for South African debt was mainly driven by a record demand by foreign investors who increased the year to date holding of South African debt to R48 billion with R18 billion coming in the last months of the quarter alone. The foreign demand was mainly on the back of South Africa's inclusion in the World Government Bond Index (WGBI). It was also a quarter where headline inflation declined to inside the target range, prompting the market to start discounting a 60% probability of a rate cut in the next meeting. Internationally there was higher demand for US and German government debt as the problems in Europe mounted. The US FOMC also announced further stimulus which allows them to sell shorter dated instruments and purchase longer dated ones of up to 30 years in order to keep the yield curve flat. The SARB MPC left the domestic repo rate unchanged, but issued a more dovish statement in comparison to past statements. This helped to keep the short end of the yield curve well bid. The yield curve started the quarter at 170 basis points and ended the quarter steeper at 192 basis points on the yield differential between the R186 and R157. On the supply side, the government continue to issue longer dated instruments, while also indicating an increased activity in performing switch auctions, where they buyback shorter dated instruments and issue longer dates ones.

Looking Ahead
Looking forward into the next quarter, the market is likely to still be affected by the events in the Euro zone which may have implications for volatility. With Greece out of the radar for a little while, markets may continue to benefit from increased confidence. Domestically, the central bank is expected to leave rates unchanged, although the balance of probabilities favour another cut, given declining inflation and slowing growth. Monetary policy will continue to be accommodative for a considerable length of time.

The STANLIB EXTRA INCOME FUND will invest its assets in South African markets at all times and will be permitted to invest in a flexible mix of non-equity securities, including but not limited to money market instruments, bonds, fixed deposits, listed debentures and other high yielding securities, as well as any other securities which may be approved by the Registrar from time to time and which are consistent with the investment policy of the portfolio, to the maximum levels permitted by the Collective Investment Schemes Control Act, No. 45 of 2002, and the Regulations thereto, as amended from time to time.

This portfolio may have direct and /or indirect foreign exposure up to the maximum as per the ASISA Domestic-Fixed Interest-Income portfolio category from time to time.

Weighted Average Duration of portfolio: Maximum 2 years.

For the quarter under review, the Reserve Bank left its benchmark interest rate unchanged at 5.5 percent, in line with market expectations. However, the Governor of the Reserve Bank's most recent comments reiterate the fact that inflation remains the core objective of Monetary Policy, and that stubbornly high inflation will not be tolerated.

Sustained rand weakness coupled with higher petrol prices continues to have a negative impact on inflation expectations. However, the annual rate of inflation eased to 6.1%y/y in February from 6.3%y/y in January 2012. Nevertheless, the risk remains to the upside, with the increased price of oil and administered prices and their knock-on effects yet to filter through the broader economy.

GDP growth in the fourth quarter of 2011 printed 3.2 percent, slightly better than the market forecast of 3.1 percent. The Kagiso PMI (an indicator of manufacturing activity) decreased slightly to 55.1 in the month of March from a previous rise of 57.9 in February, confirming the moderate growth outlook for 2012.

At quarter end Forward-Rate Agreements (FRAs) assign a 38 percent probability for a rate hike at the MPC committee meeting in May. STANLIB expects that the Reserve Bank will continue to leave the Repo interest rate unchanged for the remainder of 2012; however, core inflation remains the gauge for future interest rate movements.

For the quarter under review, the repo rate was kept unchanged; this was in line with market consensus. The Governor made mention of inflationary pressures and that inflation is likely to peak at around 6.3% in the first quarter of 2012 and is then expected to return within target range in the final quarter of 2012. Inflation pressures emulated mostly from food prices and from high administered prices, thus inflation is of a cost push nature and not demand driven. The monetary Authorities have thus expressed a degree of tolerance to higher inflation. As a result of the debt problems in the Euro Zone the Reserve Bank has also revised growth forecasts down for the South African economy for 2012.This will result in a balancing act for the Reserve Bank going forward to manage inflation with low GDP numbers. The risks to inflation remain on the upside due to cost push pressures.

The Forward Rate Agreement (FRA) curve remains flat, thus predicting rates to remain on hold for the better part of 2012. Market consensus mirrors this view. The money market curve is flat with very little value on a nominal basis between the three month NCD rate and the one year NCD rate.

With the possibility of the repo rate remaining unchanged for the better part of 2012 and with flat money market rates, floating rate notes continue to offer the better value. All STANLIB's money market funds are positioned to take advantage of short term lack of volatility.