The Liberty Bond Fund continued to be a top performing fund, returning 9.8% over a one year period to 30 September 2002. Bond yields closed the quarter little changed, however, the yield curve inverted significantly.

The modified duration of the Bond Fund was maintained close to the All Bond index during the quarter. Shorter dated Transnet stock and 2010 TCTA bonds were disposed of and the proceeds invested in the longer term 2016 TCTA bond. The fund continued to hold no 2026 R186 bonds, as the bond does not offer fair risk return advantages. However, further inversion of the curve saw the long end of the bond market delivering the best performance.

The lack of supply of paper is negatively impacting on the daily liquidity in the bond market. The balance between negative fundamentals and lack of script has caused a decline in daily volatility. Short term interest rates are expected to remain higher for longer, therefore making bond yields increasingly vulnerable at current levels.

The funds under management increased by 24.0% during the second quarter of 2002 to R653m. The fund was managed to remain relatively close to the All Bond index benchmark with the modified duration at quarter end at 4.6%, 0.1%longer than the All Bond index. The net cash inflows were mainly invested in government guaranteed securities maturing in 2010,however very short and long dated securities exposures were lightened, giving the fund a bullet position in the middle of the yield curve.
With inflation expected to peak towards the end of the third quarter, the bond market is already discounting an easing of monetary policy, however limited scope for rate cuts exists until inflation falls substantially from current levels. The better than expected performance of the fiscus is likely to cap the upside in yields, as the supply from government remains a net drain on the bond market. Given that bond yields are expensive on a relative basis the fund is likely to maintain a position close to the All Bond index.