Trustees The STANLIB Bond Fund outperformed the All Bond Index by 1.2% for the end of September, returning a year on year return of 11.3%. The Fund is now ranked the best performer in its category over the one, two and three year measurement periods. The bond market traded on a bullish tone during the quarter as yields descended from a high of 9.90% to a low of 8.60% buoyed by the surprise 50 basis point rate cut by the SARB's Monetary Policy Committee in early August. The Fund benefited from its overweight bullet position in the short to middle sector of the yield curve, which performed well due to the normalisation of the yield curve. The Fund's modified duration was kept slightly longer that the All Bond Index to benefit from the rate cut. The Fund's most significant investment was the purchase of Standard Bank Preference shares funded by cash in the portfolio. The Fund sold Investec 2008 and First Rand 2010 paper during the quarter.

Inflation numbers released during the quarter were all benign, lending credit to the SARB's decision to cut the repo rate early in August. Post MPC, the market continued its downward trend, building expectations of another rate cut at the next MPC. The Rand weakened from R6.00 to R6.60 over the quarter. The government continued to fund in the long end of the yield curve at a time when issuance of corporate paper had dried up. The yield curve is expected to flatten as the market stops pricing in further monetary easing.

The Stanlib Bond Fund was ranked the best performing fund over the two-year and three year measurement periods. However, over the one-year period, the performance of the Fund moved into the second quartile.

During the quarter, the bond market traded in a tight range, with a low in yields of 9.40% and a high of 10.29% on the RSA 2010 R153. As the market traded on a weaker bias, the Fund's modified duration was kept short in order to reduce the risk of capital depreciation. The Fund continued to maintain its bullet strategy of being overweight the middle sector to the yield curve. The Fund sold an RSA 2008 investment and used the proceeds to purchase a high yielding corporate instrument issued by Super Group of similar maturity. The Fund also sold a substantial portion of RSA 2014 and TCTA 2016 in order to provide cash for the purchase of longer dated RSA 2017 paper.

The MPC left the Repo rate unchanged in the last meeting, indicating the bottoming out of the interest rate reduction cycle. However, inflation numbers released over the quarter were benign compared to analysts' expectations, providing a real possibility that interest rates may be left unchanged for the rest of this year. The Rand has remained strong for the quarter supporting the view for lower money market rates for longer. The government continued to raise funds in the long end of the yield curve resulting in the curve normalizing.

The Stanlib Bond Fund remained in the top quartile over the one, two and three year measurement periods. This Fund was the result of a merger between the Liberty Bond Fund and the Standard Bank Gilt Fund at the end of February. The Fund returned 12.5% over the last 12 months, outperforming the All Bond Index by 0.2%.
The bond market was volatile during the fi rst quarter of 2004, with the R153 trading in a range of 8.66% and 9.63%. During the quarter, the All Bond Index benchmark was reconstituted over a period of four weeks to smooth out the huge maturity of the RSA 2005 bond, which resulted in the benchmark modifi ed duration increasing substantially. The Fund was traded close to the benchmark-modifi ed duration but with a shorter bias. The Fund maintained its bullet strategy of overweight the middle sector of the yield curve after the merger. A substantial holding of RSA 2010 was sold during the quarter in order to reduce the Fund's modifi ed duration to take advantage of the negative sentiment in the bond market.
The bond market yields drifted higher after the South African Reserve Bank left rates unchanged at their last MPC meeting, which was a clear indication that the Repo rate will not come down further. Infl ation numbers released over the quarter seem to have bottomed out and are expected to move higher. The yield curve has normalised as government funding is expected to be higher than the previous fi scal year.

Stanlib Bond Fund emerged on March 1 with the merger of Liberty Bond and Standard Bank Gilt, both managed by Henk Viljoen. Though he says bond funds deviate little from the bond index, extracting that extra bit of value from the bond market has long been his forte. But 2004 " will be tough", with the interest rate cycle at or near its low and the bond market facing big demands from government, corporates and parastatals later this year.

Due to the STANLIB amalgamation (27 Feb 2004), the Liberty Bond Fund and the Standard Bank Gilt Fund merged to form the STANLIB Bond Fund. The history of the Liberty Bond Fund has been retained.

The Liberty Bond Fund remains the top performing Bond Fund over one, two and three years. The fund returned 18.6% over the 12 months period ending 31 December 2003, outperforming the All Bond index by 0.6%.

Over the last quarter, the bond market experienced some volatility within a tight range of 9.15% and 8.64% on the RSA 2010 bond. Due to the narrow range that the market traded, it was decided to keep the fund's modified duration close to that of the All Bond index. The bullet strategy of being overweight the middle sector of the yield curve, in order to take advantage of further cuts in the Repo rate was retained. During the quarter, a holding of the longer dated Eskom 2020 paper was disposed of, with the proceeds of the sale used to purchase RSA 2014 and 2015 paper. The holding of RSA 2008 paper was also increased, in order for the fund to benefit from the yield curve normalising.

The South African Reserve Bank cut the Repo rate by a further two percentage points at the two MPC meetings held over the quarter. This was in response to inflation embarking on a downward trend, which ended the quarter inside the three to six percent range target. The yield curve aggressively normalised early in the quarter as a result of the cut in the Repo rate and the strong rand. The last Repo rate cut was less than expected, leading the market to temporarily sell off as a result of the SARB erring on the side of caution.