The STANLIB Bond Fund garnered excellent performances, retaining the top-performer position in its category over one, two, and three year major measurement periods. Over the 12 months period ending 30 June 2005, the Fund outperformed the All Bond Index benchmark by 3.5%, returning 23.6%. Compared to the other funds in the same category, the Fund outperformed the next best fund by 2.70% over the 12 months period. Yields on the benchmark RSA 2010 (R153) started the quarter at a high of 8.35% and traded a low of 7.48% before closing at 7.57%. During the quarter the weight composition of the All Bond Index benchmark changed after most bonds migrated to a different sector of the Index, which resulted in the Fund showing an overweight position in the 3-7 years area of the Index. The Fund, however, maintained its bullet strategy in the middle sector of the yield curve. The Fund liquidated ABSA and Standard Bank 2010 papers and used the proceeds to purchase Barlow World 2011, Rand Water 2012 and Standard Bank 2015 papers. Some of the proceeds were used to purchase longer dated RSA government debt. During the quarter the SARB cut the repo rate in April by an unexpected 50 basis points, tilting the trade in favour of further yield compression. Although yields compressed, the yield curve was relatively steep over the quarter as more issuances occurred in the long-end. In June, the SARB left rates unchanged, in line with market consensus. Concerns about future inflation creeping back increased over the quarter due to the Dollar oil price and the Rand moving higher. The view is for rates to remain relatively sideways as the SARB is expected to keep rates unchanged for longer.

The STANLIB Bond Fund remained the top-performing Fund in its category over the one, two, three and five year major measurement periods. Over the 12 months period ending 31 March 2004, the Fund outperformed the All Bond Index benchmark by 2.0%, returning 17.2%. The Fund outperformed the next best Bond Fund by 1.2%. During the first quarter, the bond market was volatile, with the RSA 2010 (R153) bond trading a wide range, with a low of 7.38% and a high of 8.35%. The All Bond Index benchmark was reconstituted during the quarter, when the RSA 2006 (R152) was removed from the index and new longer dated bonds were introduced, resulting in the modified duration of the index increasing by approximately 50 basis points. The Fund acquired a new holding of Barlow World 2011 paper, which was funded by the sale of RSA 2008 and ABSA 2010 holdings. Some of the sales proceeds were used to fund outflows during the quarter. The preference shares holding were all disposed from the Fund during the quarter. Towards the end of the quarter, the bond market yields drifted higher from its all time low, shadowing weaker movements in the Rand and stronger oil prices. The yield curve steepened significantly over the quarter on fears that higher oil prices coupled with Rand weakness will translate into inflation in future. The MPC left the repo rate unchanged during the quarter, preferring to err on the side of caution. The Government continued to fund mainly in the long end of the yield curve.

Modified Duration: 4.84

All bond managers aim to beat the total return of the Bond Exchange of SA's all bond index (Albi). For the period of the past three years this has meant beating 60,9%, a target only one in five funds has exceeded. Over the past 12 months the target was 14,7%, a level only seven out of 17 funds managed to surpass.

Patently the Albi is a tough adversary, yet it's one that Stanlib Bond Fund (SBF) manager Henk Viljoen has beaten consistently by a good margin since the fund's launch in March 2000. Essential to his success has been the correct reading of shorter-term market trends, which demands fine-tuning the fund portfolio's average duration relative to that of the Albi's structure.

Duration indicates the portfolio's sensitivity to rate movements. For example, as bond rates rise, bond prices fall and, ideally, when this occurs the average duration of the portfolio will be below that of the Albi, thus reducing capital losses. Similarly, when rates fall, a duration longer than the Albi's will produce above-average capital gains.

Far easier said than done. This was especially true in 2004, when there were big swings in investor sentiment. In the first half of the year the general view on bonds was bearish and the Albi produced a negative 3% total return between January and mid-May.

"Fortunately we ran a shorter duration [than the Albi] in the first half of last year," says Viljoen.

But in midyear sentiment began turning positive . Again, Viljoen was positioned correctly, having taken SBF's duration above the Albi's.

Viljoen says value was also added by solid exposure to parastatal bonds and Investec's IV01. These bonds were rerated, which resulted in their yield falling (and thus their price rising) by more than the market average.

At present Viljoen is playing it safe. He says SBF's duration is just below the index's, "a position I will maintain for now". He explains: "There are a lot of risks in the market; too many to be too brave." For now the biggest risk is from a weaker rand.

Financial Mail - 18 February 2005

The STANLIB Bond Fund outperformed the All Bond Index benchmark by 3.0% for the year ending 31 December 2004, delivering a year on year return of 18.3%. The Fund is ranked the best performer in its category over the one, two and three year major measurements periods. The bond market traded on a bullish tone during the last quarter as yields descended from a high of 8.82% to a low of 7.70% before closing the year at 7.82%, buoyed by the Rand which closed the year at a six year best level of R5.64, due to a weaker US dollar. Compared to the All Bond Index, the Fund was underweight the 3-7 years sector and overweight the 7-12 years sector of the yield curve, benefiting from the flattening of the yield curve following the SARB MPC leaving the repo rate unchanged. The Fund's modified duration was kept slightly longer than the index. During the quarter two new holdings of Standard Bank and one holding of FirstRand debt were introduced to the portfolios, funded by the sale of RSA Government debt and new inflows into the Fund.

Inflation numbers released during the quarter moved slightly up but remained well within the SARB's targeted range of 6% to 3%, leading the Monetary Policy Committee to leave the repo rate unchanged in the December meeting. The oil price was volatile, going above $50/barrel before settling at $40/barrel, leading to a large decrease in domestic fuel prices. The outlook for interest rates for the next quarter is for sideways movement, with the Rand and US bond yields dictating events.