The STANLlB Bond Fund returned 17.54% vs. the All Bond Index return of 15.34% The overweight position in corporate bonds was maintained during the quarter, which benefited the Fund as the spreads continued to perform well. During the quarter, the Fund covered its underweight position in the 12+ area as demand for longer dated instruments increased, driven by the global search for higher yielding assets by foreigners. The modified duration of the Fund was increased during the quarter to slightly longer than that of the benchmark All Bond Index. This was achieved by switching from shorter dated instruments, including cash, into longer dated bonds.

Looking Ahead
The bond market extended the gains achieved in the first half of the year into the 3rd quarter with the All Bond Index producing a very solid 8.04% return for the three months ended 30 September 2010. The yield on the RSA 2015 government paper ended the third quarter at 7.30%, a full 73 basis points lower than the level at which it traded at the end of June. The main driver for bond yields was the tremendous demand from foreign investors who were in search of high yielding emerging market assets. Interest rates in most of the developed world remain at very low levels and this made emerging market yields particularly attractive. As a result most emerging markets have seen their currencies appreciate substantially against the major currencies over the last year. During the third quarter consumer inflation (CPI) continued its downward momentum and surprised the market by repeatedly posting numbers that were lower than consensus estimates. This positive inflation trend, as well as the rampant Rand, prompted the SARB MPC committee to lower the Repo rate by a further 50 basis points in September. This brings the total reduction in the Repo rate to 600 basis points since December 2008. The market adjusted rather aggressively to this rate cut and bond yields at the short end of the yield curve saw the biggest moves. Global bond yields remain at historically low levels with further monetary quantitative easing expected from major central banks around the world. This should be supportive for domestic bond yields in the short term.

Fund Review
The STANLIB Bond Fund returned 1.70% vs the All Bond Index return of 1.12% for the quarter ended 30 June 2010, benefitting from an overweight position in corporate bonds as they performed relatively better than government debt. In terms of yield curve positioning, the Fund retained its underweight position in the largely underperforming 12+ area of the yield curve and an overweight in the middle sector. The modified duration of the Fund was increased towards the end of the quarter to match that of the benchmark All Bond Index at 5.9 years, achieved by purchasing of debt in the secondary market into weakness. The purchases were funded by a reduction of cash balances in the Portfolio.

Looking Ahead
The bond market managed to produce a positive return for the second quarter. The yield on the RSA 2015 government paper ended the second quarter of 2010 at 8.03% which was marginally up on the first quarter closing of 7.945%. Despite government bond yields drifting slightly higher, the returns for the quarter remained positive as corporate bonds outperformed. There was a fair amount of intra-quarter volatility, which saw yields at one stage touching 8.30%. This volatility was driven mostly by oscillating currencies, particularly in May, as sovereign risk concerns in the Euro zone states, Greece in particular, saw the Euro slip from $1.33/€ at the end of April to $1.22/€ at the end of May and the Rand from R7.38/$ at end April to a worst level of R7.94/$ on the 20th of May. Greece, at one point, was on the brink of a possible debt restructuring, only to survive as the IMF and EU bailed them out. Yields received most of their support from the continued benign inflation trajectory with CPI inflation easing on an annual basis to 4.6% year-on-year in May from 4.8% year-on-year in April. Demand in the bond market was largely driven by offshore investors looking for RSA shortand medium-dated debt instruments. The yield curve ended the quarter steeper as the short end was anchored by a more accommodative monetary policy stance and the long end was pressured by continuous debt supply from the government and state-owned enterprises. The global risk aversion trade is constantly changing, but foreigners seem to be better buyers of local debt into bouts of market weakness rather than sellers into strength. The search for yield in emerging markets continues as interest rates in developed markets remain at very low levels. Currently the view is that the major central banks will err on the side of caution and keep rates lower for longer as fragile economies take tentative steps towards recovery.

Fund Review
The STANLIB Bond Fund returned 1.24% vs. the All Bond Index return of 1.08% for the quarter. The main contributors to the outperformance were the Fund's overweight positioning in corporate bonds, the yield curve positioning and modified duration positioning during the quarter. During the fourth quarter, corporate bond spreads continued to tighten in line with developments in the international markets. The yield curve remained positive during the quarter as more supply from the government continued to dominate the market, leaving the long end underperforming the middle and short end of the curve. The STANLIB Bond Fund has an underweight position in the long end and an overweight position in the middle sector, which benefitted the Fund during the third quarter. The main action on the Fund was to increase the modified duration of the Fund from a short position to benchmark weight as liquidity in the market dried up ahead of the December holidays. This was achieved by switching some shorter-dated bonds for longer-dated bonds, but at the same time keeping the preferred short position in the long end of the yield curve. The favourite value add component is to keep an overweight position in the corporate bond market and maintain an underweight position in the long end of the yield curve, as government is still expected to run short in revenue collections.

Looking Ahead
There were a number of bond friendly fundamentals that were able to outweigh the supply concerns during the fourth quarter, namely: positive comments from the Reserve Bank about the inflation outlook given weaker real economic growth and the widening output gap, with most forecasts now indicating that inflation should fall into the 3% to 6% target band in the second quarter of 201 O. Looking forward, 12 month bond returns are expected to stay on the low side as a result of further expectations of weakness in the long end of the yield curve as funding pressure from government stays on the high side. Corporate spreads will continue to do well, and as a result the Fund will maintain an overweight position. With respect to interest rates, the SARB is expected to leave rates unchanged for the better part of 201 0; however, if inflation continues to surprise on the low side, it could open up another possibility of further interest rate cuts. The RSA 2015 R157 started the quarter at 8.29%, touched its worst level of 8.70%, before ending the quarter at 8.39%. The interest rate markets are not pricing any further rate cuts at the moment, but the headline fundamental numbers as well as the level of the Rand will be the key drivers for any further action by the SARB.