Economic backdrop
Monetary easing resumed this quarter, after the decision to keep the repo rate on hold at the end of last quarter. The authorities refer to this stop start trend as "end of the cycle deliberations"; we call it "confusion as to how to marry stubborn inflation with a desperate economy and a strong rand". The monetary committee cut the repo rate by 50 basis points at the August meeting as inflation moved lower and the demand side of the economy, best summed up by a sharp contraction in household consumption expenditure, continues to deteriorate. However, in almost the exact fashion as they ended Q2 '09, they got cold feet and paused again at the September meeting. This left 3-month jibar 55 points lower over the quarter at 7.01% and 12-month jibar 23 points lower at 8.16%, with the forward rate market now seeing no chance of further easing in policy with the first hike as soon as July next year. We continue to view these pauses in monetary easing as policy errors that will prolong the economy's emergence out of the current slump. There is a window of opportunity for further easing while the Rand is strong, inflation is falling and before the rest of the world resume tightening again. While we have lost a little faith in their ability to tackle policy boldly on the downside, we still maintain our conviction that the authorities will not begin tightening policy anytime soon, and are driven by this view in investing the portfolio rather than our more adventurous call for further easing.

Fund overview
It was more of the same this quarter as further monetary easing and continued strong inflows made maintaining the portfolio yield fairly challenging. While risk aversion among investors does seem to be abating, some concern around the outlook for more tax aggressive yield funds has seen investors moving back into more conventional money market portfolios. We continue to try and sustain the portfolio yield through a combination of lengthening the duration of instruments and taking advantage of the unprecedented yield enhancement opportunities from the growing commercial paper issuers accessing the market. The yield of the portfolio declined to end the quarter at 7.64%.

Fund activity
We have slowed the rate of duration extension a little as the risk that monetary easing is over increases. We still maintain the average maturity of the portfolio at around 80 days as even if cuts are over, there is unlikely to be a significant reversal in money market rates with hikes not expected for a while. We continue to take advantage of the great opportunities in non-bank paper from some of the corporates and parastatals, who starved of funding in the current environment, are left with no choice but to be price takers in raising their borrowing requirements.

Fund positioning
Duration - the portfolio is at 81 days, positioned for a flat to declining interest rate environment.

Yield curve - the yield curve is very steep i.e. 12 month rates comfortably above 8% offer decent value. We favour the combination of 1-3 month paper and 12month paper, rather than the middle part of the yield curve (6-9 month).

Credit / diversity - we continue to add to the non-bank exposure of the fund as fundamentals have improved as corporates de-leverage and cut back on investment. Spreads on high quality corporates remain generous for investors and diversification of the fund improves.

Economic backdrop
The second quarter of the year saw monetary easing continue as economic growth contracted sharply (-6.4% Q109) and the inflation outlook as per the Monetary Policy Committee remained fairly optimistic. The authorities cut the repo rate by a further 2%, bringing the total easing this cycle to 4.5% (Prime at 11% and repo at 7.50%). However, the euphoria came to an abrupt end when the repo rate was left unchanged at the meeting held in the last week of June. Money market rates rose aggressively on these developments. The 3-month Jibar rate ended the period back above 7.50%, after bottoming out just above 7%, while the 12-month Jibar rate shot up to 8.35%. The consensus in the market, as evidenced by the forward rate curve below, has now become that further easing is no longer on the cards and indeed that monetary tightening is on its way in the next 10-11 months.

We were a little surprised by the MPC's decision to pause. While inflation is clearly behaving in a stubborn fashion, the stickiness emanates from supply or cost push factors that are not directly influenced by monetary easing. We are fairly optimistic that inflation will make it back into the target band, and will be accompanied by very pedestrian economic growth. Thus it would not surprise us to see the MPC resume monetary easing. Although it must be said we are clearly close to the end of the easing cycle. Either way, we think it will be some time before monetary tightening is necessary.

Fund overview
The fund had another quarter of strong inflows as risk aversion amongst investors remains high. With interest rates still falling, it is difficult to maintain the portfolios yield as new cash flows are invested at lower yields. The portfolio's comfortably outperformed the SteFI benchmark through a combination of having a longer term-to-maturity and significant yield enhancement from the growing commercial paper issuers represented in the fund. The yield of the portfolio declined to end the quarter at 8.29%.

Fund activity
Managing the portfolio's duration becomes fairly tricky at the end of an easing cycle as you do not want to extend term-tomaturity excessively when rates are bottoming out. Indeed, the retracement higher in yields after the MPC meeting decision has presented an opportunity to extend duration again given our view that they may still ease policy further in the coming meetings and then that rates will stay low for some time. We are thus adding longer-dated instruments to the portfolio for a potential downward leg in yields. We believe that there are good selective opportunities to add higher yield to the portfolio by investing in corporate paper. The yield spreads are reflective of liquidity and uncertainty rather than fundamental credit quality.

Fund positioning
Duration - the portfolio is at 84 days in line with the view that they are likely to ease monetary policy further.
Yield curve - we think longer dated paper offers value, as yields are pricing in a hike in the next twelve months. However, it is difficult to add significant exposure in the longend with the 91 day duration limit.
Credit / diversity - we continue to take advantage of current credit spreads issued by selective issuers. We favour the issuers in defensive sectors that have sound balance sheets. American Tobbacco.

Economic Overview
The first quarter of the new year saw continued improvement in the outlook for short-term interest rates as local economic growth expectations deteriorated significantly and inflation began its decent, triggered by the re-weighting of the inflation basket. The monetary authorities cut the repo rate by a further 2% in addition to the 0.5% at December's meeting. The 3-month Jibar rate plummeted 263 basis points to 8.80%, while the 12-month rate fell 145 basis points to 8.35%. The forward rate money market curve, which collectively reflects the markets' expectations for short rates, shows 3-month Jibar declining to 6.75% in Q3 2009. We have a slightly more sanguine view on where the bottom of the cutting cycle will ultimately be, but are very cognizant that we are in unprecedented territory for global monetary policy authorities which may result in unprecedented actions.

It is obvious that the local economy needs further monetary policy relief. However, the authorities are faced with a delicate balancing act as fiscal policy is very expansionary, the current account deficit is one of the largest in the world and the decline in inflation has not been as fluid and dramatic as expected. The temptation for the authorities is clearly to focus on the short-term declining economic environment, while worrying about the inflationary consequences of their actions at a later stage. We do not believe that they have the luxury to do that, and would be concerned if they began to move in large increments. However, given the dovish rhetoric from Governor Mboweni there is every chance they push the envelope on monetary easing.

Portfolio Overview
The quarter presented an extremely difficult environment for managing Money Market portfolios. Interest rates fell like a stone, and cash flows into money market products continue to be huge as investors' risk aversion remains buoyant. Thus, while out performing its Stefi benchmark, the portfolios yield has declined, in line with the rest of the money market sector, to end the quarter at 10.61%. The good news for investors in the fund is that the real yield offered by money market has increased as inflation is falling faster than interest rates.

Portfolio Activity
We have tried to maintain duration as long as possible when reinvesting cash given that interest rates still have some way to fall. However, the longer dated money market rates have declined dramatically in anticipation of further monetary easing and we are cautious of locking in 12 month rates at current levels below 8.50%. We believe these rates may have fallen too quickly, and rather favour the 3-6 month area of the yield curve. Credit spreads are also much more favourable in the short to medium area of the curve, as issuers of instruments do not want to lock in the current excessively wide credit spreads for a one year period. We have added a variety of high quality corporate issuers to the portfolio at very attractive yields, which should help to keep the portfolios yield higher for longer as rates decline.

Portfolio Positioning
The portfolio duration is currently 85 days, and the exposures are highly diversified across a variety of issuers. This reflects our view that money market rates will continue to decline, but more so in the short to medium area of the yield curve than the longer dated terms, and that credit spreads offered in the money market by the banks and high quality corporates are showing value.

The fourth quarter saw continued improvement in the outlook for interest rates, with market pricing in a deeper and more rapid cutting cycle than originally expected as global and domestic economic data deteriorated further. The 3-month Jibar rate declined by 62 basis points, while the 12-month rate plummeted 275 basis points, leaving the money market yield curve pricing in 400 basis points of cuts this year. The Monetary Policy Committee (MPC) did not disappoint the market as they cut the repo rate by 50 basis points in December, although some analysts and investors were hoping for a full 100 basis points. Whilst the authorities clearly highlighted the deterioration in growth and improvement in the inflation outlook, they were very measured in their assessment of the fundamental backdrop and nothing suggests to us they are about to go on an imprudent rate cutting spree.

Bond yields declined further in anticipation of future easing in monetary policy, rallying significantly, with the All Bond Index returning 11.35% for the quarter. In one quarter, bonds restored a large degree of respectability relative to cash. It is clear that local inflation has peaked, with the last two readings (October and November) coming out below market expectations. The slowdown in the domestic economy is being exacerbated by the global slowdown. The Rand seems to have attained some stability below R10/$ and commodity prices, led by food and oil, are declining rapidly. These factors, along with the unwinding of the extremely high base effects from a year ago as well as the re-weighting of the inflation index in January should result in sharply falling inflation to within the Reserve Bank's target range before the end of 2009.

Whilst we have had a relatively good quarter in the fixed income funds, it's been a momentum play rather than a value proposition.

The RMB Money Market Fund continues to be managed in a very conservative manner, especially given the uncertainty around the outlook for the economy and the ability of issuers to maintain good quality balance sheets and credit metrics. It is too easy to be tempted into some of the higher yields on offer right now. We are not out of the woods yet and face a very tough year domestically. We prefer to stick with the tried and tested issuers in the portfolio, and for now will exclude marginal corporate paper, especially for cyclical issuers closely tied to the domestic economy. The speed at which the trend in interest rates has changed has made positioning portfolios extremely difficult, but we have managed to get the portfolio duration up around the 90-day limit in order to benefit from the decline in rates. Investors were faced with an unusual anomaly - the need to lengthen duration as rates fall, but most issuers are unwilling to offer attractive credit spreads on longer- dated instruments, thus extending their borrowing profile with rates about to fall. Investors faced a trade-off between keeping duration short and accessing attractive credit spreads, or lengthening duration but losing yield in the process.

Time will tell which one of these strategies will outperform. Rates have fallen too far too quickly, and we feel that there is not too much more to be earned from duration with one year fixed rates now already below 10% (having peaked above 14%).

While we do expect rates to continue to fall during the first quarter of 2009, the reduction may be less than what the market predicts. Thus the fund's yield should remain very attractive, with money market funds doing well relative to other more aggressive fixed income funds.