The current environment of low growth and relatively well behaved inflation suggests that that rates will remain low for some time to come. Money market funds continue to be faced with low absolute yields, with very little protection against the declining level of real returns that will come through as inflation rises. The yield of the portfolio has remained unchanged at 5.44% on a net annual effective basis. While yields remain unchanged, credit spreads continue to grind lower leaving very little protection for already stretched investors. The risk is that rates move lower over the next quarter if the market moves to pricing in another cut in the repo rate. The funds' yield will react in line with any moves in the repo with around a two-month lag.

Portfolio positioning
Duration - There is minimal interest rate risk in the portfolio as rates are expected to remain flat for an extended period of time. We will try to keep weighted average duration as close to the 90 day maximum as possible during this period in order to enhance the funds' yield.
Yield curve - Investing out along the curve in longer-dated fixed rates has not been compelling for some time, and with the sharp fall in 12-month Jibar this quarter it has become even less so. In fact, there is basically no yield pick-up between threemonth commercial paper and 12-month fixed bank paper. We thus remain invested in the three to six month area from a yield curve perspective, given our view that they are unlikely to cut interest rates again.
Credit / Diversity - Credit spreads continue to compress as the search for yield in the market intensifies. We are invested in a range of high quality non-bank issuers which enhance yield and add to the diversity of the fund. We see further compression in the next quarter as the search for yield persists, although many of the issuers' spreads have likely reached a floor for now, thus reducing re-investment risk for the fund going forward

Economic overview
Monetary policy remained on hold this quarter and a great deal of the hawkishness from last quarter has dissipated. Global growth is stuttering and inflation, although still rising, appears more benign or transitory than originally feared. The local three-month jibar rate remained completely stationary at 5.575% for the entire quarter. The 12-month jibar rate drifted slightly upwards to end at 6.42%, as interest rate expectations alternated between a September 2011 hike and a January 2012 hike.

The incredible degree of uncertainty that exists globally makes policy action a moving target. European Sovereign risk poses a huge challenge to growth and to risk aversion. Slowdowns in the US, Japan and more recently China are resulting in monetary policy expectations being pushed out. Fiscal policy seems to be taking centre stage as the need to deal with the risk around debt obligations intensifies. Peripheral Europe is still very much a huge risk, but is joined now by the US who have hit their debt ceiling and are at risk of a downgrade to their credit rating. This is an environment where policy makers are likely to keep rates low for as long as possible as long as inflation behaves acceptably.

Local authorities continue to express concern over the prospects for economic growth. Although inflation is rising, the pace is measured and their forecast breach of the top of the target band is temporary. Under the new flexible inflation mandate, and given the current rand strength, we believe they will err on the reactive side rather than pre-emptive one, and will want to wait as long as possible before hiking. The market is currently pricing in a November hike. Our view is that this may be slightly on the hawkish side (favouring an increase in interest rates), as the pricing of a September hike was last quarter.

Portfolio overview
Our view remains that short rates will stay low for some time, and the risk is that the first interest rate hike is later than the market expects. Money market funds continue to be faced with low absolute yields, with very little protection against the declining level of real returns that will come through as inflation rises. While the yield of the fund has declined over the quarter, the pace of the decline has slowed somewhat. The yield of the fund is at 5.43% (from 5.65% last quarter). This decline does not come from rates having fallen further, but rather from the fact that credit and term spreads are offering less protection than they were last quarter. The search for yield, excess liquidity and improving credit quality has resulted in yields on offer to investors compressing over the quarter.

Portfolio positioning
Duration - there is minimal interest rate risk in the fund as rates are in the process of bottoming out. While there is some time before they move up meaningfully, we prefer to keep the fund underweight from a modified duration perspective (60 days) but maintain maximum term-to-maturity (90 days) to enhance yield.

Yield curve - the curve continues to steepen slightly with the long-end now almost pricing in our expected 100 basis points of hikes in the next 12 months. Investors are still not offered enough to fix rates for longer terms given the uncertainty that prevails when it comes to monetary policy. We remain invested in the three to six month area from a yield curve perspective, and would need comfortably higher than an additional 100 basis points over 12 months to coax us out along the curve. Credit/diversity - credit spreads continue to compress as the search for yield in the market intensifies. We are invested in a range of high quality non-bank issuers which enhance yield and add to the diversity of the fund. We see further compression in the next quarter as the search for yield persists.

The RMB Money Market Fund will change it's name to Momentum Money Market Fund, effective from 01 August 2011

Economic overview
This quarter saw monetary authorities leave policy unchanged in the face of rising uncertainty for both global growth and inflation. The Monetary Policy Committee (MPC) meeting in January gave a strong indication that the easing cycle was over followed by the March meeting which emphasised some of the hawkish concerns the authorities have. The net impact of this was an unchanged three-month jibar rate which held at 5.575% for the entire quarter, but a significant swing in market expextations, bringing the first rate hike of the new cycle forward to September this year. A number of developments have come to the fore in 2011, making life difficult for policy makers. Inflation has gained traction, led by rising commodity prices and excess liquidity. Inflation expectations are pushing higher, despite the fact that core inflation generally remains contained. The growth outlook is improving gradually although still in an uneven fashion. Both the growth and inflation outlook are dramatically clouded by Middle East tensions, the Japanese earthquake, the Eurozone debt crisis and increased prospects of monetary tightening by the European Central Bank (ECB) and potentially the Bank of England (BOE). In our view the cycle has turned and it is now all about getting the timing of the first hike right. We think the market may have run ahead of itself in pricing in a rate hike as early as September. Economic growth remains well below its noninflationary trend growth level; core inflation remains very benign (3%) despite the rise in headline inflation and the rand has entered a period of renewed strength. For us the fear of tipping the economy back into a slowdown (along with the risk that hikes will further strengthen the rand) will likely lead to the authorities waiting as long as possible before they start to tighten policy.

Portfolio overview
Our view is that short rates will stay low for the next while before starting to move up in an orderly fashion in the last quarter of the year. So money market portfolios continue to be faced with low absolute yields. However, these are padded by attractive credit and term spreads which offer some protection against the declining level of real returns that will come through as inflation rises. So while the yield of the portfolio has declined over the quarter, the pace of the decline has slowed. The yield of the portfolio is at 5.72% (from 6.07% last quarter). Yields have probably fallen as much as they are going to, and now will likely consolidate for a couple of quarters before starting to move up with the cycle. Credit spreads should continue to compress but in a more gradual fashion and thus still offer good value.

Portfolio positioning
Duration - there is minimal interest rate risk in the portfolio as rates are in the process of bottoming out. While there is some time before they move up meaningfully, we prefer to keep the fund underweight from a modified duration perspective (60 days) but maintain maximum term-to-maturity to enhance yield (90 days).

Yield curve - the curve has steepened somewhat but stills remains very flat, with the long-end yet to move up in anticipation of rising rates. Investors are not paid enough (only 65 basis points) for going from three- month out to 12- month term given the risk involved. With further cuts unlikely, and rate hikes coming onto the radar, we remain invested in the three to six month area from an interest rate risk perspective.

Credit/diversity - credit spreads continue to compress as the search for yield in the market intensifies. We are invested in a range of high quality non-bank issuers which enhance yield and add to the diversity of the fund.

Economic overview
This quarter saw the monetary authorities ease interest rate policy further as they continue to face the dual challenge of low inflation and below-trend economic growth. The repo rate was cut to 5.5% (prime 9.0%) at the November Monetary Policy Committee (MPC) meeting. The three-month JIBAR rate dropped 52bp to end at 5.50%, whilst the 12-month JIBAR rate declined 48bp to end at 5.93%. This brings the cumulative easing cycle to 650bp since the first cut in November 2008. The surge lower in inflation has been caused by the strong rand as liquidity, created by global central banks, continues to flow into high-yielding emerging markets. This poses a challenge for the authorities who need to guard against taking rates artificially low in an effort to combat currency strength. The slow recovery in growth is mainly as a result of a lack of economic activity, usually financed by credit, at these low levels of interest rates. This is a fundamental problem that will not necessarily be solved by reducing rates further. To us there seems little scope for further interest rate cuts. The last two inflation readings have surprised on the upside and 2011 could see inflation risk from oil, food and local unit labour costs pull prices higher than expected. Economic growth should also recover, albeit gradually. There is evidence of a pick-up in consumer spending and a rise in private sector credit extension, which the monetary authorities will not want to unduly stimulate through still lower rates. However, as a small open economy with a flexible exchange rate, we remain vulnerable to the vagaries of global capital flows. If 2011 proves to be a year of further liquidity creation, and authorities are faced with strengthening currencies, one is hesitant to completely discard the possibility of further rate cuts. This is why the market - see Forward Rate Agreement (FRA) graph above - will keep a non-negligible probability of further easing alive.

Portfolio overview
The yield of the fund continues to fall as the effects of the rate cuts filter through to reinvestment of maturing assets. The challenge is to maintain the yield as high as possible while not exposing the fund to excessive interest rate or credit risk. We have positioned the fund with the expectation of lower rates and have been fully invested at the longest permissible average term-to-maturity (90 days). We are comfortable with the risk imposed by doing this as we do not think rates are about to turn up meaningfully for some time. In addition, there continues to be good value in credit spreads despite the compression over the quarter and the fund has diversified exposure earning attractive yield pick-up. This has allowed the yield to remain fairly elevated relative to the level of the repo rate at 6.07% (from 6.76% last quarter).

Portfolio positioning

Duration - the fund remains positioned for a flat-to-declining interest rate environment, with duration close to the maximum 90 days.

Yield curve - the curve is very flat, pricing in the "rates low for long view". Investors are only paid an extra 35bp for going from three month out to 12-month term. With further cuts unlikely, we remain invested in the three to six month area.

Credit / diversity - credit spreads continue to compress as the search for yield in the market intensifies. We are invested in a range of high quality non-bank issuers, which enhance yield and add to the diversity of the fund.