Economic overview
The long period of accommodative monetary policy continues unabated. In fact sentiment for further policy easing has escalated as the global growth backdrop deteriorates further. The three-month jibar rate was unchanged at 5.60% for the quarter, while the 12-month jibar rate reacted strongly to the increasing likelihood of further easing, rallying 33 basis points to end at 5.95%. This led to the STeFI Money Market Index delivering a return of 1.39% for the quarter.

The domestic economy continues to be dragged down by global developments, and this quarter saw both the US and China slowing down while Europe descends deeper into its quagmire. In addition, local inflation appears to have peaked and is surprising to the downside. We have an economy growing below trend and an inflation rate that is back within the target band - shouldn't the Reserve Bank ease rates further under their flexible inflation targetting mandate? They have alluded to the dire situation in Europe as a major risk to our economy from an export perspective and any dramatic developments on this front carry the risk of lower rates. We believe that the authorities would prefer to keep the repo rate at current levels for as long as possible. There is a feeling that monetary policy has already done all it can. Market expectations are firmly behind the further easing in the repo rate and the probability of another 50 basis point cut in the next six months now trades at 60%. More importantly, the first hike in policy is only expected in the second quarter of 2014 as the market looks to falling inflation and dissapointing growth to draw a response from the authorities

Portfolio overview
We see the repo rate on hold well into 2013, with the only reprieve for money market investors being that the decline in inflation restores some purchasing power to the income earned. The stability of rates and the flat yield curve makes generating active return very difficult and we continue to utilise the only counter defence available, which is turning to credit and term risk to try and enhance the yield of the portfolio. However, even these spreads have compressed due to the search for yield and any positive real return outcome over the next quarters will be a win for investors. The yied on the portfolio has increased slightly to 5.41% (from 5.36% at the start of the quarter).

Portfolio positioning
Duration - there is minimal interest rate risk in the portfolio as rates are expected to remain flat for some time. Modified duration remains stable at around 50 days, while weighted average term-to-maturity is at the 90-day maximum in order to enhance yield.
Yield curve - longer-dated rates (12 months) have flattened materially and are now only around 35 basis points higher than three-month rates. Investing out along the curve does not offer too much appeal unless you are of the view that another repo rate cut is likely. We thus remain invested in the three to six month area from a modified duration perspective.
Credit - credit spreads have compressed further as the search for yield sustains itself. Some issuer spreads have reached what we consider overdone levels and we have tempered our interest in these sectors. We continue to invest in a range of high-quality and diversified exposure, balancing the need for yield with a very strong risk-cognisant approach to what we are invested in.

Economic overview
Monetary policy remained on hold this quarter and the repo rate remained unchanged at 5.5% for 15 months. One needs to go back to 1963 before we find the last period of such a lengthy break between the end of the cutting cycle and the first hike of the new cycle. The three-month jibar rate was unchanged at 5.60% for the quarter, while the 12-month jibar rate nudged up 17 basis points to 6.28%, with the market conceeding some chance of a tightening in policy during 2012 (but not very convincingly). This led to the STeFi Money Market Index delivering a return of 1.38% for the quarter. The benign macro environment continues to give policy makers some flexibility in terms of running easy monetary policy for a longer period than they traditionally may have under this backdrop. Sub-par economic growth and the lack of demand for credit in the economy has resulted in them tolerating inflation above the target on the premise that it is forecast to re-enter the 3% to 6% band in early 2013. This very stimulative policy stance, i.e. negative real rates, has been sustainable due to the flood of global liquidity searching for yield in emerging markets. SA has never before been able to fund twin deficits while running negative real rates for such a long period of time. Market expectations, as indicated by the FRA outlook below, are priced for the first hike in the first quarter of 2013, which is the start of a very benign and drawn out hiking cycle. We see the repo rate on hold for the rest of 2012, with the first move to normalise these very low rates dependent on how high inflation pushes. This is a very difficult environment for money market investors who are faced with rising inflation but a central bank who will leave rates as low as possible for as long as possible. The stability of short rates and the money market yield curve makes generating active returns over benchmark fairly challenging. The portfolio has very little interest rate risk given the benign environment expected going forward and there are no real opportunities to take relative views along the yield curve. This leads managers to utilise the only defence available to counter this, which is turning to credit and term risk to try and enhance portfolio yield. The portfolio's yield has remained steady for the quarter at 5.36%.

Portfolio positioning
o Duration - there is minimal interest rate risk in the portfolio as rates are expected to remain flat for at least another two quarters, if not longer. We will keep weighted average duration as close to the 90-day maximum as possible during this period in order to enhance the fund's yield. There is very little risk of a sudden rise in short rates that would justify a shorter duration position in the fund.
o Yield curve - longer-dated rates (12 months) have backed up a little during the quarter and are now around 67 basis points higher than three-month rates. Investing out along the curve is beginning to offer a little value, given that one 0.5% hike is priced in. On a risk-adjusted basis, investors need a little more protection than that for locking in fixed rates at the end of a cycle in such an uncertain environment. We thus remain invested in the three to six month area.
o Credit - credit spreads have compressed further as the search for yield sustains itself. Chasing this yield is not without its risks as the compression in some sectors looks a little overdone. We are invested in a range of high-quality, non-bank issuers, but are much more selective than we were a couple of quarters ago.

MET Money Market Portfolio has closed and merged into Momentum Money Market Fund.

Economic overview
Monetary policy remained on hold this quarter and the repo rate has now been unchanged at 5.50% for the last 13 months. Market expectations for the future move in the repo rate vascillated between further easing in the first half of the quarter to an unchanged repo rate for the next couple of quarters by the end of the period. The three-month jibar rate remained fairly static moving up 2 basis points to 5.595%. The 12-month jibar rate lost ground, rising 25 basis points to end the quarter at 6.115%, as expectations for further easing began to fade. This led to the STeFI Money Market index delivering a return of 1.40% for the quarter.

The start of the quarter saw the monetary authorities very focused on the downside risks to local growth emanating from the Eurozone debt crisis and the strong rand. This led the market to price in around a 60% chance of another cut at its most optimistic. However, some significant rand weakness caused by a rise in global risk aversion, began to push the forecast for local inflation further through the top of the target band and with more permanence than previously expected. This resulted in a change of course from the monetary authorities, whose rhetoric swung more towards inflation concerns. Market participants immediately took any chance of further easing off the table.

We have consistently maintained that the hurdle rate for another interest rate cut is high. Monetary policy has done all it can to assist the economy, real rates are negative and inflation fighting credibility still seems to be a policy objective. While further easing is thus unlikely, we see rates on hold for the first half of 2012 at least. Money market yields should thus remain stable, and the yield curve fairly flat.

Portfolio overview
The current environment of stable rates over a lengthy period of time renders active management of interest rate risk a fairly mute exercise. The portfolio has little interest rate risk at present. We continue to look to yield enhancement in the fund by terming out investments and taking credit risk to high quality non-government and non-bank issuers. These term and credit spreads offer good value at low risk and are basically the only defence for investors against negative real rates at present. The yield of the portfolio has declined marginally to end the quarter at 5.38% on a net annual effective basis, from 5.44% at the start of the quarter.

Portfolio positioning
o Duration - there is minimal interest rate risk in the portfolio as rates are expected to remain flat for an extended period of time. During this period we will keep weighted average duration as close to the 90-day maximum as possible in order to enhance the fund's yield.
o Yield curve - longer-dated rates (12 months) have backed up a little during the quarter and are now around 50 basis points higher than three-month rates. Investing out along the curve is beginning to offer a little value given that one 0.50% hike is priced in. But on a risk-adjusted basis, investors need a little more protection than that for locking in fixed rates at the end of a cycle in such an uncertain environment. We thus remain invested in the three-to-six month area from a yield curve.
o Credit - credit spreads continue to compress as the search for yield in the market sustains itself. 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 spreads grinding lower this coming quarter as demand for any assets that offer some sort of yield enhancement continues.