Economic overview
The US Fed left interest rates unchanged at 0.25% and continued its $300bn Treasury purchase program, reiterating that economic activity would remain fragile for "some time" before growth catches up. The ECB cut interest rates twice to 1.00%, the lowest yet, in an effort to combat the recession. Moreover, after announcing plans to buy €60bn of covered bonds, the ECB pumped some €442.2bn into the Eurozone's banking system through one-year loans at base rate. The BoE held rates at 0.50% and said it would pump £50bn into the UK through increased government purchases of Gilts. In fact the BoE extended its quantitative easing plan by purchasing top quality investment grade debt in order to reduce corporate borrowing costs.

Fund overview
Money market securities had a decent rally during the second quarter of 2009. First, investors' optimism improved after the G20 summit, held in London early April, hailed "new World Order" to "fight back" against recession. The global leaders agreed to reinforce financial regulation to tighten limits on hedge funds and other financial intermediaries, and also to triple the IMF's resources to help developing economies to have more emphasis in the global economy. Better than expected results of the US government's "stresstest" were also well received by investors who were relieved that the capital shortfalls of the 19 tested banks were not as big as some had feared. The significant drop in Libor rates since the October 2008 peak has suggested to many that the credit crisis is easing and that the world economy is on the road to recovery. But while lower Libor rates should have boosted lending in the financial markets, higher rates paid by smaller institutions in the unsecured lending markets could slow recovery as the higher costs drag on earnings and slow the recapitalisation process. Although corporate fundamentals are pretty dire by historical standards, US banks Q1 results beat analysts' forecasts due to robust revenues from capital markets trading. Ten US banks, amongst others JPMorgan and Morgan Stanley, that passed the government "stress-test", were allowed to repay their TARP funds after raising more equity. Meanwhile S&P had been cutting the rating of 18 US banks. Despite reporting a profitable first quarter, European banks faced $283bn of further losses this year as the recession forced them to take further write-downs while Spanish ones struggled with ongoing bad debt problems. June saw Moody's downgrade 30 Spanish banks while Santander planned to raise equity to consolidate its balance sheet.

Fund activity and positioning
During the quarter the floating rate note market saw spreads narrow from 440 basis points over Libor to 140 as liquidity improved. At fund level, we significantly reduced the fund's spread duration risk by selling the longer dated securities held in the portfolio and taking profit on some mispriced securities. We reinvested the proceeds into quality short term corporate paper with attractive spread and increased our exposure to both sovereign bills and cash.

Economic Overview
With the world economy still under threat we saw a renewed attempt by global leaders to halt its decline. In the US the Obama administration introduced plans for more regulations on capital and liquidity and to take toxic assets off banks' balance sheet. In the UK the Bank of England (BoE) took decision to buy Gilts as part of the so called Quantitative Easing program which sought to inject much needed cash into the financial system and those reliant upon it. With news of the Japanese economy shrinking in the last quarter the Bank of Japan unveiled a plan to help the subordinated loans of large commercial banks. And in Europe the Swiss National Bank intervened in currency markets. Central Banks in general continued to be very active in cutting interest rates during the quarter. The BoE cut from 2.00% to 0.50%, the ECB cut from 2.50% to 1.50% and the US Fed kept interest rates at 0.25%. Investors are now looking to more immediate domestic and global events that can help mitigate the continuing fallout from the credit crisis and kicks off with global leaders meeting in London in early April at the G20 summit.

Portfolio Overview
Money markets were very volatile during the first quarter of 2009. The Global New Year resolutions to cope with the financial crisis were brave but revealed insufficient. Obama rescue plan and European ministers' action stove to help the bank to lend again through partial nationalisation, quantitative easing program and further interest rate cuts by all central banks in general. However, banks preferred to consolidate their balance sheet by reducing their leverage and sparingly lending to high quality companies rather than to all types of companies. This was not the answer expected by the Global State Leaders which feared deeper global economic slump. The new OECD leading indicators confirmed the prospect of a continued global recession in February before further worries swept across the money markets in March. The shrinking global economy continued to affect corporate profitability to the point where we saw an additional round of dividend cuts and the continuing negative newsflow on the financial sector weighed on the market in general. Consequently investor confidence plummeted as a wave of downgrades was announced and the anticipated increase in defaults started to emerge. As a result short term corporate papers and floating rate notes (FRNs) were once again very volatile during the quarter. Despite a slight rally in January, spreads sharply widened in February and March, pushing the price to fall further.

Portfolio Activity & Positioning
Over the quarter we managed the fund conservatively by maintaining a healthy cash allocation and reinvesting maturing names in high quality paper such as sovereign bills. On the currency side, we continued to run a neutral strategy versus benchmark.

Money markets remained frozen in October. The Lehman Brothers shockwave spread to the entire financial system causing the money markets' confidence to virtually disappear. The US Dollar and Euro Libor rates reached their third peak mid October before the Fed, ECB, BoE and many other Central Banks lowered their rates in a co-ordinated reduction. Liquidity certainly improved in the second part of the month but still remained viscous. The Floating Rate Note (FRNs) spreads soared to their highest levels, averaging 480 basis points (bps) compared to 47bps one year before.

Liquidity barely improved in November despite a sharp fall in the G10 currencies' Libor rates. During the American elections, the US economy continued to worsen with fears that General Motors, Ford and Chrysler could go bankrupt. The Fed did not plan to meet during the month, leaving the interest rates at 1.00%. In the UK, insolvency numbers confirmed the bleak reality facing small businesses and the BoE cut interest rates aggressively by 150bps to 3.00% - back to a level last seen in 1954. At the same time the ECB cut interest rates by 50bps to 3.25% as Euro Zone economies struggled with worsening economic conditions. Any improvement to this gloomy global outlook is heavily dependent on central banks continuing to work together to kick- start economic growth and restore circulation to the monetary system. FRN spreads stayed at 480bps through the month while the Itraxx Europe index reached a record high, touching 200bps.

December marked the one-year anniversary of the US entering recession and saw a continuation of the US yield-curve flattening. The Fed's initiative on supporting the ailing US economy led to renewed talk of quantitative easing as the Fed Fund target rate approached zero. This came as the global economy continued to slow and the threat of deflation became more real. Most of G10 Central Banks slashed their respective interest rates with the US down 75bps to 0.25%, UK down 100bps to 2.00%, Euro Zone down 75bps to 2.50%, Australia down 100bps to 5.25%, New Zealand down 150bps to 5.00% and Norway down 275bps to 3.00%. With some governments continuing to guarantee paper issued by banks, Libor rates dropped dramatically as confidence returned to inter-bank lending. The second half of the month was distinguished by the subsequent rescue of US carmakers through a $17.4bn loan, the Madoff scandal further denting the reputation of Hedge Funds, and the US investment banks' writing down further billions of losses.

Again, during Quarter 4, 2008 long-dated financials bore the brunt of the sell off, particularly in US banks, and the market kept selling off floating rate bonds in favour of lower-risk-assets such as short-term government papers.

Liquidity in money markets has varied considerably over the quarter and we continued reducing the spread-duration by selling long-dated securities and reinvesting into sovereign short-term securities.