Economic overview
Economic growth has been falling short of expectations across both developed and emerging markets. High-frequency US data continues to send mixed signals, indicating that the economy is likely to muddle through this year, posting a growth rate of around 2%. Upside risks to growth remain capped by the on-going Eurozone debt crisis; suggesting that the US Federal Reserve's decision to extend Operation Twist may not be the last easing step should a recovery in the US appear threatened.

Further stimulus is expected in the UK and Eurozone economies as a result of the broadening of the Eurozone debt crisis and its resultant negative impact on growth. Even as domestic demand remains robust in Germany, recent-high frequency data has disappointed as a result of the adverse trade consequences in the rest of the Euro area, which has dented business sentiment. Despite short-lived market rallies post the Greek election results and Spanish bailout, reactions were positive around the outcome of the EU Summit, including part one of the 'roadmap' to economic and monetary integration - involving a statement of intent to form a banking sector union - despite a lack of detail or firm deadlines.

Emerging market (EM) growth continues to be at risk. But with lower food and oil costs suggesting a rather benign inflationary trajectory for most of these economies, EM policy makers have room to embark on further monetary easing to boost domestic demand - compensating for sustained weakness in external (European) demand. While Chinese growth has disappointed of late relative to historic standards, further cuts in the bank lending rate, coupled with the potential for further easing in the Reserve Requirement Ratio, is likely to support firmer growth in the second half of 2012.

Market and portfolio overview
The second quarter of 2012 was a game of two halves. The first half of the quarter saw a strong sell-off in risk assets as the continuing Eurozone crisis took a turn for the worse with the Greek elections in May resulting in a stalemate, with no party gaining a majority, and the failure to form a coalition sending the Greeks back to the polls for a second election in June. Markets dislike uncertainty and the failed election added fuel to the fire with the more radical parties that rejected the EU-IMF programme gaining a significant share of the votes, which exacerbated talks of Greece exiting the euro. In contrast, the second half of the quarter saw a partial recovery in risk markets as June's Greek election resulted in the New-Democracy Party forming a coalition with a mandate to remain in the euro. The change in sentiment was further assisted at the end of June when the EU Summit surprised markets with steps to provide direct bank recapitalisation, as well as other measures aimed at stimulating growth in the Eurozone.
On the back of the seesawing Eurozone situation, risk markets sold off across the board through the quarter, however, some off the pain had been clawed back in June and the quarter finished with positive momentum. In equity markets, the Euro Stoxx 50 was down 8.6%, the S&P 500 was down 3.3% and the FTSE 100 was down 3.4%. In credit markets, the USD investment grade five-year CDX index spreads widened 21 basis points and the EUR investment grade five-year iTraxx index spreads widened 41 basis points. Short-dated money market securities also sold off, with the JP Morgan Short-term FRN Index of financial credit spreads, which reflects a portion of underlying holdings in the funds, widening from +147 basis points to +169 basis points over the quarter.

In the cash markets, there were no changes to any of the policy rates in the US, UK or Europe, with rates remaining at historical lows of 0.25%, 0.50% and 1.00%, respectively. In the three-month LIBOR markets, the easing liquidity conditions for financials across all three markets continued with the EUR LIBOR down 12 basis points, the USD LIBOR down 1 basis point and the GBP LIBOR down 13 basis points. In the 12-month LIBOR markets, the EUR LIBOR was down 19 basis points, the USD was down 2 basis points and the GBP was down 18 basis points.
The main driver of absolute returns in the fund is the rand exchange rate movements versus the basket of foreign currency denominated bonds the fund invests in. These currency movements are often significantly greater, and more volatile, than the returns generated by the underlying bonds. This quarter, the rand depreciated against all three currencies: 1.0% against the euro, 6.0% against the US dollar and 4.2% against the British pound, which was the significant driver of the fund's positive performance over the quarter. The fund returned 4.69% for the quarter versus the benchmark return of 4.77% for the quarter. The one-year return of the fund is 14.45%.

Portfolio activity and positioning
The fund is currently invested defensively, with high credit quality and short durations. The weighted average rating factor is 34, which implies an average rating of AA and approximately 40% of the fund is invested in AAA-rated bonds. The weighted average duration is around 100 days, which we have increased this quarter from around 40 days in the first quarter as we look to take advantage of the higher yields available further out the yield curve (without compromising the credit quality of the fund). Bonds we purchased this quarter were issued by BMW, Vodafone, Wal-Mart, Australia and New Zealand Bank, Nordic Investment Bank, European Investment Bank, Deutsche Bank and various governments' treasury bills, which we use for managing liquidity. Residual cash is invested into British pound, euro and US dollar cash deposits. The regional split r

Market overview
The fourth quarter of 2011 saw some reversal of the pain felt by risk assets in the previous quarter. Progress was made, albeit only in small steps, resolving the Eurozone sovereign crisis and the associated liquidity issues facing the region's banks, both of which have been dragging on global economic confidence for some time. The main points were the increasing rhetoric coming from Europe's political leaders pointing to the likelihood of fiscal union of the member states and the European Central Bank (ECB) action increasing US dollar liquidity to European financials. On the back of these outcomes equity markets rallied across the US, Europe and the UK with the US' S&P 500 up 11.2%, Europe's EURO STOXX 50 up 6.3% and the UK's FTSE 100 up 8.7%. Longerdated credit spreads also rallied with the US Dollar Investment Grade Five-Year CDX index spreads tightening 17 basis points and the Euro Investment Grade Five-Year iTraxx index spreads tightening 14 basis points.

Short-dated money market securities however continued to see significant spread widening over this quarter as dealer inventories were run down in the lead up to year end. The JPMorgan Short-Term Forward Rate Note (FRN) index of financial credit spreads, which reflects a large portion of underlying holdings in the fund, widened significantly from +150 basis points to +250 basis points over the quarter. This had a dampening effect on the return of the fund over the quarter. In the cash markets Europe was again the mover, but this time in the opposite direction with the ECB cutting rates by 25 basis points on two occasions, down from 1.50% to 1.00%, removing the previous two quarters' rate hikes.The first of these rate cuts was a surprise to the market which expected the ECB to hold rates steady in the face of persistently higher inflation than their 2% target. However, given the lack of an imminent solution to the Eurozone sovereign debt crisis, the ECB cut rates citing the negative impact this was having on economic activity and confidence which has created "high uncertainty and intensified downside risk" to the economy. Both the US Federal Reserve and the Bank of England left their official rates at historic lows of 0.25% and 0.50%, respectively. In the three-month LIBOR markets the euro LIBOR was down 20 basis points on the back of the ECB rate cuts, the US dollar LIBOR was up 21 basis points and the sterling LIBOR was also up 13 basis points. In the 12-month LIBOR markets the euro LIBOR was down 13 basis points, the US dollar LIBOR was up 27 basis points and the sterling LIBOR was up 15 basis points. The main driver of returns in the fund is the rand exchange rate movements versus the basket of foreign currency denominated bonds the fund invests in. These currency movements are often significantly greater than the return generated by the underlying bonds. This quarter the rand appreciated against all three currencies; 3.4% against the euro, 0.1% against the US dollar and 0.3% against the sterling, which contributed to the negative performance of the fund over the quarter.

Portfolio activity and positioning
During the fourth quarter of 2011 this fund was amalgamated with four other unit trusts resulting in the fund increasing in size four-fold and the benchmark changing to a three-month LIBOR index, equally weighted across the US dollar, euro and sterling. The amalgamating assets were predominately cash which we invested into high grade, short-dated securities in line with the existing positioning of the fund. However, we have moved the portfolio to a slightly more defensive tilt given the uncertainty in financial markets in the final quarter of 2011 and heading into 2012. The weighted average rating factor improved from 36 to 30 implying an average rating of AA. This was primarily achieved by increasing the AAA-rated holdings in the fund via government bills, government-guaranteed bonds and supranational entities. Some of the bonds we purchased this quarter were: Treasury bills issued by UK, Dutch, French and Belgium governments; UK sovereign-guaranteed bonds issued by Nationwide Building Society, Yorkshire Building Society, Skipton Building Society and Barclays Bank; supranational entities such as European Investment Bank & Council of Europe; financials such as General Electric, ING and Morgan Stanley. Residual cash is invested into sterling, euro and US dollar cash deposits. The regional split remains broadly neutral in terms of currency positioning. In rand terms the Momentum International Income Fund returned -0.60% (benchmark return -0.94%) over the quarter and 21.1% (benchmark 23.33%) for the year ending 31 December 2011.