Market Overview
The first quarter of 2013 was predominately a positive one for risk assets, with the US and UK equity markets up and government bond yields widened significantly in the US, UK and Europe. The only slight wobble was European equities, which finished the quarter down slightly.

The quarter started off on a positive note in January, with US politicians coming up with a partial resolution to the US fiscal cliff issue, which avoided a near-term drag on the US economy. The resolution was more of a 'kick the can down the road' solution, with only a delay in the scheduled $110 billion spending cuts being put forward, rather than a final solution. The markets still responded positively to this decision and much of the risk-on tone for the quarter came in January. The remainder of the quarter was more mixed, with the UK rating downgrade by Moody's from Aaa to Aa1, the Italian election stalemate and the Cyprus financial system meltdown all negative events that added some volatility and risk-off sentiment in those regions.

Investment grade credit markets were broadly unchanged, with US spreads down 2bps and EUR spreads up 5bps, as measured by Barclays' Global Aggregate Corporate indices. Short-dated money market securities, however, rallied significantly, with the JP Morgan short-term FRN index of financial credit spreads, which reflects a portion of underlying holdings in the funds, moving from 84bps to 42bps. In equity markets, the Euro Stoxx 50 was down 0.5%, the S&P 500 was up 10.0% and the FTSE 100 was up 8.7%. In 10-year government bond markets, the German yield was up 52bps, the US yield was up 44bps and the UK yield was up 38bps.

In the three-month LIBOR markets, the liquid conditions for financials across all three markets remained broadly the same, with the EUR LIBOR flat, the USD LIBOR down 2bps and the GBP LIBOR down 1bps from what were already low rates. In the 12-month LIBOR markets, the EUR LIBOR was down 1bps, the USD was down 11bps and the GBP was down 10bps. The main driver of absolute returns in the fund is the ZAR exchange rate movements versus the basket of foreign currency-denominated bonds the fund invests in. These currency movements are normally significantly greater and more volatile than the returns generated by the underlying bonds. This quarter, the ZAR again depreciated significantly against all three currencies: -5.4% against the EUR, -8.1% against the USD and -1.7% against the GBP, which was the main driver of the 5.71% return over the quarter and the 16.54% return for the full year.

Portfolio activity and positioning
The fund is still defensively positioned, with high credit quality and short durations, although we did extend the durations and average rating of the fund to capture some of the risk-on sentiment in the markets and pick up some yield by positioning further out the curve this quarter. The weighted average rating factor increased 29 points to 71, which implies an average rating of A and approximately 36% of the fund is still invested in AAA-rated bonds. The weighted average interest rate duration is around 125 days and the credit spread duration is slightly higher at around 160 days.

Examples of the bonds we purchased this quarter were those issued by Goldman Sachs, Bank of American/Merrill Lynch, Citigroup, Morgan Stanley, General Electric, National Australia Bank, EDF, Royal Bank of Scotland, KFW and various governments' treasury bills, which we use for managing liquidity. The regional split remains neutral in terms of currency positioning.