The STANLlB Flexible Income Fund retumed 13.46% vs. the benchmark retum of 8.91 %. The Fund received inflows of R85 during the third quarter. The modified duration of the Fund was increased as bond fundamentals tumed positive. The duration was increased by purchasing RSA R 157 2015 govemment paper. Short dated money market instruments were sold and replaced by higher yielding corporate bonds. The exposure to floating rate notes was increased through the purchase of Imperial Group and Investee paper at attractive levels. Property exposure was increased to 9.9% of the portfolio due to positive bond market fundamentals underpinning positive valuations on listed property.

Looking Ahead
The bond market extended the gains achieved in the first half of the year into the 3rd quarter with the All Bond Index producing a very solid 8.04% retum for the three months ended 30 September 2010. The yield on the RSA 2015 govemment paper ended the third quarter at 7.30%, a full 73 basis points lower than the level at which it traded at the end of June. The 12 month NCD opened the quarter at a high of 7.20% and trended lower over the period to close at 6.30% primarily as a result of the South African Reserve Bank lowering the repo rate. The main driver for bond yields was the tremendous demand from foreign investors who were in search of high yielding emerging market assets. Interest rates in most of the developed world remain at very low levels and this made emerging market yields particularly attractive. As a result most emerging markets have seen their currencies appreciate substantially against the major currencies over the last year. During the third quarter consumer inflation (CPI) continued its downward momentum and surprised the market by repeatedly posting numbers that were lower than consensus estimates. This positive inflation trend, as well as the rampant Rand, prompted the SARB MPC committee to lower the Repo rate by a further 50 basis points in September. This brings the total reduction in the Repo rate to 600 basis points since December 2008. The market adjusted rather aggressively to this rate cut and bond yields at the short end of the yield curve saw the biggest moves. Global bond yields remain at historically low levels with further monetary quantitative easing expected from major central banks around the world. This should be supportive for domestic bond yields in the short term.

Fund review
The STANLIB Flexible Income Fund returned 2.24% vs. the benchmark BEASSA 1 to 3 Year Index return of 1.98%. Trades for the fourth quarter included the sale of shorter dated money market assets to buy corporate bonds at attractive yields. The Fund's modified duration position was increased to benefit from higher yielding medium dated bonds. The exposure to government bonds was increased through the purchase of RSA 2015 R157 and RSA 2014 R206 bonds. Again, the Fund's modified duration position was increased to benefit from higher yielding bonds. Due to increased supply concerns in the long end of the yield curve, short and medium dated bonds were purchased. Short dated corporate bonds were switched for longer dated corporate bonds to benefit from the spread enhancement. Purchases of corporate bonds consisted of Standard Bank, ABSA, African Bank, Nedbank, FirstRand, MTN, Bidvest, Sappi and Daimler Chrysler paper. The exposure to floating rate notes was increased due to the attractive levels being offered in the market and expectations of interest rates bottoming out. The exposure to listed preference shares was also reduced due to poor valuations and low liquidity. Exposure to property was reduced after there was a resurgence in volatility in the bond market as well as the negative view we had on bond yields and the expected normalisation of the yield curve due to bond supply concerns.

Looking Ahead
There were a number of bond friendly fundamentals that were able to outweigh the supply concerns during the fourth quarter, namely: positive comments from the Reserve Bank about the inflation outlook given weaker real economic growth and the widening output gap, with most forecasts now indicating that inflation should fall into the 3% to 6% target band in the second quarter of 2010. The continued strength in the Rand will have a beneficial effect on inflation and inflation expectations. The market is pricing for short interest rates to remain on hold for most of 2010. Shorter dated bond yields remained fairly unchanged during the quarter as the market priced for the SARB to leave the repo rate unchanged for the remainder of 2009. The RSA 2015 R 157 started the quarter at 8.29%, touched its worst level of 8.70%, before ending the quarter at 8.39%. The 12 month NCD rate traded from 8.08% to a high of 8.25%, before ending the quarter back at 8.08%. Domestic corporate bond spreads have continued to narrow against the government curve as the appetite for risk continues.