Fund Review
The STANLIB Flexible Income Fund returned 7.27% versus the benchmark's 8.53% and received further inflows of R130m during the third quarter. The Fund's yield curve position was maintained with an underweight in the long end which performed poorly during the quarter. The duration was slightly increased through the purchase of RSA 2018 R204 paper and Eskom 2018 paper. Shorter dated money market instruments were liquidated and reinvested in longer date floating rate instruments at attractive yields. The modified duration position was increased from 0.9 to 1.1 years. Exposure to securitized assets has also been increased, mainly in the residential mortgage issues, due to attractive levels in comparison to money market assets. We maintained the RSA 2022 inflation linked paper as a means of diversifying inflation risks. Exposure to the listed property market was retained as the property sector's valuations and outlook remained attractive in relation to current bond yields.

Looking Ahead
The third quarter was a tale of two halves. The quarter started with emerging markets still the preferred investment destination for fixed income investors, due to attractive real yields being offered. The bullish undertone was, however, reversed in the last month of the quarter as risk aversion across the globe led to currency volatility in emerging markets and this curtailed the gains for the period. Confidence was abruptly shaken in the latter part of the quarter, with the renewed focus on sovereign debt default in Southern Europe as well as deteriorating fundamentals in more European countries. The ALBI 1-3 Year index returned 3.0% for the third quarter against 1.4% from cash. There was a significant normalization of the yield curve with the yield differential between the longer dated R186 and the shorter dated R157 trading up to 161 basis points at the end of September from 110 basis points at the beginning of July, largely in response to government issuances in the long end and an accommodative monetary policy supporting the short end.
The SARB Monetary Policy Committee (MPC) left rates unchanged in both meetings during the quarter, changing their focus from being inflation orientated to much more growth focused. Although headline inflation is increasing, the SARB MPC indicated that they will only act when they see second round effects on prices developing, placing a lot more focus on the deteriorating growth outlook from developed markets. The Rand weakened abruptly and sharply during the latter part of the quarter, due to the risk aversion trade in emerging markets.

Fund Review
The STANLIB Flexible Income Fund returned 9.61 % versus the benchmark return of 7.81%.

The Fund's yield curve position was maintained at underweight the long end of the yield curve. The duration was slightly increased through the purchase of RSA 2018 R204 paper. During the quarter shorter dated money market instruments were liquidated and reinvested in longer date floating rate instruments and a higher yield. The modified duration of the Fund was increased from 0.7 to 0.9 years and exposure to floating rate notes was increased through the purchase of Barloworld, Sappi, FirstRand and Standard Bank paper at attractive levels. Exposure to securitized assets has also been increased, mainly in the residential mortgage issues, due to attractive levels being offered by issuers in relation to money market assets. We also purchased RSA 2022 inflation linked paper as a means of diversifying inflation risks developing as evidenced by the continuous upward revision by the SARB monetary policy committee. Exposure to the listed property market was maintained as the property sector's returns were supported by lower bond yields.

Looking Ahead
Second quarter bond returns improved significantly as compared to the first quarter as demand for risky assets saw significant inflows into emerging markets, with South Africa also attracting a fair amount of attention. The All Bond Index (ALBI) 1- 3 Year area returned 2.17% for the quarter, easily outperforming money market assets. The yield curve remained positively sloped as longer dated debt instruments were demanded less than shorter dated instruments, a result of a highly accommodative monetary policy stance by the SARB and higher supply in the long end. Bond yields in peripheral Europe ended higher as debt concerns around Greece's ability to refinance maturing debt looked unclear and the possibility of debt rescheduling in future looked possible. The SARB monetary policy committee left rates unchanged in their meeting during the quarter, although as expected they revised the inflation forecast higher as compared to the previous forecast, but still see a breach above the 6% targeted ceiling as being temporal. Although headline inflation is increasing, the SARB indicated that they will only act when they see second round effects on prices developing. A strong currency will help soften inflation threats, although it will hurt South Africa's terms of trade. The SARB is expected to keep lending rates on hold for this year, with a possible hike pencilled in for the first quarter of 2012.

Fund Review
The STANLIB Flexible Income Fund returned 0.90% over the quarter. The fund's yield curve position was decreased as the bond market fundamentals turned negative. The duration was decreased through the sale of RSA 2017 (R203), RSA 2018 (R204) and RSA 2020 (R207) paper. The funds were placed in lower risk money market assets. The modified duration position of the fund was reduced from 1.6 to 0.7 years. The fund's exposure to floating rate notes was increased through the purchase of Absa, Nedbank and Investec paper at attractive levels. Exposure to the listed property market was reduced to zero as a defensive strategy in the early part of the quarter as bond yields trended higher, but subsequently increased to 7% as the property sector's returns started to look attractive.

Looking Ahead
The first quarter of 2011 saw bond returns dipping back into negative territory on the back of risk aversion and a flight to quality as foreign investors liquidated their investments in emerging markets. Foreign investors continued to be the biggest drivers of bond yield direction in the South African market. The All Bond Index returned -1.6% for the quarter, but returns for the last 12 months remain positive at 8.3%. Globally, the inflation dynamics have been shifting higher as a result of higher commodity prices, leading to concerns also for the local market. The shape of the yield curve has changed significantly over the quarter, normalizing further mainly in the very long end of the curve as the government continued to concentrate their bond issuances in that area. Bond yields in peripheral Europe rose as the risk of default increased in the financially distressed economies of the EU.

In the past two meetings the SARB MPC kept rates on hold, citing the current low inflation environment and the focus on supporting growth in the economy. The outlook for inflation is negative though as inflation across the globe has bottomed out due to high commodity prices especially energy prices. South Africa has seen significant petrol price increases since the beginning of the year, due to high oil prices with all the volatility in Middle East countries. There is also the threat of steep increases in administered prices locally which could place further upward pressure on inflation in the coming months. We currently maintain the view that the SARB will keep short rates on hold for most of the year, with a higher probability of an increase at the end of 2011.

Fund Review
The STANLIB Flexible Income Fund retumed 13.26% versus the benchmark retum of 8.75% and investment flows totalled R53m during the fourth quarter. The modified duration was increased as the bond market fundamentals remained positive. The duration was increased by switching shorter dated RSA 2015 (R157) paper into RSA 2017 (R203), RSA2018 (R204) and RSA2020 (R207) paper. Short term money market instruments were sold to purchase longer dated bonds. The exposure to floating rate notes was increased through the purchase of SA Homeloans and Vukile Properties paper at attractive levels. The holding in parastatals was increased through the purchase of Landbank bond. The exposure to property was increased to 9.5% of the portfolio as the positive sentiment in the bond market is positive for listed property.

Looking Ahead
Fourth quarter retums in the bond market remained modestly positive at 0.75% for the benchmark All Bond Index (ALBI) despite yields in the long end ending slightly higher. Retums for the year as a whole were 14.96%. The RSA 2015 R157 govemment bond yield opened the quarter at 7.30%, trading to a low of 6.86% before closing the year at 7.31 %. Money market yields also trended lower with the 12 month NCD ending the quarter at 5.85% from 6.30%. Foreigners, who had flooded the local market in search of yield over the past three quarters, were mainly responsible for a higher close in yields as they ended the quarter as net sellers of R20bn bonds, taking profits ahead of the year end. The yield curve remained positive over the quarter. The bond market correlated highly with US yields which trended higher on better economic growth expectations. US Treasuries ended the quarter at 3.3% compared to the previous quarter close of 2.5%. Third quarter consumer inflation (CPI), although still benign at very low levels has started to show signs of bottoming out, which may curtail any further possibility of the SARB to cut the repo rate again. Expectations in the market are broadly for the SARB to keep the repo rate unchanged for 2011 with rates only being hiked early in 2012. The Rand's strength against major currencies will be good for inflation fundamentals as this may limit the pace of increases in future. The SARB MPC will be monitoring the path of inflation and inflation expectations forecasts for signs of any secondary round effects from inflated commodity prices. Going forward, bond yields are expected to stay lower in the short term, but gradually start to move higher in the later part of the year.