Fund Review
The Fund's modified duration was slightly decreased from 1.43 years to 1.28 years. Inflows were used to purchase higher yielding assets, with a preference for Jibar linked instruments, where the exposure was slightly increased. The floating rate instruments purchased included ABSA, Standard Bank, FirstRand, Nedbank, SA Homeloans, Capitec and African Bank. The fund selectively purchased securitization notes where the yields were attractive in comparison to similar rated paper. The exposure to listed property was increased due to the attractive valuation of property as a result of lower bond yields. The second quarter of 2012 saw bond yields disconnect with the Rand and trade lower, with the short end of the yield curve touching all-time lows. The BEASSA ALBI benchmark returned 3.3% for the quarter. The 12 month NCD opening the quarter at 6.23% and closing the quarter at 5.90%. Meanwhile, the Rand weakened during the quarter to a three year low of R8.70 as volatility in the market briefly returned before the risk on trade resumed again. The increased demand for South African debt was mainly driven by a record demand by foreign investors who increased the year to date holding of South African debt to R48 billion with R18 billion coming in the last months of the quarter alone. The foreign demand was mainly on the back of South Africa's inclusion in the World Government Bond Index (WGBI). It was also a quarter where headline inflation declined to inside the target range, prompting the market to start discounting a 60% probability of a rate cut in the next meeting. Internationally there was higher demand for US and German government debt as the problems in Europe mounted. The SARB MPC left the domestic repo rate unchanged, but issued a more dovish statement in comparison to past statements. This helped to keep the short end of the yield curve well bid. The yield curve started the quarter at 170 basis points and ended the quarter steeper at 192 basis points on the yield differential between the R186 and R157. On the supply side, the government continue to issue longer dated instruments, while also indicating an increased activity in performing switch auctions, where they buyback shorter dated instruments and issue longer dates ones.

Looking Ahead
Looking forward into the next quarter, the market is likely to still be affected by the events in the Euro zone which may have implications for volatility. With Greece out of the radar for a little while, markets may continue to benefit from increased confidence. Domestically, the central bank is expected to leave rates unchanged, although the balance of probabilities favour another cut, given declining inflation and slowing growth.

The STANLIB Flexible Income Fund will predominantly invest its assets in South African investment markets at all times and will be permitted to make investments in a flexible mix of non-equity securities, to the maximum permitted by the Act, and any other securities, which may be included in a portfolio in terms of the Act and relevant legislation, which are consistent with the portfolio's investment policy, and which will include but will not be limited to preference shares. The STANLIB Flexible Income Fund may from time to time invest in financial instruments, in accordance with the provisions of the Act, in order to achieve the portfolio's investment objective.The STANLIB Flexible Income Fund will further be permitted to invest its assets in foreign investment markets, within the implied limitations of the portfolio's industry association portfolio classification, in a flexible mix of non-equity securities, to the maximum permitted by the Act, and any other securities which are consistent with the portfolio's investment policy, which will include but will not be limited to preference shares, and which may be included in a portfolio in terms of the Act and relevant legislation.

This portfolio may have direct and /or indirect foreign exposure up to the maximum as per the ASISA Domestic-Fixed Interest-Varied Specialist portfolio category from time to time. No duration requirements.

Fund Review
The STANLIB Flexible Income Fund increased in size to over R1 billion touching R1.044 billion during the first quarter of 2012. The fund's modified duration was decreased from 1.70 years to 1.43 years as more floating rate paper was introduced in the portfolio. Purchases of floating rate notes included ABSA, Standard Bank, First Rand and Investec. The fund's property exposure was reduced from 7.41% to 2.5% after the listed property market had a decent run during the quarter returning 8.03%. Exposure to Inflation Linked bonds was reduced from 5.2% to 1.1%.

Looking Ahead
The bond market traded in a tight range during the first quarter of 2012 as the market struggled to pick up any serious directional trend. Demand for riskier assets by international players was fairly effectively offset by Government commitments to domestic supply. The international bond market environment improved significantly during the course of the first quarter resulting in an increased demand for risky assets. Emerging markets, including South Africa, benefited from this "risk-on" trade and this put an effective cap on yields on the upside. The Volatility Index improved to 15.5%, a level last seen before the credit crisis. Major central banks around the world continued to implement accommodative monetary policy in order to prevent their economies from slipping back into the recessions that followed the sovereign bond crisis in Europe. In the domestic market, headline consumer inflation stayed above the targeted band of 3% to 6%, but the SARB kept in step with its international peers by remaining accommodative in setting monetary policy. In the budget speech in February, the government brought down its projected budget deficit to levels that were below market consensus. This announcement, which was broadly positive for the bond market, was accompanied by government's commitment to switching shorter dated bonds into longer dated bonds and introducing ultra-long-dated new issues. It also indicated that it will continue to issue approximately R3.1 billion of long-term bonds in the domestic market per week. The combined effect of these announcements was to keep the yield curve normalized. Inflation linked yields traded lower as demand for inflation protection increased.

Going forward, the market is expected to continue trading sideways with risk in the eurozone still expected to impact sentiment. The SARB is expected to leave rates unchanged for the whole year as long as inflation does not move significantly higher. Shorter dated bonds will remain anchored by an accommodative monetary policy; however, longer dated rates will remain elevated due to supply.

Fund Review
The Fund grew by a further R80m during the fourth quarter. The Fund's yield curve position was maintained with an underweight in the long end which performed poorly during the quarter and the year as a whole. Shorter dated money market instruments were liquidated and reinvested in longer dated floating rate instruments at attractive yields. The modified duration position of the Fund was increased from 1.10 to 1.70 years through the purchase of RSA2018 R204. The Fund's exposure to securitized assets was increased, mainly in the residential mortgage issues, due to attractive levels being offered in comparison to money market assets. We increased the holding in 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 increased as the property sector's valuations and outlook remained attractive in relation to current bond yields.

Looking Ahead
The fourth quarter of 2011 was characterized by further volatility in bond yields driven by a plethora of factors both fundamental and technical. Five year benchmark yields ended the quarter and year on a positive note. There was a general improvement in the demand for risky assets as volatility, measured by the VIX, reduced substantially from a high of 45% to end the quarter at 23%. As a result the JP Morgan South Africa sovereign spread compressed by 50 basis points as the risk-on trade dominated the quarter although there was some volatility in between. The Rand however remained on the back foot and at one stage touched a high of R8.61 before recovering to end the quarter at R8.07 as concerns around the sovereign debt crisis in Europe lingered for longer. The ECB which had been hawkish on inflation changed tune and cut the minimum bid rate by a total of 0.5% during the quarter to end at 1% and took further steps to reduce the potential liquidity gridlock by reducing reserve requirements amongst other measures. The latest inflation data showed CPI breaching the top end of the SARB target, printing 6.1%, and is still expected to rise further due to a weaker Rand and higher food prices. Inflation linked bonds benefited from inflation rising as real yields trended lower.

The SARB monetary policy committee left rates unchanged in the two meetings held, as they were concerned about below average growth and increasing inflation. The SARB will continue to find a balance between growth and inflation, and as a result, the repo is expected to remain flat for most of 2012 unless second round inflation starts to increase as well.