December saw the usual end of year slowdown in market activity as most market participants took a break. The ZAR had a strong month as it strengthened by more than 3% against the US dollar. This was mostly driven by a risk on tone in global markets due to hopes of an end to the trade wars between the US and China. Rates had a more muted reaction as they were largely unchanged. The FRA curve continues to price in one interest rate cut over the next 12 months. Looking ahead, many of the risk factors facing the SA market still remains relevant. The fiscal trajectory has not improved, with little in the way of plans to fix it. Eskom's woes are set to intensify as load shedding again becomes part of South African lives. With the ANC set to meet in June, the market will closely watch the power dynamics and the ability of the President to implement the unpopular but desperately necessary reforms. The Fund is still earning an attractive real yield of between 3% and 4%, with a strong focus on high quality, shorter term liquid assets. We remain cognisant of the looming risks and will again wait for an opportunity to increase the duration in the Fund. Should interest rates rise, it would benefit from the low duration profile as yield earned will rise with the market. In our view, the bigger risk is rising inflation, which will threaten the Fund's real return target. To this end, the Fund holds an inflation swap, a currency option and a South African market hedge position. These will provide some performance enhancements should emerging market or inflation risk materialise. 51.40% of the portfolio is invested in Namibian money market assets.
The Fund outperformed its benchmark in December as well as over the last twelve months. The bulk of the performance came from good quality paper held in the portfolio, which generated yield over and above the benchmark. December saw a positive contribution to the performance from the property exposure. The strengthening rand and lower inflation numbers saw the inflation hedge positions in the Fund detract from the performance.