Fund manager

Finweek English Edition - - FUND IN FOCUS - First, a lay­man’s

guide to money mar­kets: when buy­ing loans of dif­fer­ent ma­tu­ri­ties, longer-dated pa­per as it’s called, typ­i­cally de­mands higher in­ter­est rates (yields). The value of longer-dated fixed-in­ter­est pa­per is also more sen­si­tive to changes in in­ter­est rates, re­ferred to as ‘du­ra­tion’. This means that port­fo­lios with higher du­ra­tion will, as in­ter­est rates go up, see their cap­i­tal val­ues de­crease at a faster rate than pa­per with a shorter du­ra­tion.

“The way we see the mar­ket,” says port­fo­lio manager Al­bert Botha, “is that partly due to Basel 3, which en­cour­ages banks to use longer dated fund­ing, and partly due to the fact that in South Africa there is a large amount of money in money mar­ket funds chas­ing a fairly fixed level of sup­ply – there can be quite large dif­fer­ences in the yields of pa­per that have sim­i­lar ma­tu­ri­ties. So we think you can buy pa­per with slightly longer ma­tu­ri­ties and pick up a higher yield with­out tak­ing more credit risk or in­creas­ing the du­ra­tion [sen­si­tiv­ity] of the port­fo­lio.”

As an ex­am­ple, Botha cites two auc­tions of Ned­bank pa­per (which nat­u­rally car­ries iden­ti­cal credit risk). “Re­cently Ned­bank auc­tioned Dou­ble A-rated pa­per with a five-year ma­tu­rity that had a yield of roughly 7.5%. At the same time, pa­per with a three-month ma­tu­rity was of­fer­ing just 6.1%.”

Con­ven­tional wis­dom would sug­gest that by buy­ing the longer-dated ma­tu­rity, in­vestors would be tak­ing on more du­ra­tion risk. But Botha ex­plains how this was avoided: “About 90% of the fund is in float­ing rate note pa­per, with the in­ter­est rate re­set ev­ery three months. So the du­ra­tion of float­ing rate pa­per is never more than the next re­set pe­riod.” This ef­fec­tively al­lows the port­fo­lio to pick up the higher yield of longer-dated in­stru­ments, while avoid­ing the risk of be­com­ing more sen­si­tive to move­ments in in­ter­est rates.

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