next move in interest rates is up,” says Le Roux. “What happens in the US is key. If and when the Federal Reserve starts to hike rates – something that could begin happening as early as August – then we think our rates will begin to move, too.”
Le Roux and Maharaj have prepared the fund for this scenario by investing in paper (short-term instruments) and bonds that can adjust quickly to changes in interest rates. “The floating Negotiable Certificates of Deposit (NCDs) issued by the banks reset every three months and are currently paying us 1.2% above JIBAR,” says Le Roux. (JIBAR is an interest rate that the banks borrow and lend to one another over very short durations.) Floating NCDs account for well over a quarter of the fund.
The fund used the tremors in fixed-income markets post the collapse of African Bank to buy corporate bonds providing very healthy yields. “We didn’t hold any African Bank debt; we just never liked the risk-reward tradeoff, and we had cut all exposure as far back as 2012,” says Le Roux.
Le Roux adds that the fund has been withdrawing its exposure to listed property. “This is now less than 6% of the fund, and we also think inflationlinked bonds are fairly priced. We currently hold just 5% of the portfolio in these instruments.”