its uses two external managers – in the form of Prescient and Coronation – who manage the money on behalf of investors. “The investment managers have absolute return targets written into the mandate,” says James. This means the returns must exceed 2.5% per annum above the consumer price index (CPI), regardless of market conditions. With CPI currently at 4%, this would imply the fund must achieve returns of 6.5% in the current period, something that it seems to be doing quite easily at the moment.
In terms of the types of instruments the managers can invest in, James says that “these have to be bonds issued by the government or corporates that meet certain credit criteria, and in order to achieve the returns we want, the fund is restricted to holding a maximum of 5% in cash”.
You can see the way the fund has been positioned by looking at the accompanying table entitled Duration allocation, which shows the different maturities of instruments in the fund. The fund is overweight exposure in the one- to three-year category. “Basically, we think inflation is going to be relatively subdued and interest rates flat for the foreseeable future,” says James. This implies the fund will be less influenced by interest rates in the future than a bond fund with more duration would be.