A place for in­vestors to hide

Finweek English Edition - - PRO PICK - BY CRAIG GRADIDGE Co-Founder Of Gradidge-Mahura In­vest­ments ed­i­to­rial@fin­week.co. za

The cur­rent mar­ket volatil­ity must have a num­ber of in­vestors scur­ry­ing for cover. With so many sources of risk in global mar­kets such as Greece, China and ris­ing rates in the US, to­gether with a weak­en­ing cur­rency, de­te­ri­o­rat­ing eco­nomic con­di­tions and ris­ing in­ter­est rates lo­cally, weak­ness and/or volatil­ity could char­ac­terise mar­kets for some time to come.

So where s hould i nvestors be look­ing to park their f unds while wait­ing for volatilit y to drop off ? Cash is still of­fer­ing low re­turns af­ter taxes and fees. Higher re­turns at the bank come with liq­uid­ity trade-offs as in­vestors are ex­pected to com­mit to at least a one-year f ixed term to get some­thing close to an at­trac­tive rate.

In­vestors with fresh cap­i­tal have a num­ber of op­tions at the mo­ment: ig­nore volatil­ity and in­vest now with a long term view; phase money into the mar­ket in an or­derly fash­ion over a cer­tain time hori­zon; phase money into the mar­ket in a dis­or­derly fash­ion based on mar­ket move­ments; or park t he f unds i n cash and wait un­til mar­kets are cheap and yields high.

Which strat­egy is the best one to adopt will de­pend on the in­vestor and their ap­petite for risk. For the pa­tient in­vestor with a suf­fi­ciently long-term hori­zon, the op­tion to park funds and wait is good. The ques­tion is then where to park the funds, and at least beat inf la­tion while wait­ing?

The Pre­scient In­come Provider f und is a solid op­tion for in­vestors. The fund aims to gen­er­ate in­come and out­per­form the South African cash and short-term bond mar­ket through a full in­ter­est rate cy­cle, and pro­vide some growth in cap­i­tal. Ac­cord­ing to the fund fact sheet, it in­vests in cash, high qual­ity cap­i­tal mar­ket in­stru­ments, pref­er­ence shares and listed prop­erty. A num­ber of tech­niques are used to gen­er­ate re­turns in­clud­ing du­ra­tion man­age­ment, yield en­hance­ments and risk man­age­ment strate­gies. Risk is also mit­i­gated by ap­ply­ing strict credit lim­its, and the fund is able to in­vest off­shore.

We l ike the f und be­cause of the rel­a­tively low cost struc­ture com­pared to its peers. The Coro­na­tion Strate­gic In­come fund is cheaper, but only by 0.05%. The fund also has an ex­plicit risk bench­mark of no cap­i­tal losses over rol l i ng t hree-month pe­ri­ods, and has con­sis­tently achieved t his bench­mark. On the up­side, the fund has a per­for­mance bench­mark of CPI+3%, which is an in­cred­i­bly tough bench­mark for such a fund. We will be happy with CPI+1% – CPI+2% over t i me f rom t he f und. It has out­per­formed CPI+3% since in­cep­tion i n 2005, how­ever, t his has been a largely be­nign inf la­tion en­vi­ron­ment cou­pled with above av­er­age re­turns from bonds and prop­erty.

Pre­scient has a long and cred­i­ble track record in man­ag­ing fixed in­ter­est man­dates, and was largely re­spon­si­ble f or t he s uc­cess of t he Ned­group Flex­i­ble In­come fund be­fore hand­ing back that man­date. The low cost and low volatile na­ture of the fund makes it an at­trac­tive op­tion for in­vestors with an un­de­fined in­vest­ment hori­zon, wait­ing for an op­por­tu­nity to get back into the mar­ket. They will likely keep inf la­tion at bay in the short term, and have the liq­uid­ity when they need it.



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