Fund manager insights
THE FUND IS skewed towards floating-rate notes and floating-rate bonds, which are benchmarked against an interest rate, typically the Johannesburg Interbank Acceptance Rate (Jibar).
“It is easier to restructure the portfolio and add duration via swaps if the core of the portfolio is in floating-rate assets. There is good yield pickup in medium-dated floating-rate assets and your interest rate resets every quarter to the prevailing interest rate, which works well in a rising interest rate environment,” Farzana Bayat, one of the fund’s managers, says. “The fund aims to generate a real yield and we compound that over time.”
With consumer price inflation having risen to 5% in July from 4.7% the previous month, Bayat sees that the benchmark indicator for price increases could breach the upper limit of the Reserve Bank’s 3% to 6% target early in 2016. “With the weakness in the rand we see upward inflationary pressure,” she says. About 19% of the fund is invested offshore and mainly in floating-rate instruments and properties, Bayat says. The fund’s exposure to foreign currency was fully in US dollars when the rand was below R10/$. When the rand traded above R10, the fund hedged rand via a currency collar. Currently half of the offshore currency exposure has been hedged between rand/US dollar levels of 13.50 and 14.50, which means that the fund will participate in rand weakness between 13.50 and 14.50 and beyond those levels, the fund will be back in rands.
The other half of the offshore currency exposure is hedged into rand via a rand forward. The effective US dollar exposure in the fund is around 4%. Although the rand is cheap on a purchasing power basis, SA-specific risk and potential emerging market outflows on the back of higher US rates make a hedge sensible.