Fund man­ager in­sights

Finweek English Edition - - FUND IN FOCUS -

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.

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