Cap­i­tal-preser­va­tion op­tion for those near­ing re­tire­ment The fund aims to pre­serve in­vestors’ cap­i­tal and grow un­der­ly­ing as­sets mod­estly over the long term. This reg­u­la­tion 28-com­pli­ant fund in­vests in un­der­ly­ing man­agers such as Absa As­set Man­age­ment, C

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The outlook for bonds is par­tic­u­larly dou­ble-edged at the mo­ment given the up­com­ing rat­ings re­view of South Africa, says Mal­colm Holmes, one of the fund’s man­agers.

“Whilst we think that much of the bad news was priced into the mar­ket in De­cem­ber, bonds will likely sell off on the an­nounce­ment of a South African down­grade,” he says. “There is a real risk this could hap­pen.”

All the ma­jor credit rat­ings agen­cies have is­sued neg­a­tive com­ments on the South African gov­ern­ment’s abil­ity to re­pay its surg­ing debt in re­cent months.

A rat­ings down­grade of the coun­try’s sovereign debt, to be­low in­vest­ment grade or “junk” sta­tus, will af­fect longer-dated ma­tu­ri­ties more, ac­cord­ing to the fund man­ager. The vast ma­jor­ity of the fund’s bond ex­po­sure is, how­ever, in short ma­tu­ri­ties and some cor­po­rate credit, ac­cord­ing to him.

“If it weren’t for the rat­ings is­sue, bonds would be at­trac­tively priced, of­fer­ing around in­fla­tion plus 2.5% over the next 10 years,” says Holmes. “In the face of this un­cer­tainty, we would rather re­main de­fen­sively po­si­tioned un­til there is fur­ther clar­ity from the rat­ings agen­cies.”

Should SA be down­graded, the rand will de­pre­ci­ate, and this will ben­e­fit rand hedges, or stocks earn­ing a sub­stan­tial part of their earn­ings out­side of SA, as well as the global ex­po­sure in the fund, ex­plains Holmes. This pos­i­tive ef­fect will off­set the neg­a­tive im­pact on lo­cal bonds to some ex­tent, ac­cord­ing to him.

“The rand has to some ex­tent al­ready priced in this prospect and by most ac­counts would be re­garded as a cheap cur­rency,” he says. “This, to­gether with the im­proved sen­ti­ment to emerg­ing mar­kets in the short term, has re­sulted in the re­cent ‘ten­ta­tive’ strength in the rand and rel­a­tive weak­ness in rand hedges, which have also had a good run over time.”

Even though they re­main a lit­tle ex­pen­sive rel­a­tive to his­tory, they are solid busi­ness mod­els and will al­ways have a place in a multi-man­aged port­fo­lio like theirs, but his team has no­ticed a mild down-weight­ing more re­cently, con­cludes Holmes.

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