Good for a stable income, capital protection
The fund aims to achieve a high level of sustainable income while preserving the stability of the capital invested. It is skewed to fixed-income assets such as bonds, money-market instruments and listed property stocks.
In an environment where equities are delivering sub-optimal returns to investors, stable and income funds are starting to become attractive in the bid to protect capital. One such fund is the Harvard House Group’s Flexible Income Fund.
The fund’s mandate is a little more relaxed than those of traditional money-market type assets, explains Willie Pelser, the fund’s manager. The fund has a larger choice to invest in riskier assets, such as listed property stocks and even some local equities.
“We can move between asset classes,” he explains, and adds that the fund’s exposure to the listed property sector ranges between 20% and 25% of the fund. This sector delivers yields that outpace inflation, according to him.
Almost half of the fund was invested in local bonds, according to its latest fund fact sheet. Among the top picks were two inflation-linked government bonds.
Pelser says that inflation-linked bonds are yielding the “fruits” to those investors who entered the asset class about two years ago. Currently these bonds, also known as linkers, are yielding negative returns to those buying belatedly. Inflation-linked bonds pay certain percentage points more than the official inflation rate.
Nominal government bonds, or that government debt with a fixed coupon rate, have already discounted a downgrade of South Africa’s sovereign credit rating to below-investment grade, or so-called junk status, explains Pelser.
Even though a ratings downgrade is looming, Pelser is more optimistic about the play-out of such an event on the local bond market.
“In terms of public finance, South Africa isn’t close to a debt trap,” he says. Compared with its peers in the Brics nations, SA’s debt level of close to 50% of GDP isn’t close to causing a concern for default, Pelser says.
Why finweek would consider adding it:
Stable and income funds are bedrocks in uncertain economic times. With equities on the local bourse struggling to benefit investors, many are turning to fixedincome type assets.
Local government bonds have experienced sort of a short-term rally of late. This was mainly driven by a resurgent currency. Nevertheless, the search for a proper income stream, especially for pensioners, and the concomitant protection of capital should be at the forefront of an investor’s mind when deciding where to park money at this stage.