Generating inflation-beating returns The fund aims to generate higher levels of income than a pure income fund. The bulk of the fund is invested in interest-bearing and money-market assets.
The fund’s favoured assets include three-year floating-rate notes, according to Brandon Quinn, manager of the fund. These bonds’ interest rates, usually benchmarked against the Johannesburg interbank acceptance rate (Jibar), reset every three months, giving the holder of the note the benefit to realise higher income as interest rates rise.
Banks and insurance companies count among the fund’s preferred issuers of corporate bonds as they operate in a highly regulated industry, explains Quinn. Through this approach, the default risk of the underlying debt issuers is minimised.
The fund’s offshore exposure was positioned to take advantage of the prevailing recovery in commodity market issuers, with a moderate diversified exposure to Anglo American, AngloGold, Impala Platinum, Gold Fields, Sasol and Glencore, says Quinn.
“We took advantage of the recovery in the commodities complex, which was oversold,” he says. “This strategy contributed significantly to the fund’s performance – an outcome of our relative value positioning philosophy.”
In order to minimise currency risk, inherent when offshore assets are held, the fund uses currency hedges to neutralise the impact of the rand’s volatility, explains Quinn. The fund, as an income fund, therefore avoids “wild swings” in the currency, protecting underlying capital and income streams, according to him. The fund is cautious in its approach to SA government debt. Government bonds constitute between 3.5% and 4% of the fund’s underlying assets, says Quinn. “This was the right decision,” he says. “Government bonds sold off significantly since February.”
With the possibility of a downgrade of SA’s sovereign credit rating, or rather a perception of its ability to honour its debt obligations, many investors, especially foreigners, have dumped domestic bonds this year. Nevertheless, the significant country risk premium, measured by the difference between the yield on US 10-year government debt and similar-dated South African bonds has widened significantly to 7.27%, and is now at more than double its decade historical low of 2.3% in 2006, says Quinn. “This is, however, largely a global emerging-market phenomenon. South Africa should not view itself as unigue in this regard despite the local economic and political uncertainty,” he says. He estimates that between 85% and 95% of the impact of a potential ratings downgrade is already priced into domestic government debt.
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