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.

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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.

Why fin­week would con­sider adding it:

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