Weekend Argus (Saturday Edition)
Fairtree income fund makes the most of mispricing opportunities
FAIRTREE FLEXIBLE INCOME PLUS PRESCIENT FUND (A)
the market, while minimising any risks associated with running those positions,” say the fund’s managers, Paul Crawford and Louis Antelme, who have managed the fund since it was launched in 2013.
The Fairtree Flexible Income Plus Prescient Fund returned an average of 10.55% a year over three years to December 31, 2017, according to ProfileData. The 58 funds in the South African multiasset income sub-category with a performance history of at least three years produced an average return of 7.4% a year over this period.
Inflation, as measured by the Consumer Price Index, averaged 5.39% a year over the past three years.
Funds in the interest-bearing short-term sub-category returned, on average, 7.79% a year over three years, while funds in the interestbearing variable-term (bond fund) sub-category returned, on average, 6.42% a year. The fund’s objective is to produce an annual afterfee return of the Short-term Fixed Interest Index (Stefi) plus 3%. Since the fund was launched in 2013, it has returned, on average, 9.61% a year, while the return from the Stefi plus 3% has been 9.85% a year.
The fund’s investment mandate allows it to invest in interestbearing securities (including bonds, cash deposits and money market instruments), non-equity securities such as equity-linked notes, listed non-equity derivatives, listed preference shares and liquid assets.
As a multi-asset income fund, the Flexible Income Plus Fund can, in addition to cash and bonds, invest in equities (up to 10% of the portfolio) and listed property shares (up to 25%). The fund can invest 25% offshore and a further 5% in Africa, excluding South Africa. Funds in the interest-bearing sub-categories can invest only in interestgenerating assets.
The fund, however, has eschewed investing in either listed property or equity-linked notes.
Crawford and Antelme say they believe the fund’s investors are looking for reasonable returns without the induced risk of adding more volatile asset classes to the portfolio. “We have avoided listed property or equity-linked notes, as we believe that the risk-adjusted returns from these assets does not fit with the shape of the fund at present.”
The managers attribute the fund’s superior performance over the past three years to its exposure to credit assets and the corporate debt market. Floating rate notes (debt instruments that do not have fixed rate of interest over the term of the instrument) have delivered a required spread (the difference between the bid and offer price) above the risk-free rate (the theoretical rate of return of an investment with absolutely no risk of loss, such a government bond).
Crawford and Antelme say there have been no significant changes to the fund’s asset allocation over the past three years.
The fund’s asset allocation is mainly to South African cash and the money market (47.1%), bonds (37.11%), while 10.62% and 5.1% are invested in foreign bonds and foreign cash and money market respectively.
Crawford and Antelme say all exposure to the local bond market is via floating rate notes, which have negligible or modified durations. The fund has no exposure to longdated fixed-coupon bonds issued by the government. Limiting exposure to modified-duration assets has ensured a less-volatile return profile for clients invested in the fund.
The fund’s offshore exposure is hedged using listed futures, so movements in the rand will not affect the performance of the fund, they say.
Looking ahead, Crawford and Antelme say it is possible that there will be two interest rate cuts this year – in March and in May or July. If these rates occur, the yield on the fund should by about 50 basis points, which will see the fund’s total return decrease by about 35 basis points. – Mark Bechard