Income funds do perform

Income funds that risk and return are opposites.

“Over the last 12-plus years, since the fund’s inception, it has never lost capital over any threemonth rolling period.”

Investors in income funds typically buy them to draw income and have two requirements: stability in capital values, and real returns.

Prescient Management Company CEO Meyer Coetzee says income funds are suitable for investors seeking stable returns and aiming to maximise income via exposure to money and bond markets.

Unexpectedly, however, the Prescient Income Provider Fund has outperformed more than half of all balanced unit trust funds over the last 12-plus years since its launch, at a fraction of their volatility.

“Conventional wisdom tells one that risk and return are the two opposites, but our fund has delivered consistently above inflation every year since inception in December 2005, and over the whole period, it has returned 3.5% [in real terms] after fees.

“Over the last 12-plus years, it has never lost capital over any three-month rolling period.

“If you compare other alternatives available for retirees, specifically across the Asisa multi-asset categories, which are the ‘balanced funds’, it has outperformed the average of all.

“Currently the gross yield of Income Provider is 9%, and inflation 4.9%, so the yield is just over 4% above inflation,” Coetzee says.

While income funds have limited exposure to equities, they have exposure to other risks.

The ultimate risk is the real yield offered to investors decreasing. For this to happen, either overall yields must come down or inflation must go up, or combinations of those that would result in the gap between the two decreasing. Most experts don’t believe there’s much room for yields to drop, especially with interest rates on the increase.

The bigger risk is inflation. “If inflation goes down, the real return offered by the fund will increase,” Coetzee says.

To protect investors against that scenario, the fund uses three strategies.

The first protects against the rand weakening. Traditionally, this is achieved by holding foreign currency-denominated assets, but in this fund all offshore assets are hedged back to the local currency to remove currency volatility-associated risk.

The second uses explicit inflation protection instruments where the fund is compensated if inflation runs away.

The third, through a five-year instrument, protects the fund more broadly against the possibility of a major emerging market sell-off, which would lead to imported inflation.

Moneyweb

South Africans initially took money offshore because of political uncertainty and concerns over the future of the economy and the rand. But over the last few years, there has been a change in their approach to international investments – offshore investment has become far more nuanced.

“The investment rationale for diversification is now far more than a contingency plan,” says Andrew Brotchie, MD of Glacier International. “It is a strategic part of asset allocation and of how investors structure their affairs.”