The fourth quarter (Q4) of 2020 began cautiously through October and early November, as markets monitored global second-wave Covid-19 infection developments. Rating agencies Moody’s and Fitch, downgraded the South African sovereign credit rating a further notch and maintained a negative outlook in November. However, risk appetite improved robustly during that month in response to positive vaccine developments and the outcome of the United States (US) election.
The current global signaling from policymakers is for interest rates to remain low for the next one to two years to stimulate an economic recovery. While we face similar issues here at home, there are some rather idiosyncratic risks to this outlook of rates remaining low. On the one hand we expect economic recovery to take a lot longer given the preceding growth environment which will make it difficult for the South African Reserve Bank (SARB) to increase rates from this perspective. However, the pressures to inflation that stem from administered prices and other factors linked to global developments could put pressure on the price stability mandate of the SARB sooner than is expected. What is certain is that fixed income will be an important investment asset class over the next few years.
With the above in mind, we’ve provided you with an update on the Absa Bond Fund, a specialist portfolio in the fixed income funds category, and one that has consistently outperformed over the years.
Launched in May 2002, the Absa Bond Fund has grown, as at 31 December 2020, to R3.9 billion. Over a one year, three year and five year period, it has returned an annualised 11.96%, 10.4% and 11.62%, respectively.
According to the Fund Manager James Turp, the Bond Fund’s outperformance is largely attributable to its conservative approach to the asset class and the high level of experience and constant asset class research involved in the funds management. “The Absa Bond Fund has performed pretty much top of the charts compared before or after fees to similar bond mandates over this one-year period and the preceding five years too. This performance is testament to the consistent application of a conservative management style combined with a strong active management signature during times of heightened risk and volatility - precisely what investors require of this type of fund,” says Turp.
* Peer Group: ASISA Sector (South Africa) = (ASISA) South African IB Variable Term And Primary Share in Market = South African UT-Retail
Source: January 2021, Morningstar Direct
About the Absa Bond Fund
The Absa Bond Fund provides investors with well-diversified exposure to the South African Bond market as well as other interest bearing instruments. It will invest primarily in:
- South African bonds,
- corporate bonds,
- fixed deposits, and
- other interest-bearing instruments of differing terms to maturity, taking into account changes in interest rates, credit risk and liquidity.
Given the current economic outlook and the damage that the multiple lockdown measures have already had on South Africa’s potential growth rate, what’s the likely impact on the performance of the fund going forward? “For fixed income and bond funds the years ahead will be critical, as so much depends on the global and domestic economic recovery as well as our fiscal policy management and debt sustainability trajectory. Our target remains to beat our determined benchmark and aim to do this at a similar margin to our long term track record,” says Turp.
“With fixed income yields lower as a result of the Covid-19 policy response we are in for an exciting and fast changing investment landscape ahead. We will be paying intense attention to inflationary developments and economic and fiscal policy to inform our investment strategies as always,” concludes Turp.