We had the pleasure of hosting the Fixed Income Franchise at our last External Distribution Channels (EDC) team lunches. James Turp, Head of Fixed Income and Keorapetse (Keo) Leballo, Assistant Portfolio Manager interacted with clients in Pretoria, Johannesburg and Cape Town in a space of three days, spreading the word of the good work they are doing within the franchise. It is worth mentioning that the Absa Bond fund managed by James was the runner up in the Bond Fund category at the Morningstar awards* held in February 2019.
The space held by fixed-income assets is evolving. The status of Kingmaker has been the view held by many when it comes to the relevance of this sector in a portfolio. By the very definition, Kingmaker has great influence over others’ succession, without being a viable candidate. This definition has been apt historically but fixed income has been more King than Kingmaker in the last few years. Cash was always viewed as a place to park money while it was in transition but in the last 3 to 5 years, Cash and Bonds have outperformed Equity, Property, and even the currency (USD/ZAR) performance, as shown by the chart below.
Asset Class returns: 3 year
Source: Bloomberg (June 2019)
Fixed income has been able to deliver above-inflation risk-adjusted returns over the medium term and continues to support client return objectives and goals. James spoke to clients about the different offerings available within the fixed income stable.
ABAM Fixed Income Product Range
Source: ABAM (May 2019)
As shown above, on the lower end of the risk spectrum sits the pure Money Market fund, which has the Stefi Composite as a benchmark. The fund is focused on capital preservation and liquidity. As the largest Money market fund in South Africa, at just over R77 billion (as at 31 May 2019) the fund is ideal for short-term investments. Slightly higher on the risk spectrum is the Absa Core income fund, a fund that the franchise is particularly proud of and looking to showcase on several levels. The fund benchmark is 3-month Jibar plus 0.5% and uses the money market fund as a building block and adds returns through duration extension. The fund has grown over the years to close to R6 billion in assets under management (as at 31 May 2019). On the far end of the risk spectrum is the bond fund which is the All Bond Index (ALBI) flagship fund.
When asked about the bond market and duration, James explains that they currently prefer to be short duration. There are concerns around the fiscal health of South Africa, particularly impacted by escalating debt from the State Owned Entities (SOE), particularly, Eskom and SAA. A potential downgrade by Moody’s also remains a cloud looming over the bond market. Remaining short gives the franchise the ability to be nimble. James says that they have also found it much easier to add duration when things look more positive than it is to reduce duration when markets turn negative. They are also short Inflation-linked bonds as they currently do not see value in the space. Should this change, they would look to increase their allocation.
ABAM Fixed Income Fund performance (Gross of fees)
Source: ABAM (April 2019)
The chart above shows that the bond strategy has been working well, with phenomenal returns across the majority of the tenors shown. Delivering close to 9% in the one year space, the Absa Core Income Fund is a compelling alternative to pure money market. James and Keo remain constructive on the sector and we continue to look to the good old Kingmaker or King (depending on the investor’s view) to continue delivering solid risk-adjusted returns.
* The Morningstar awards recognize funds and asset managers that add the most value for investors within the relevant peer group over a 5 year period with emphasis on performance over the last year.
This communication has been produced by Absa Asset Management (Pty) Ltd (ABAM), an Authorised Financial Services Provider. The information contained in this presentation does not constitute an offer or solicitation to enter into any transaction, nor does it constitute any recommendation, guidance or proposal to enter into any transaction. The information is provided for illustrative purposes only and is not guaranteed. Past performance is not an indication of future performance. While every effort has been made to ensure the accuracy of the above information, ABAM does not accept any liability or responsibility for any loss, damage or expense incurred neither in relying on the above information nor in the use thereof, nor makes any representation as to the accuracy or completeness of the above information. Anyone making use of the information contained in this presentation does so entirely at their own risk.
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