Fixed interest in 2018: A Janus-headed half-year
By Melville de Plessis, fixed interest portfolio manager at Sanlam Investments
Distinctly different quarters
The first quarter was dominated by positive news flow and ‘Ramaphoria’ on the local front, which further supported South African fixed-interest assets and the currency, short on the heels of the very good performance delivered during December. By contrast, the second quarter was dominated by negative developments on the international front which weighed on emerging market assets in general, with South African fixed-interest assets and the currency not escaping unscathed. International developments, such as trade tensions and growing concerns that the Fed may hike interest rates more quickly than expected, overshadowed positive developments on the local front, such as the news around an investment roadshow by President Ramaphosa and his team of envoys working to raise foreign investments into the country.
June was particularly tough for emerging markets
In June global financial markets were pulled in a few different directions. On the one hand, trade war news continued to feature in headlines. On the other hand, monetary policy in the US and Europe stood in contrast with each other as the Fed took a more hawkish tone while the European Central Bank was more dovish than expected. Emerging market equities were pulled down during June resulting in them being one of the worst performing asset classes for the year to date.
Emerging market bonds have also had a tough year so far with most indices under water in local currency as well as hard currency terms for the year to date. South African fixed-interest and credit assets have performed relatively well given the prevailing local environment and global backdrop.
Ratings agencies all have a stable outlook on SA
S&P kept their rating of the South African sovereign unchanged, at BB for the foreign currency rating and BB+ for the local currency rating. They also kept their outlook unchanged at stable. Fitch subsequently kept South Africa’s sovereign credit rating unchanged at BB+ on the local and foreign currency rating, with the outlook also unchanged at stable. Their update stood in contrast to S&P’s review, which was a bit more positive and alluded to a possible improvement in the outlook going forward if there are continued improvements on the political and economic front. Both S&P and Fitch thus have South Africa’s sovereign credit rating below investment grade with any return to investment-grade ratings being a multi-year process. Only Moody’s still has an investment-grade credit rating on the South African sovereign, also with a stable outlook. The ratings outlooks could deteriorate if there is slippage on the fiscal front, if institutional credibility is undermined or if the investment and economic outlook is jeopardised.
Local credit is supported by strong investor appetite
Local credit spreads continued to be very supportive. Spreads on existing credit counterparties continued to trade with a stronger bias while new issuances also priced strongly with very healthy investor appetite for new paper. Credit spreads in the financial and corporate sectors have continued to trade stronger, while spreads on SOEs and municipalities have stabilised. Credit is still being supported by very strong investor appetite. We take this into consideration when looking at new opportunities for the Sanlam Investment Management (SIM) Enhanced Yield Fund, our fund aimed at investors who have at least a 6- to 12-month investment horizon. We are thus approaching new investments with more of a cautionary bias.
SIM Enhanced Yield Fund celebrates 7 years of excellence
The SIM Enhanced Yield Fund reached its seven-year track record during the second quarter of 2018, ranking at number 1 over the seven years to June 2018 among the 18 funds with such a long track record. The results show that the strategies employed for the Fund can deliver sustainable outperformance, but we have nevertheless continued to seek ways in which to further enhance the Funds’ performance profile of the last few years. Yield enhancement is pursued by using a combination of both interest rate and credit strategies. The Fund’s track record so far demonstrates that it is possible to outperform during various interest rate cycles, as well as favourable and even unfavourable credit market environments.
Overall, the investment proposition for the SIM Enhanced Yield Fund remains a good one. The Fund is supported by established fixed-interest processes as well as an extensive credit process. In addition, the valuations of assets which form part of the investable universe of the Fund are more than fair. All of this suggest that going forward we should be able to deliver similarly good results that we have been able to achieve thus far.
Disclosure:
Although all reasonable steps have been taken to ensure the information on this website/advertisement/brochure is accurate, Sanlam Collective Investments (RF) (Pty) Ltd does not accept any responsibility for any claim, damages, loss or expense; however it arises, out of or in connection with the information. No member of Sanlam gives any representation, warranty or undertaking, nor accepts any responsibility or liability as to the accuracy of any of this information. The information to follow does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act. Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision.
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The fund may from time to time invest in foreign instruments which could be accompanied by additional risks as well as potential limitations on the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme/ Standard Chartered Bank is the appointed trustee of the Satrix Managers Scheme.
The SIM Enhanced Yield Fund is an interest-bearing fund that invests in a wide range of debt instruments. The Retail class is the most expensive class offered by the Manager. The maximum fund charges include (including VAT): An initial advice fee of 0.34%; annual advice fee of 1.15% and annual manager fee of 0.48%. The most recent total expense ratio (TER) is 0.49%. The source of the performance data is Morningstar – seven years to 30 June 2018. The worst 12-month performance for the Fund is 5.8%. The best 12-month performance is 10.4%.
Please note that past performances are not necessarily an accurate guide of future performances, and that the value of investments / collective investment units / unit trusts may go down as well as up. Commission may be paid and, if so, would be included with the brokerage charges, securities transfer tax, auditor’s fees, bank charges, trustee fees and levies in the overall costs, which will be levied against the fund. A schedule of fees and charges and maximum commissions is available from the manager, Sanlam Collective Investments(RF) Pty Ltd on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total value of all assets in the portfolio including any income accrual and less any permissible deductions from the portfolio. Portfolio performance is calculated on a NAV to NAV basis and does not take any initial fees into account. An annualised growth rate is used for all performance data of 12 months or longer. Income is reinvested on the ex-dividend date. Total return performances are published. The source of performance data and risk statistics is Morningstar. Actual investment performance will differ based on the initial fees applicable, the actual investment date and the date of reinvestment of income. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The manager has the right to close the portfolio to new investors in order to manager it more efficiently in accordance with its mandate.
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