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SA investors to consider fixed income funds in current market environment

 

SA investors to consider fixed income funds in current market environment
21-10-22 / Tommy Jackson

SA investors to consider fixed income funds in current market environment

Johannesburg - Rising inflation and volatile global equity and bond markets have been key themes for investors to contend with in 2022 thus far. Against this backdrop, investors are looking to protect their savings from being eroded by inflation, with traditional safe havens not providing the level of protection as in prior bear markets. 

While we are experiencing a rate hiking cycle, real interest rates on cash (i.e. interest rates net of inflation) are currently negative, making it especially challenging for investors to maintain the purchasing power of their money if they rely solely on cash investments to do so.

This is according to Lyle Sankar, Head of Fixed Income at PSG Asset Management, who explains that a diversified income fund can provide investors with protection against inflation and preserve capital.

“We believe it is important that investors expand their fixed income toolkit beyond cash and cash-like instruments. Our approach is quite unique in the market in that we have an investment objective in our Diversified Fixed Income fund of outperforming inflation plus 1% over rolling 2-year periods, thereby shielding our clients savings from inflation.  We do this by investing in a mix of local and foreign assets to provide a core fixed income portfolio comprised of the full breadth of fixed income securities.”

Sankar notes that PSG Asset Management also utilises exposures to listed property, preference and ordinary shares when attractive, adding differentiated return and risk drivers to the core fixed income portfolio. These investments average below 10% of the fund in aggregate through cycles, yet provide the ability to opportunistically strengthen returns through small but valuable allocations to a wider range of mispriced assets than typically seen in this category of funds, while still keeping the objective of capital preservation in mind.

“The fund is managed with the needs of an inflation cognisant, yet conservative investor in mind. Risk is kept within tightly defined parameters by dynamically managing risk and allocating capital to the best areas at different points in the cycle,” Sankar explains. The fund can be viewed as a core fixed income portfolio which delivers attractive inflation-beating income returns at appropriate risk levels, while also solving allocation decisions on behalf of our investors to position them appropriately in different cycles. This removes the risk of emotional investor responses that may impact on the ability of investors to achieve their longer-run investment objectives.”

This means that while investors should be comfortable with a small degree of exposure to market and interest rate fluctuations, investors in this fund have only seen two negative rolling 3-month returns over the past 10 years, both during the outbreak of Covid-19 in 2020, evidencing the reliability of returns of this approach.

In constructing this fund, Sankar explains that capital is only invested in securities that meet their real return requirements (return above expected inflation).“Risk management is central to our approach.” Sankar continues. “While we aim to achieve our benchmark of CPI+1%, our dynamic approach of buying only when we believe assets are mispriced has rewarded clients as the fund has returned closer to CPI + 2.9% p.a. over rolling 2-year periods at appropriate levels of risk. Over long periods, these returns are similar to that of the typical ALBI-benchmarked bond fund, at significantly less duration risk and lower volatility. 

“We believe the PSG Diversified Income Fund’s objective of outperforming inflation is an important (and relevant) differentiator for fixed income investors, since inflation erodes the value of the income received over time. We also believe the need to outperform inflation will become critical in the years ahead, especially given a more volatile inflationary environment. Aligning the benchmark of this fund to a key investor challenge, allows us to achieve better outcomes for investors over the longer term,“ Sankar concludes.

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