HARVARD HOUSE BCI FLEXIBLE INCOME FUND
Raging Bull Award for the Best South African Interest-bearing Fund – the top-performing fund on straight performance in the South African interest-bearing short-term and variable-term sub-categories, as well as the South African multi-asset income sub-category over three years to December 31, 2014
A relatively high exposure to listed property probably gave a multi-asset income fund the edge over its competitors in the bond, income and multi-asset income sub-categories.
The Harvard House BCI Flexible Income Fund earned a return of 9.83 percent a year over the three-year period to the end of December 2014 (according to ProfileData), the highest return among the funds in the three different sub-categories that invest predominantly in interest-earning assets. This result earned it the Raging Bull Award for the best South African Interest-bearing Fund at this year’s awards ceremony.
The Harvard House Group is a financial services group based in Howick in KwaZulu-Natal. Its flexible income fund, managed by Willie Pelser, can move between bonds, money market instruments and listed property, in line with the manager’s views on which of these asset classes will deliver the best returns.
Pelser says he has maintained an exposure of about 20 percent of the fund to listed property since the fund’s inception in October 2006.
The FTSE/JSE Listed Property Index returned 23.1 percent a year over three years and 16.25 percent a year over seven years to the end of December last year. Funds in the multi-asset income sub-category are permitted to have property exposure of up to 25 percent and equity exposure of up to 10 percent.
Although the Harvard House Flexible Fund does not invest in listed equities, it invests in preference shares, with, at times, low exposure to these shares and, at other times, the full exposure of 10 percent.
Pelser says there have been times when Harvard House’s research, as well as that of others, has indicated that the prices of listed property shares have had a good run, which is unlikely to continue.
“But I have been contrarian at various times of the property cycle – the income you earn from listed property is a growing one and assists the income distribution growth to the underlying investor,” he says.
Pelser says that he tries to maintain a good income from listed property by making subtle shifts between companies that have retail, office or industrial property.
The aim of the Harvard House Flexible Income Fund is to earn an income that is better than you could earn from investing in cash or a money market fund.
Pelser says that the fund has consistently achieved a return of about one percentage point higher than cash.
A money market fund will currently earn about 5.3 percent, while the Flexible Income Fund is earning about 6.5 percent in income, he says. The fund pays out quarterly, rather than twice a year, making it the choice of investors who want a regular flow of cash in their pockets.
Holding preference shares, listed property and bonds does create the risk for investors of losing capital in the fund, but the fund is much less risky than higher equity multi-asset funds or equity funds.
Besides preference shares and listed property, the fund also has a large exposure to bonds, including corporate bonds and inflation-linked bonds. It had an exposure of more than 30 percent in 2012 and throughout 2014, which has helped the fund’s overall performance.
Looking ahead, Pelser says he will maintain the fund’s 20-percent exposure to property. He is finding opportunities in property companies that are exposed to the residential market and, in particular, local companies with exposure to student accommodation.
With inflation heading downward on the back of the lower oil price, Pelser expects he will earn good returns from government bonds with longer dates to maturity. He says he does not think there will be any change in interest rates, although we may have an interest rate cut, which will result in a downward shift of the yield curve (the curve showing bond yields – the income relative to the price – against their maturity dates).
Pelser has increased the fund’s bond exposure marginally to about 65 percent, but he is avoiding corporate bonds following the writing down of African Bank’s bonds.
He says he will not invest any more of the fund in inflation-linked bonds because of the expected decline in inflation, but he also does not expect to be able to sell the fund’s current inflation-linked bond holdings, which make up less than 10 percent of the fund.