Experience and research pay off for bond fund
ABSA BOND FUND
- Raging Bull Award for the Best South African Interest-bearing Fund (for straight performance over three years to December 31, 2020)
- Raging Bull Certificate for the Best South African Interest-bearing Variable-term Fund (for straight performance over three years to December 31, 2020)
- Raging Bull Certificate for the Best South African Interest-bearing Variable-term Fund on a Risk-adjusted Basis (for performance over five years to December 31, 2020)
The Absa Bond Fund is a specialist fixed-income fund that provides affordable access to the South African bond market. It is ideal for investors with a medium- to long-term investment horizon who seek lower risk than an equity fund, or who need diversification from the equity market. According to ProfileData, the fund delivered 10.39% a year, on average, after costs, over three years. Its benchmark, the South African All Bond Index, returned 8.88% over that period.
There are 32 funds in the interest-bearing variable-term sub-category that qualified for inclusion in the awards. Over three years, they averaged an annual return of 7.12%, but these annualised returns ranged from 10.39% by the Absa fund to -2.08% by the bottom fund in the group.
The fund invests primarily in South African government and corporate bonds of varying durations. In December, two-thirds (66.7%) of the portfolio was invested in four long-term, fixed-rate government bonds with interest rates (yields) varying from 6.25% to 10.5%.
Bonds, like equities, are traded on a secondary market, so returns come not only from yield, but also from capital appreciation on bond prices. Balancing these two aspects of performance requires a skillful manager.
Personal Finance found out more from James Turp, the head of fixed income franchise and portfolio manager at Absa Investments.
Please outline your investment philosophy/strategy regarding the Bond Fund, taking into account yield versus price, government versus corporate, and the macroeconomic backdrop.
The Absa Bond Fund aims to beat its benchmark at the lowest acceptable level of risk. This strategy has notably delivered strong periods of outperformance during periods of increased volatility, which has been a signature characteristic of the asset class. Using this philosophy, the fund focuses on delivering the most attractive risk-adjusted returns over the short and long term. This approach does not seek to return the highest yield available, but the best strategic return given the known risks.
The fund leverages off of intense fundamental and technical analysis of the investment environment, focusing on key influences to the structural bond market, such as inflation, monetary policy, term-premia and liquidity risk.
A low-risk, conservative approach, combined with an unflinching active management style, has helped the fund to deliver attractive returns to our investors. Duration calls are expressed using liquid government bonds relative to the All Bond Index, whereas credit positioning is focused toward the more liquid, higher-quality issuers.
To what do you attribute your fund’s outperformance over the past few years, and specifically during the pandemic?
The 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 fund’s management.
The strategy of delivering the most attractive risk-adjusted return, and not simply accumulating the highest available yield, is the starting point of the fund’s performance over the long and short term. The fund managers’ active approach to portfolio management attempts to structure a defensive position to benefit from the prevailing macro-economic environment with minor active adjustments in line with structural changes to the yield curve.
The fund’s bias to outperforming during negative market moves while participating in the positive moves is testament to the integrity and consistency of this approach.
How are you positioning the fund for the year ahead, considering the ongoing effects of the pandemic and other local and global opportunities and risks?
After the incredible year that was 2020, the fund will continue to focus on its investment philosophy to deliver its mandated benchmark. The fund will seek opportunities as they present themselves across the yield curve and fixed income market. It is very possible that volatility will be high during 2021 and, as such, it will be important to remain calm and focused on delivering the best for our investors from this exciting asset class.