PRESCIENT INCOME PROVIDER 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 and the South African multi-asset income sub-category over three years to December 31, 2015
A well-honed capacity to identify, quantify and assess risky assets resulted in performance by the Prescient Income Provider Fund that was worthy of a Raging Bull Award.
The fund is in the South African multi-asset income sub-category. As such, it can, in addition to cash and bonds, invest in equities (up to 10 percent of the portfolio) and property shares (up to 25 percent). The fund can invest 25 percent offshore and a further five percent in Africa.
This ability to diversify gives multi-asset income funds a fighting chance of out-performing inflation in an environment of low interest rates and high inflation.
There is an enormous range in the performance of the 50 funds in the sub-category that are older than three years. To the end of 2015, the Prescient Income Provider Fund’s average annual return was 9.91 percent, while the bottom performer produced minus 0.82 percent. The average return for the sub-category over the three-year period was 5.92 percent a year.
The Prescient Income Provider Fund is managed by Cape Town-based Prescient Management Company. The interest-bearing division at Prescient is led by veteran investor Guy Toms.
Toms is one of two founding members of Prescient and has been with the group since 1998. Other key members of the income team are Farzana Bayat and Jean Pierre du Plessis.
The Income Provider Fund aims to deliver a return of inflation plus three percent a year through a full interest rate cycle, while aiming never to lose capital over any rolling three-month period.
According to the fund’s fact sheet, it invests in local and offshore money market instruments, bonds, listed property, preference shares, inflation-linked bonds and derivatives.
Performance can be generated from taking a view on interest rates, yield enhancement via credit instruments, asset allocation among income-producing asset classes, offshore exposure and the use of derivatives.
Meyer Coetzee, the head of retail at Prescient, says that being risk-aware or risk-averse has paid off. He says the defensive nature of the fund and the focus on capital and inflation protection ensured that concentrated bets were avoided.
“Back in 2010 we used the rand strength post the global financial crisis to increase the fund’s offshore exposure. For a while during 2010 the rand kept on strengthening and that caused some pain, but fortunately the fund ended up delivering a healthy real return for the year,” he said.
As an example of the fund’s capacity to avoid risk, he says most funds in the multi-asset income sub-category incurred losses in December following the market turbulence that resulted from the “three finance ministers in one week” crisis, the sell-off in government bonds and the rand hitting a new low against the United States dollar. However, the Income Provider Fund gained 0.19 percent for the month.
“The fund held up very well, due to the short duration to maturity of the interest-bearing instruments (making them less sensitive to the negative effect of yields spiking than longer-term instruments) and due to the fund’s exposure to offshore assets, which benefited as the rand weakened against the dollar.
“Following the debacle, we used the increase in bond yields to increase the duration in the fund and locked in higher yields through interest rate swaps. That is a very efficient way to increase duration without having to trade excessively,” he says.
Asked which assets have contributed most to the fund’s success over the past few years, he says returns have primarily been driven by a good yield earned from floating rate notes and from having exposure to great offshore assets, notably property shares.
Over the past three years, he says, the fund had significant exposure to good-quality short-dated floating rate notes. “We found the risk-reward trade-off of these instruments very attractive.”
Only 19 percent of the portfolio is invested offshore. Meyer says its effective exposure to the dollar was reduced to only five percent to limit the risk of the rand strengthening from its current levels.
He says the offshore portfolio follows the same philosophy as the local component, with the possible exception of exposure to property. “We find selected offshore property counters more attractive and hence we are overweight in these relative to domestic property,” he says.
On likely investment themes for the year ahead, Meyer says the Prescient team is awaiting the Minister of Finance’s Budget speech in February with great anticipation.
“The outcome could significantly influence investors’ perceptions about our economic prospects. However that turns out, we remain committed to managing the fund in a manner that strives for consistent real returns while avoiding capital losses over any three-month period,” he says.