Raging Bull Awards: Truffle SCI Income Plus Fund
TRUFFLE SCI INCOME PLUS FUND
Raging Bull Award for the Best South African Interest-bearing Fund on straight performance over three years to December 31, 2019
Certificate for the Best South African Interest-bearing Short-term Fund on straight performance over three years to December 31, 2019
The Truffle Sanlam Collective Investments Income Plus Fund was launched by boutique manager Truffle in September 2016. According to its December 2019 minimum disclosure document, the fund has assets under management of R300 million. More than 91% of the fund is invested in floating-rate bonds.
The fund aims to achieve higher yields of income than money market portfolios, while preserving capital. In keeping with the restrictions on funds in the short-term fixed-interest sub-category, the maximum duration of investments in the fund is two years.
Over three years to December 31, 2019, the Income Plus Fund was the top-performing fund in the interest-bearing (short term and variable term) category, returning 11.65% a year, on average, according to ProfileData. The fund’s benchmark, the Short Term Fixed Interest Composite Index, returned 7.37% a year over that period. The average annual return of the 33 funds in the interest-bearing short-term sub-category with a performance history of three years was 8.55%. The annual average return of the 33 funds in the interest-bearing variable-term sub-category with a performance history of three years was 7.88%.
Hannes van der Westhuyzen, one of the co-founders of Truffle, has managed the fund since its inception. Palvi Kala joined him as co-manager in 2018.
Van der Westhuyzen answered the following questions about the fund:
What is Truffle’s investment philosophy with regard to managing the Income Plus Fund?
Truffle follows a multi-strategy approach in targeting benchmark-beating returns. We use a combination of credit and duration when appropriate to generate outperformance. One of our main considerations with this fund is capital preservation, and we therefore avoid what we perceive to be risky credit. We do not invest in instruments with a rating below A minus. We could earn a higher yield on a bond with a BBB rating, for example, but we won’t invest in it, because capital preservation is more important than a small increase in yield. Investors in this type of fund want the assurance of receiving a steady line of income. We therefore seek to mitigate by keeping the overall duration in the fund as low as possible without affecting the return.
To what factors do you attribute the fund’s out-performance over the past three years?
When Basel III (a global regulatory framework on bank capital adequacy, stress testing and market liquidity risk) was introduced in South Africa three to four years ago, we identified the new bank subordinated Tier 1 and Tier 2 bond classes very early in their evolution as a viable investable asset class. We did our homework and set out risk parameters and invested in these bonds from the outset. This was hugely beneficial to the fund, as well as for all of our multi-asset funds where we manage the fixe- income allocation in the same manner, as the yields we achieved were higher than what we perceived the risk to be. Since then, these spreads have narrowed, which resulted in significant gains for the fund over and above the interest coupons.
What opportunities and challenges will the fund face over the coming year, and, following from this, how will you be positioning the fund?
Our biggest challenge is that the benefit of excessive bank sub debt spreads has disappeared as new issues are priced fairly. At the same time, most managers now include this asset class in their funds. This means that returns on actively managed funds will converge. Despite this, we continue to search for mispriced instruments, as we have done in the past. We foresee another rate cut by the Reserve Bank this year – probably in the near term. If this happens, the trend of investors moving into fixed-interest funds will probably reverse, as investors may switch into equities.