SASFIN BCI FLEXIBLE INCOME FUND
Raging Bull Award for the Best South African Interest-bearing Fund on straight performance over three years to December 31, 2018
Certificate for the Best South African Multi-asset Income Fund on straight performance over three years to December 31, 2018
Having the flexibility to adapt to changing market conditions and take advantage of opportunities in times of weakness earned the Sasfin BCI Flexible Income Fund the Raging Bull Award for top performance over three years in the South African interest-bearing category at this year’s awards ceremony.
The Flexible Income Fund returned an average of 12.06% a year over three years to the end of December last year. The average annual return for the 59 funds in the multi-asset sub-category with a performance history of at least three years was 7.94%.
Philip Bradford, who has managed the fund since July 2015, says that, in addition to its flexible mandate, the fund’s outperformance was a result of Sasfin’s tried-and-tested investment process, the experience of the management team, and the fund’s relatively small size, which allows it take advantage of mispricing opportunities in the market fairly quickly.
For example, after “Nenegate” in December 2015, he says the fund calculated that the market had overreacted, and it was able to lock in low-risk returns of over 12% for many years. Sasfin’s research also identified high-yielding credit investments that were not well known to the broader market.
Sasfin investment philosophy is built on four main pillars: identifying global macroeconomic themes, appropriate asset allocation, managing risk and controlling costs. It believes these are the “core drivers” necessary to achieve sustainable, compounding returns over the long term.
Bradford says although the manager’s specialist portfolios have different risk and return objectives, certain principles remain consistent. “We believe that markets are generally efficient but that opportunities will exist across the investment spectrum. Our process is therefore adaptive to changing market conditions and has a strong focus on risk management and diversification.”
The Flexible Income Fund is focused on providing investors with a high level of income, while preserving capital. It does this by investing in high-yielding asset classes, such as preference shares, different types of bonds (government, corporate and inflation-linked), and other lower-risk income assets, such as cash deposits and money market instruments. The fund aims to provide a return that is similar to, or better than, the All Bond Index, but with lower volatility.
“We actively manage the interest rate and credit risk in the fund. The fund typically has less than half the duration than the All Bond Index,” says Bradford.
The fund is suitable for conservative investors looking for a high-yield, lower-risk investment that provide a regular income.
The fund is currently conservatively positioned, with about 60% in a range of fixed-rate bonds, 20% in floating-rate bonds and 20% in money market instruments. Within the bonds, more than 80% have AA credit ratings or better. The reason for this positioning is that fixed-rate bonds are offering between 2% and 4% above cash, which is a wide margin, and Sasfin believes it is unlikely that interest rates will rise by more than two percentage points. Therefore, despite the risks, fixed-rate bonds are likely to outperform cash comfortably over the medium to long term. This positioning is providing the fund with a gross yield of just less than 11%, which is attractive compared with cash and other asset classes.
Looking at the challenges that the fund is likely to face over the coming year, Bradford says Sasfin is concerned about the economic and fiscal issues facing South Africa, and therefore the fund is likely to remain cautious going into the elections in May.
“We are also keeping a close eye on global events such as the trade war between the US and China, the uncertainty surrounding Brexit, events in the eurozone and slowing global growth,” he says.
“A low-growth environment is one that is typically better to hold bonds, as we saw in many cases in 2018.” In light of this, the fund has recently increased its cash holdings and has reduced its exposure to fixed-rate bonds. Therefore, we are well positioned for any risks and will be able to take advantage of any weakness.”