Quarterly Commentary - Q1 2021

They grow up so fast: Our income funds turn five

There are surprisingly many parallels between investing and parenting

It can be tough being a parent – as every parent will tell you. You must often make hard decisions. You want to nurture your children while also making sure they can thrive and succeed. At times, it’s an emotional rollercoaster. But the rewards far outweigh the difficulties. I am a mother of two wonderful teenage daughters, and it’s hard to imagine what life would be like without them.

Although investing is supposed to be purely objective, I cannot help but liken the experience of raising and managing a fund to raising children. As a fund manager, you want to make sure your fund grows, thrives and succeeds for your clients. Everyone says you shouldn’t get emotional. That you can’t control the markets. But it’s hard not to get emotional about something you are so passionate about.

This month marks a special milestone in the life of Granate

The Granate SCI Multi Income Fund and Granate SCI Money Market Fund turned five years old. The years were with filled with many challenges (and many celebrations), and time flew by. They grow up so fast. So please bear with me as we flick through the photo album of their lives.

On 1 April 2016, with a small amount of cash from our sole shareholder at the time, RMI Investment Managers, we entered the market and our income funds were born. On this same day, former president Jacob Zuma apologised to the nation for breaching the constitution. Still visible in our rear-view mirror, the baton for Finance Minister had been recklessly passed around and we breathed a sigh of relief that we had managed to escape managing fixed income funds during this time.

It was the best of times, it was the worst of times

However, the outlook for the economy was far from rosy. South Africa’s fiscal concerns were firmly in the spotlight and avenues for growth were looking narrow and rocky. The IMF pulled back its growth estimates and everyone was talking about inevitable ratings downgrades. Our currency was just off its lowest level ever against the US dollar.

Still, it was a good time to launch an income fund. The repo rate was at 7%, real (above-inflation) yields were high and corporate credit markets were offering good returns to entice investors who had the remnants of recent corporate failures lingering in their minds. When corporate bonds offer rates that are high above prevailing interest rates, they’re ideal for an income fund, as they provide a higher level of income than cash, bank deposits or government bonds. They also generally offer low volatility and consistent, positive returns. Five years ago, there was enough high-quality credit at attractive rates for us to diversify the funds appropriately and achieve high overall real yields at very low risk.

My heartfelt gratitude to our early investors

The months passed and our funds started to build decent – albeit very short – track records. By 2017, some of our earliest supporters had started to invest with us. We were doing what we are most passionate about: managing portfolios for the benefit of our clients. We just had very few clients.

Around this time we also shared a low that many parents will recognise when their child doesn’t qualify for a sports team or isn’t invited to the party. Equity investors had grown disenchanted by returns that had failed to compare to those enjoyed post the global financial crisis, with the JSE having lagged many fixed income funds. Consider that from mid-2014 to mid-2017, the FTSE/JSE ALSI returned below 5% on an annualised basis – a negative real yield. In contrast, the attractive real yields being offered by income funds were increasingly drawing attention. However, while our performance was good, our funds were still the largely ignored new kids on the block. It was tough, but we accepted that we still had some growing up to do.

The market was changing along with our business

To ensure the sustainability of our business, it was also time to take the kind of tough decision parents only know too well: one that may feel uncomfortable at the time but that you know is right for your child in the long term. And so, Granate underwent some big changes. New team members joined, and old and dear colleagues left. The staff took over majority ownership of the business and I had more people to call my fellow Granatians. We moved home from a modern steel and glass high-rise in the Cape Town foreshore to a historic water mill with uneven wooden floors in the southern suburbs. In February 2020, we launched the Granate SCI Balanced Fund and Granate SCI Flexible Fund, and our little fund family grew.

While demand for income funds had increased, the rates on offer from corporate bonds had fallen – to such an extent that government bonds (which are in theory ‘risk free’) were offering higher rates. It was clear that the market was taking a dim view of South Africa’s fiscal situation. To us, the bad news seemed over indexed, resulting in an anomaly. We started to reduce credit exposures to take advantage of the rising opportunity government bonds were offering. We also started to reduce our already small property weightings, as we believed that the soaring debt levels and market dynamics these companies faced no longer made them appropriate for income funds.

The COVID crisis and beyond

Then, the COVID crisis hit. Government bond yields rose even further, as the market rushed to sell these instruments when there were few buyers. Our philosophy of avoiding overvalued instruments had resulted in us building up a significant cash position. We therefore capitalised on this rare opportunity and increased our exposures. We also realised how grateful we are to be small-but-big-enough, as it allows us to be nimble. Providing liquidity in an illiquid market often has very good results for clients.

Flicking the pages forward to today, government bonds have sold off significantly once again. This time, it was due to signs of an improving US economy and fears that this may bring inflation. We believe that the inflation outlook in South Africa remains contained and that the market is pricing in more risk than is warranted. We are therefore comfortable to continue harvesting returns from the steepness of the yield curve, so that our clients can benefit from the attractive rates on offer.

A birthday wish fulfilled

Raising a family and managing people’s savings are both relentless and wonderful long-term pursuits. I’m exceedingly proud of being a parent to two wonderful daughters and I’m in a fortunate position to say that I’m very proud of the funds I manage, the people I get to call our clients and the business I am a part of. We are, after all, just people doing the best for our families and the communities we serve. I look forward to serving our clients and my Granate colleagues for many more birthdays ahead.

Happy 5th birthday!

(Written by Bronwyn Blood)

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Portfolio Manager: Vaneshen Naidoo

Portfolio Manager

Vaneshen joined Granate Asset Management in December 2015 and currently manages the Money Market and Cash portfolios in the Fixed Interest Team. He joined Cadiz Asset Management in 2006 as a graduate and during this time analysed the credit and property sectors for the fixed interest and multi asset class teams. Vaneshen holds a BSc. Hons (Engineering) and M.Sc.(Engineering) from The University of Cape Town, and is also a CFA.

CFA ®
M.Sc. (Engineering) (UCT)
BSc. Hons (Engineering) (UCT)