Quarterly Commentary - Q3 2019

Fund profile

The Granate SCI Multi Income Fund is a domestic income portfolio which seeks to provide investors with consistent positive returns and minimal volatility. The objective of the portfolio is to deliver real returns in excess of money market and traditional income portfolios over the medium to longer term. Investors are primarily exposed to the fixed income and credit markets.

The portfolio aims to optimize risk-adjusted returns by strategically allocating within the various sources of the fixed interest and credit universe according to current valuations. The portfolio will optimize the yield of the portfolio whilst compensating as far as possible for the underlying risk. This is done by focusing mainly on credit and yield enhancing strategies, whilst very moderate duration strategies are employed. The portfolio is managed in accordance with regulations governing pension funds and CISCA.

Market Comment

Globally Central Banks eased policy rates in response to slowing economic growth over the quarter: both the Fed and ECB cut rates along with 20 other banks. The Fed also eased a liquidity shortage, while the ECB will restart asset purchases. Ongoing US-China trade tensions, an oil-price spike and more Brexit drama kept volatility on the high side for the quarter.

On the local front, the SARB kept rates unchanged which didn’t have much of a market impact as it was a widely expected decision. Given the weak state of the local economy, low domestic inflation and the fact that globally the tone is extremely dovish meant it was quite surprising that the decision to keep rates unchanged was unanimous amongst MPC members. There is still a considerable risk around the Moody’s review in November and fiscal issues which will be highlighted in the MTBPS, which is why the SARB is focused on keeping real policy rates high for now.

Money market was the best performing asset class for the quarter returning 1.8%, whilst equities and listed property had another very poor quarter at -4.4% and -4.6%. Nominal Bonds and ILBs although performed poorly, were at least were positive for the quarter at 0.7% and 0.3%.

Portfolio Activity and positioning

We saw some opportunities in the bond market over the quarter to go longer as our fair value model was showing significant positive risk compensation mainly due to extremely low levels on US treasuries. The fund increased its duration to around 1. Although we are mindful of the fiscal risks which could impact the long end of the curve, we cannot ignore the fact that longer dated bonds are offering very attractive real yields, and in an environment where there could be further rate cuts, we would like to have more exposure to fixed rate bonds.

We have been consistently improving the quality of credit, as well as reducing credit duration as credit spreads are at all-time lows and do not offer relative value against nominal bonds or ILBs. However, we have increased exposure to Eskom bonds as the relative credit spreads for government guaranteed credit versus local bank credit has widened significantly.

The fund achieved a return of 2.13% for the quarter which outperformed all asset classes as well as the benchmark of Stefi + 1%. The multi income fund continues to focus on achieving consistent positive returns by focusing on our credit process and diversifying appropriately, not taking binary duration bets, and avoiding repricing risk by not overpaying.

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Written by Bronwyn Blood

Portfolio Manager

Prior to joining Granate Asset Management in December 2015, she was the Portfolio Manager of the Flexible Fixed Interest Funds and the flagship Absolute Yield Fund at Cadiz Asset Management. When Cadiz bought African Harvest in 2006 Bronwyn took over the management of the Flexible Fixed Interest funds. Bronwyn holds a B.Comm (Honours) degree from the University of Natal.

Bronwyn Blood B.Comm (Honours)