Quarterly Commentary - Q3 2019

Fund Profile

The objective of the Granate SCI Money Market Fund is to provide investors with a way to participate in a diversified portfolio of money market instruments that ordinarily are either not available or offer a lower yield to retail investors. The primary performance objective of the portfolio is to obtain a high level of current income as is consistent with capital preservation and liquidity. Capital gains will be of an incidental nature. The portfolio is managed in accordance with CISCA and Regulation 28 of the Pension Funds Act. The portfolio will be allowed to invest in listed and unlisted financial instruments (derivatives) as allowed by the Act from time to time, in order to achieve the portfolio’s objective.

This is an ultra-conservative portfolio that caters for an extremely low risk tolerance and is designed for minimum capital fluctuations and volatility. It carries a short time-frame for investment. There are no growth assets in this portfolio and it is a cash-based investment. The ultraconservative portfolio aims to yield returns that are higher than bank deposits and typically higher than inflation. Capital protection is of prime importance.

The portfolio is bound by the exposure limits as per the ASISA fund classification structure applicable to South African – Interest Bearing – Money Market Portfolios. Money market instruments with a maturity limit of less than thirteen months, the average duration of the underlying assets may not exceed 90 days and a weighted average legal maturity of 120 days.

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. We believe that the rate cut is highly likely at the November meeting, although an unfavorable MTBPS does make this a close call.

Money market was the best local performing asset class for the quarter returning 1.8%. The Forward Rate Agreement market (FRA) market is pricing in a further rate cut next year but it is now indicating that this will be the low of the interest rate cutting cycle. As a result, Negotiable Certificates of Deposits (NCDs) rates at quarter end declined. The 3-month NCD rate decreased by 29bps, while the 12-month NCD rate ended 7.5bps lower at 7.68% (Q2 2019: 7.75%).

Portfolio activity and positioning

At the start of the quarter the fund favored longer dated floating rate notes. The market had already priced in a high probability of multiple repo rate cuts into the fixed rate notes and the risk compensation, albeit positive, had decreased. Any fixed rate opportunities were therefore defensively invested in the shorter area of the money market curve given the flattened profile and potential risks.

The money market fund does however not invest for binary outcomes. We therefore took advantage of the money market curve steepening as the market lowered its expectations for numerous rate cuts later in the cycle, by investing into longer term fixed rate notes at higher yields.

Increasing the exposure to longer term fixed rate instruments provides diversification for the fund because of the higher exposure to floating rate bank notes. The future benefits of floating rate notes could weaken if the reserve bank decreases the repo-rate at future meetings.

The money market portfolio maintains a high level of liquidity through call deposits and bank paper.

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Written by 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)