Quarterly Commentary - Q4 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

Global Markets ended the year on a positive note as trade agreements were reached between US and China, while the UK elections delivered political stability which cleared the way for Brexit. Generally, central banks continued their accommodative monetary policy stance and the overall positive sentiment spread to emerging markets including South Africa.

Unfortunately, local SA data released in December showed the economy shrinking by -0.6% displaying broad based weakness in the economy with only 4 sectors recording growth and most sectors in technical recessions. The situation at Eskom will continue to contribute largely to these negative GDP numbers going forward, as South Africa was once again plunged into darkness over the quarter due to Eskom’s electricity generation fleet experiencing an unprecedented level of breakdowns. This low level of GDP enhances SA’s fiscal predicament as it forms the base of Government’s revenue. The Mid Term Budget published in October already highlighted a revenue shortfall of R48bn over the next 3 years and based on the latest GDP numbers and nominal economic growth falling to 3.8% the future revenue shortfall could be significantly worse. Inflation continued to surprise on the downside and reached a y/y level of 3.7% – its lowest level in almost 8 years. In the fourth quarter the Monetary Policy Committee (MPC) voted against cutting the repo rate but the decision was a contentious one as three members favoured rates being kept on hold against two voting for a rate cut.

Money market and Bonds were on a par returning 1.73% and 1.74% for the quarter respectively. The Forward Rate Agreement (FRA) curve market has moved between pricing in no further rate cuts to a good chance of two possible rate cuts in 2020. As a result, Negotiable Certificates of Deposits (NCDs) rates traded in a range during the quarter. The 3-month NCD rate increased by 4bps, while the 12-month NCD rate ended 5bps lower at 7.63% (Q2 2019: 7.68%) at quarter end.

Portfolio Activity and Positioning

The link between the poor fiscal outlook and policy rate setting means that the bar for a rate cut remains high. However, there is a high probability of a weaker economy and lower than expected inflation. It is therefore our expectation that there will be at least one rate cut after the first quarter of 2020.
We continued to take advantage of the money market curve steepening when the market lowered its expectations for numerous rate cuts later in the cycle, by investing into longer term fixed rate notes at higher yields. During the quarter we also significantly increased our exposure to the government Treasury bills (T-bills) particularly in the six-month area, as yields were significantly higher than the bank NCD’s of the same term.
The fund will not invest for binary outcomes despite our expectation. We therefore still hold a reasonable exposure to floating rate notes as these instruments offer diversification to the fund as well as the fact that real rates continue to remain high.
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)