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Tailored for investment professionals this site provides information on our products, strategies and services. Please remember capital is at risk and past performance is not a guide to the future.

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By Paul Hutchinson, Sales Manager

Over the last decade, we have seen significant innovation in the types of fixed interest instruments available for investment. This has transformed what was previously considered the staid corner of the asset management landscape, dominated by the duration decision (choosing a one-year fixed deposit versus a 10-year government bond, for example) to now include a far wider range of yield enhancing instruments.

The ability to make use of a myriad of investment opportunities to diversify risk and enhance the yield of a portfolio has proven extremely attractive and beneficial to investors. This is particularly so now, given the increased volatility of the equity market and the lower real interest rate environment, with consequently lower money market returns relative to history.

Below we describe how the Investec Diversified Income Fund has combined long and short-dated bonds (both corporate and government), inflation-linked bonds, property loan stocks, debentures, fixed deposits, preference shares and listed property to create a unique outcome for investors looking for lower risk and real returns.

Participating and protecting

The Investec Diversified Income Fund is a comprehensive fixed income solution that aims to maximise income and grow capital. Essentially, the Fund seeks to generate real returns while managing downside risk. To date the Fund has:

  • provided a consistent total return in excess of cash / inflation over time, with some correlation to the bond market when the bond market outperforms, and little to negative correlation to the bond market when it underperforms
  • avoided quarterly capital drawdowns and eliminated 6-monthly drawdowns completely.

These characteristics of generating real returns while managing downside risk, are illustrated in the following chart.

Chart 1: Defining what the Investec Diversified Income Fund is trying to do

Source: Investec Asset Management

 

Has the Investec Diversified Income Fund delivered?

The past three years have seen significant volatility in the South African bond market and therefore provide an ideal opportunity to analyse the ability of the Investec Diversified Income Fund to meet this dual objective. There have been multiple periods of bond market underperformance in the three years to 28 February 2018, all driven by specific events:

  • December 2015, following the surprise removal of the Finance Minister, Nhlanhle Nene (a local event).
  • Leading up to the Brexit vote (UK referendum on whether to stay in or withdraw from the European Union) in June 2016 (an offshore event).
  • August 2016, the Hawks’ allegation of corruption against Finance Minister Pravin Gordhan (a local event).
  • March 2017, ex-President Jacob Zuma recalled Finance Minister Pravin Gordhan (a local event).
  • October 2017, the medium-term budget policy statement highlighted SA’s deteriorating fiscal position, fuelling fears of a rating downgrade to junk (local event).

The following chart shows the performance of the Investec Diversified Income Fund, together with that of the Beassa All Bond Index and the STeFI Composite (a proxy for short-term cash returns) over this period.

Chart 2: Three-year performance comparison

 

Source: Bloomberg, ©Morningstar, dates to 28.02.18, performance figures above are based on a lump sum investment, NAV-NAV, net of fees, gross income reinvested, in ZAR. Only for illustrative purposes. Past performance is not a necessary guide for future performance.

 

ANNUALISED PERFORMANCE 1 year 3 year 5 years Since inception
Investec Diversified Income Fund 9.1 8.3 7.4 8.3
STeFI Composite (ALBI 1-3 pre 01.07.2011) 7.5 7.2 6.6 6.7

 

Source: ©Morningstar, dates to 28.02.18, performance figures above are based on a lump sum investment, NAV-NAV, net of fees, gross income reinvested, in ZAR. Highest and Lowest refers to the highest and lowest 12-month rolling returns since launch. Highest: 12.8%; Lowest: 4.1%. The total expense ratio of the Fund is 0.99%.

A number of observations:

  • The Fund (which returned 8.3% p.a. for the three years to 28 February 2018) has outperformed both the All Bond Index (ALBI) (7.7% p.a.) and cash (7.5% p.a.), thereby meeting its return objective over this period.
  • The ALBI has been extremely volatile and fell materially at certain points but also rallied strongly at other times.
  • The Investec Diversified Income Fund was able to deliver a positive return when the bond market turned negative, thereby meeting its risk objective during this period. It also participated when the bond market rallied, thereby meeting its return objective.

Importantly, this ability of the Investec Diversified Income Fund to participate in bond market rallies and to protect the portfolio during bond market sell-offs is not just evident over the past few years. The following chart illustrates how the Fund has delivered on this dual objective over the longer term.

Chart 3: Participating and protecting: average rolling 12-month excess returns over cash

 

Source: Bloomberg, ©Morningstar, dates to 28.02.18, performance figures above are based on a lump sum investment, NAV-NAV, net of fees, gross income reinvested, in ZAR. Only for illustrative purposes. Past performance is not a necessary guide for future performance.

The chart compares the performance of the Investec Diversified Income Fund against the Beassa All Bond Index for the 7+ years since August 2010 during periods when the ALBI outperformed cash (approximately 65% of the time) and when the ALBI underperformed cash (approximately 35% of the time).

Some observations:

  • When the ALBI outperforms cash (which on average it does by 6.8%) the Fund participates in these rallies, capturing approximately 40% of this outperformance.
  • When cash outperforms the ALBI, the Fund protects the downside and returns almost 1.7% above cash.
  • As a result, the Fund has outperformed the ALBI over the full period, providing a return of more than 2% above cash.

In summary, the Fund has delivered upside exposure with downside protection which is in line with its dual objective.

Who should invest?

The Investec Diversified Income Fund is ideally suited for investors who do not want to make the complex asset allocation decision between the growing (in number and complexity) range of fixed income/yield enhancing instruments. As investors continue to de-risk their investment portfolios, lower-risk flexible income mandates, such as the Investec Diversified Income Fund, have become increasingly attractive. It is also at times of increased market volatility that cash seems like the safer bet. However, it comes at the price of lower longer-term returns (and possibly negative real returns).

The Investec Diversified Income Fund, which draws on the best investment ideas from Investec Asset Management’s globally integrated SA and London-based fixed income team, therefore targets those investors seeking to maximise real returns over the longer term, while aiming to protect investor capital over the shorter term. These include investors making use of retirement products (retirement annuities, preservation funds and living annuities, i.e. investors who require an immediate income from their invested capital). Investors looking to phase a capital lump sum into a more aggressive portfolio should also consider the Investec Diversified Income Fund as the phase-in vehicle.

 

Important Information


All the information contained in this communication is believed to be reliable but may be inaccurate or incomplete. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. This communication is provided for general information only and for distribution only in South Africa. It is not an invitation to make an investment nor does it constitute an offer for sale. The full documentation that should be considered before making an investment, including the prospectus, key investor information documents and minimum disclosure documents which set out the fund-specific risks, are available from Investec Asset Management. Collective investment schemes (CISs) are generally medium- to long-term investments and the manager gives no guarantee with respect to the capital or the return of the funds. Funds are traded at ruling prices and can engage in borrowing and scrip lending. The fund may borrow up to 10% of its market value to bridge insufficient liquidity. A schedule of charges, fees and advisor fees is available on request from the manager. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. A feeder fund is a portfolio that invests in a single portfolio of a CIS, which levies its own charges which could result in a higher fee structure for the feeder fund. Performance shown is that of the funds and individual investor performance may differ as a result of initial fees, actual investment date, date of any subsequent reinvestment and any dividend withholding tax. Past performance is not necessarily a guide to the future. These portfolios may be closed in order to be managed in accordance with their mandates. The value of participatory interests (units) may go down as well as up. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. A higher Total Expense Ratio (TER) does not necessarily imply a poor return, nor does a low TER imply a good return. Where portfolios invest in the participatory interests of foreign collective investment schemes, these may levy additional charges which are included in the relevant TER. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Fund prices are published each business day in selected media. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. The unit trust manager, Investec Fund Managers SA (RF) (Pty) Ltd, is registered under the Collective Investment Schemes Control Act. Investec Asset Management and Investec Investment Management Services are authorised financial services providers. Investec Conflict of Interest Policy is available on request. Issued by Investec Asset Management, March 2018.

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