Saul Doctor of JP Morgan, in a 2010 report titled, ‘What Your Great-Grandfather Should Have Bought: Analysing a Century of Asset Returns’, came to the fascinating conclusion that on a risk-adjusted basis corporate credit outperformed the other asset classes (government bonds, equities and gold) for the period (1919 – 2009). There is no proxy index for South African corporate credit, but given that corporates have generally issued debt at more than 160 basis points over JIBAR (Johannesburg Interbank Agreed Rate), this asset class has also delivered attractive risk-adjusted returns domestically.
Very few corporate credit investment vehicles exist in South Africa, particularly for retail investors and those requiring daily liquidity. However, Investec Asset Management has developed an enviable long-term track record of analysing and investing in corporate credit on behalf of such investors. The Investec High Income Fund invests largely in corporate credit as it offers an attractive opportunity to maximise income and grow capital. The Fund is a specialist fixed income fund that aims to deliver a low volatility, yet compelling and competitive high yielding alternative to traditional bond funds and cash.
The Investec High Income Fund offers access to investment-grade corporate credit and little exposure to duration, thereby cushioning the Fund’s capital against the impact of a changing interest rate environment. This is because the Fund typically invests in floating-rate notes, which offer a variable interest rate linked to money market rates. The focus on investment-grade credit, coupled with an active management approach by investment professionals with years of experience in corporate credit analysis and origination has yielded an offering that is designed to remain resilient across economic cycles. As a result, the Fund has the potential to deliver competitive returns on a consistent basis.
The application of this focused investment strategy has resulted in the Fund delivering consistent returns above cash and inflation through time. This is illustrated in Figure 1, which compares rolling 12-month returns since inception for the Investec High Income Fund to its benchmark (SteFI Composite Index and ALBI 1-3 year Index pre 1 July 2011).
Figure 1: Rolling 12-month performance of the Investec High Income Fund versus the Fund’s benchmark
Source: Morningstar and Investec Asset Management, since inception of the Fund’s A class on 02.04.00 to 31.03.17. Performance figures are based on a lump sum investment, NAV-NAV, net of fees, gross income reinvested, in ZAR. Highest annualised return: 16.1% (30.06.03) and lowest annualised return 4.3% (31.08.14) – 12 month rolling performance figures. The total expense ratio is 0.92% and the transaction cost is 0.01%.
Since inception, the Investec High Income Fund has outperformed its benchmark by 0.48% p.a. on average after fees, and by 0.87% p.a. since the change in benchmark on 1 July 2011.
Investment-grade credit refers to counterparties with a long-term credit rating of at least BBB-. The development of the South African-listed debt capital market (DCM) has shown steady progress over the last 15 years. A key feature during this period has been the evolution of the listed corporate credit market comprising predominantly investment-grade issuers. The listed DCM serves as an alternative source of funding for banks, state-owned enterprises and corporates. As a proxy for investment-grade credit, listed DCM issuers have had a strong run, with the only real default giving rise to losses for investors being the curatorship of African Bank Limited in August 2014.
The SA experience should not be a surprise – the global experience bears testimony to the resilience of the investment-grade credit class. This is evidenced in Figure 2 which tracks the performance of both investment- and speculative-grade credit for issuers rated by rating agency Standard & Poor’s.
Figure 2: Global default rates – investment grade versus speculative grade
Source: Standard & Poor’s Global Fixed Income Research and Standard & Poor’s CreditPro®. Please note that this chart has been reproduced by Investec Asset Management.
Investec Asset Management has built a leading credit team with significant assets under management (the Investec High Income Fund has approximately R7 billion assets under management out of total assets in credit strategies of approximately R50 billion). The combination of scale, speed of execution, experience and expertise has made Investec Asset Management a preferred partner for banks and private equity. As a result, we are presented with an excellent array of investments. Investec Asset Management has an established and proven credit process that draws on the credit team, credit committee, offshore credit colleagues and the wider investment business. In addition, we have a robust and well established wider risk management process. The combination of extensive experience and very good deal flow means that Investec Asset Management is exceptionally well positioned to deliver on the various credit strategies. We continue to grow our team to better source and monitor opportunities, and our origination capability is particularly useful in our search for unique and attractive investment opportunities that satisfy the risk mandates of our various credit strategies.
Given a more supportive global economic backdrop, we are cautiously optimistic as we settle into 2017. Despite our positive view on local credit market valuations, we continue to tread cautiously in choosing sectors and issuers, as a credit default (where the issuer does not honour its interest or maturity repayment obligations) is the key risk of investing in corporate credit. There is a strong focus on stock selection, portfolio composition and liquidity management. We prefer defensive sectors with strong bottom-up fundamentals. Essentially, we seek to identify entities whose balance sheets are sound and that have good strategies in place to weather tough and uncertain conditions.
In conclusion, the Investec High Income Fund has an attractive gross running yield relative to cash of around 9.4%,1 with negligible duration risk. The team has been able to enhance the Fund’s yield without sacrificing on the quality of the underlying investment instruments.
1 This yield is based on actual income earned in the Fund over the last 14 days (as at 31 March 2017) divided by the average net asset value, gross of any expenses, and is expressed on a nominal (NACM) basis. (NACM is the actual interest earned over a one-month period.) It does not include any initial fund fee and investors may be subject to tax on distributions and the actual income earned might differ from it significantly.
All information provided is product related, and is not intended to address the circumstances of any particular individual or entity. We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. No one should act upon such information without appropriate professional advice after a thorough examination of a particular situation. This is not a recommendation to buy, sell or hold any particular security. Collective investment scheme funds are generally medium to long term investments and the manager, Investec Fund Managers SA (RF) (Pty) Ltd, gives no guarantee with respect to the capital or the return of the fund. Past performance is not necessarily a guide to future performance. The value of participatory interests (units) may go down as well as up. Funds are traded at ruling prices and can engage in borrowing, up to 10% of fund net asset value to bridge insufficient liquidity, and scrip lending. A schedule of charges, fees and advisor fees is available on request from the manager which is registered under the Collective Investment Schemes Control Act. Additional advisor fees may be paid and if so, are subject to the relevant FAIS disclosure requirements. Performance shown is that of the fund 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. There are different fee classes of units on the fund and the information presented is for the most expensive class. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Where the fund invests in the units of foreign collective investment schemes, these may levy additional charges which are included in the relevant Total Expense Ratio (TER). A higher TER does not necessarily imply a poor return, nor does a low TER imply a good return. The ratio does not include transaction costs. The current TER cannot be regarded as an indication of the future TERs. Additional information on the funds may be obtained, free of charge, at www.investecassetmanagement.com. The Manager, PO Box 1655, Cape Town, 8000, Tel: 0860 500 100. The scheme trustee is FirstRand Bank Limited, PO Box 7713, Johannesburg, 2000, Tel: (011) 282 1808. Investec Asset Management (Pty) Ltd (“Investec”) is an authorised financial services provider and a member of the Association for Savings and Investment SA (ASISA).
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