The Marriott High Income Fund of Funds has, as its primary objective, a high income yield combined with the protection of the value of capital invested over the long term. The secondary consideration is growth in income. The fund benchmark is a yield higher than the 5 year rolling average yield of the BEASSA ALBI 7-12 years split interest yield index. Investments normally to be included will be participatory interests (units) in portfolios of collective investment schemes registered in South Africa. Investments, apart from liquid assets, will be in fixed interest based portfolios, other income based portfolios, high yielding equity based portfolios and high yielding property equity based portfolios.

2019 was a good year for fixed income investor globally. According to data from CBRates (a central-bank tracking service), 56 central banks cut rates 129 times in 2019. Monetary policy was loosened in major economies such as the U.S. and the Eurozone, as well as the biggest emerging markets, such as China, India, Russia and Brazil.

This monetary easing, which was the opposite to what economists anticipated at the start of 2019, pushed interest rate expectations significantly lower — a shift that prompted a positive re-pricing of the global bond market. Twenty years ago, well over half of the global bond market boasted yields in excess of 5%. Today, that proportion has reduced to 3% - the lowest share on record (according to ICE Data Indices). The current yield of the SA government 10 year bond is 9%.

The High Income Fund has an approximate 47% exposure to fixed rate debt instruments yielding approximately 9.0% which served investors well in 2019. The average term to maturity of these instruments is approximately 4.1 years .. deliberately on the shorter side to keep the modi..ed duration (interest rate price sensitivity) of the fund relatively low as we believe a Moody..s downgrade is highly likely to occur later this year. The credit rating downgrade will see SA bonds expelled from major investment grade bond indices which will precipitate significant forced selling in the bond market .. a great opportunity at which to extend the duration of the fund by securing attractive interest rates for longer.

With regards to the interest rate outlook, our view is that the Reserve Bank will probably keep interest rates unchanged in 2020 despite inflation currently running below 4%. Should a credit rating downgrade materialise, as we expect, the risk of meaningful currency depreciation would be negative for the inflation outlook – a risk that the Monetary Policy Committee is very mindful of. The fund has an approximate 50% exposure to instruments where the level of income produced (yield) is impacted by changes to the repo rate. Currently the weighted average yield of these instruments is 8.0%.

In summary, the High Income Fund is well positioned for a potential Moody..s downgrade given its low modi..ed duration of 1.2% and reasonably high short dated cash balance to take advantage of higher yields that may present themselves. Given a weighted gross yield above 8.5%, we expect the fund to deliver returns between 7 - 8% p.a. over the next 24 months.