The fund aims to deliver inflation beating returns and exceed the SA All Bond Total Return Index on a rolling 3-year basis.

The first quarter of 2024 saw central banks maintaining steady rates amid signs of improved economic growth, alongside hints of potential rate cuts, have stirred cautious anticipation in the markets. Bond yields and the US Dollar Index saw increases, while the decline of the South African rand reflected amplified challenges encountered by emerging markets. With major central banks indicating approaching the peak of rate cycles, persistent risks from unexpected inflation and geopolitical tensions contribute to ongoing market volatility.

The Federal Reserve left rates unchanged for the fifth consecutive meeting in March, in line with expectations, keeping the Federal funds target rate range at 5.25 5.50%. Although the FOMC statement was largely unchanged, markets focused on updated projections and cues about the timing of rate cuts from Chair Powell's press conference. Despite robust economic growth, the 'dot plot' still indicates potential interest rate cuts this year, despite upward revisions to GDP and inflation forecasts. Powell remained noncommittal on timing, emphasising the need for confidence in inflation progress. Discussion on Quantitative Tightening (QT) hinted at a slowdown, but no firm commitment was made. Over the quarter, the yields on US 5-year and 10-year generic bonds saw increases of 37 and 32 bps, respectively, while the US Dollar Index (DXY) displayed a noteworthy gain of +3.11%. Taking a broader annual perspective, the 5-year and 10-year yields increased by +64 bps and +73 bps respectively. Additionally, during this period, the DXY registered a gain of +1.93%.

The European Central Bank (ECB) rate decision in March saw rates unchanged for the fourth consecutive meeting, with the Deposit rate remaining at 4.00%. However, the focus shifted to future policy adjustments, with hints from President Lagarde suggesting a potential rate cut in June pending confirmation of softening wage data. Lagarde emphasised improving inflation confidence but underscored the need for further evidence. Lagarde's discussion on market expectations and rejection of waiting for Fed actions suggest independent ECB decision-making.

The Bank of England's Monetary Policy Committee (MPC) voted 8 to 1 to maintain the Bank Rate at 5.25%, with one member advocating for a 0.25% reduction. Despite the market's upward shift in implied policy rates for advanced economies, UK GDP and market sector output are anticipated to rebound in the first half of the year, supported by fiscal measures in the Spring Budget 2024. While CPI inflation fell to 3.4% in February, services inflation remains high at 6.1%, prompting expectations for a slight drop below the 2% target in Q2 2024. The MPC asserts its commitment to price stability, indicating a continued need for restrictive monetary policy to address inflationary pressures, with ongoing monitoring of economic data to guide future adjustments in Bank Rate.

The VIX Index, a measure of market volatility, closed at 13.01, marking an increase of 0.56. The J.P. Morgan Emerging Market Bond Index (EMBI) Sovereign Spread tightened by 51 bps, finishing the quarter at 294 bps, with the index delivering a positive return of +1.40%. The 5-year Credit Default Swap (CDS) for South Africa widened to 259 bps, showing a significant increase of 56 bps. In contrast, Brazil's CDS widened slightly (+5 bps) to 138 bps, and Turkey's to 310 bps (+27 bps increase). Turning to the energy sector, Brent crude oil concluded the quarter at USD 87.00 per barrel, marking a significant increase of +12.93%. Commodity price movements over the quarter, on which most emerging market economies are dependent, showed the CRB Food, CRB Commodities and CRB Metals Index returning +12.23%, +4.82 and -3.82%, with metals experiencing a divergent trend. Gold and copper posted positive returns of +5.40% and +3.58% respectively, while iron ore, platinum and palladium lost -28.63%, -8.13% and -7.61% respectively. Over the last 12 months, gold was the best performer at +13.23%, and palladium the worst performer at - 30.55%.

The South African rand depreciated by -2.83% against the USD over the quarter, aligning with the prevailing trend in metals markets. Over the preceding one-year period, the USDZAR exchange rate depreciated by -6.10%, while the CRB Metals Index recorded a loss of -7.89%. The rand also weakened against the euro (-0.95%) and the pound (-2.30%) over the quarter. Within the South African asset class landscape, the top-performing asset class for the quarter was listed property (JSAPYTR Index) at +3.85%, followed by cash (STEFI Index) at +2.04%. Nominal bonds (ALBTR Index) returned -1.80%, inflation-linked bonds (CILITR Index) -0.33% and equity (JALSHTR Index) -2.25%. Over a 1-year period, property emerged as the standout asset class with a return of +20.47%.

The South African Reserve Bank (SARB) kept its repo rate at 8.25% in March, in line with expectations. In South Africa, inflation is above targets, especially in food prices due to bad weather. The unstable rand is influenced by global interest rates and local economic challenges. Despite some growth challenges in 2023, the SARB expects gradual improvement, particularly in the private sector. The 3-month JIBAR rate decreased slightly to 8.35% over the quarter, but rising by 39bps over the year, impacting the fund’s increased running yield. The 12-month T-bill average yield was flat at 9.13%. The SAGB yield curve saw significant widening, with the short-end R186 and R2032 lifting by 61bps and 87bps, and the long-end R209 and R2040 lifting by 82bps and 77bps, respectively.

In March, the fund elected to side pocket, by way of a retention fund, its exposure to two RedInc Rentals notes on the back of significantly reduced liquidity and uncertainty surrounding the obligor’s future repayment prospects. It should be noted that at the time of the creation of the retention fund, the instruments had not missed any coupon payments. The purpose of a side pocket is to provide protection for all investors where the quantum of a potential asset write-down is uncertain.

Looking ahead: Whilst major central banks have signalled being at the peak of the rate cycle, risks remain from inflation surprises particularly against a backdrop of volatile energy markets and numerous global geo-political risks. The long end of the SA FRA curve remains flat, and at the time of writing, is expected to peak at c. 8.36%.

During the quarter, the fund (Class A) returned -0.37%, outperforming the benchmark (ALBI) which returned -1.80%. The average return for the South African Interest Bearing Variable Term ASISA category was notably lower at -1.84%. The fund's annual performance showcased significant strength, delivering a solid return of +7.03% compared to the benchmark's +4.19% and the category average of +3.82%. On a longer-term horizon, the fund's performance remains impressive, achieving an annualised return of 8.61% over a rolling 3-year period, outpacing the benchmark's 7.41%. The fund's duration increased marginally to 4.23 years from 4.19 years over the quarter compared to the benchmark's duration at 5.54 years. The fund also continues to offer an attractive gross running yield of 12.01%.