STANLIB MM Absolute Income comment - Jun 15 - Fund Manager Comment09 Sep 2015
Market overview
Volatility continued into the second quarter of 2015, hurting the riskier asset classes. Property in particular declined 6.2% in the quarter as a result of the increased risk of normalising global yields. Congruent with this, the South African 10-year interest rate increased slightly by 0.14% to 8.2%, which resulted in local bonds producing a negative return of -1.4%. Cash delivered a stable 1.3% return. Despite the tough quarter, riskier asset classes outperformed cash on a 12-month view. Property returned 27% on the back of higher than expected company earnings and corporate activity. Bonds returned 8.2%. Over the past year credit spreads have widened, removing a key source of alpha for many fixed interest managers. More recently, good quality credits look to be offering attractive opportunities.
Portfolio review The Fund returned 6.7% over the past 12 months, ahead of its ALBI 1-3 year benchmark, which returned 6.6%. o Prescient was the best performing manager in the Fund over this time, benefiting from their flexible duration strategy. They have been opportunistic in terms of inflation linkers and duration; and moved their long-dated exposure into short and medium positions timeously o Momentum produced returns ahead of benchmark for the year. This manager takes small incremental positions across various strategies and has also been opportunistic in the credit space recently o Investec marginally underperformed the ALBI benchmark on a 12-month view, being negatively impacted by exposure to ABIL and low duration in a market that favoured "lower interest rates for longer". Pleasingly, a turnaround in Investec's shorter term performance has been evident
Portfolio positioning and outlook The US Fed assesses several factors in determining whether it will raise rates. Low unemployment is vital to this decision. The latest data indicates that this metric is at the lowest level in seven years, with wage inflation tentatively starting to come through. Accordingly it is likely that the US Fed will raise rates in the fourth quarter of this year. The South African Reserve Bank has recently raised rates by 0.25% in an effort to mitigate the risks of a deteriorating inflation outlook. This is ahead of US yield being increased and is likely to continue rising albeit at a slow pace given SA's fragile economy characterised by weak GDP growth and high unemployment. Overall, markets in general are likely to be bumpy as the US Fed prepares for lift-off, implying increased risk aversion. Looking at the underlying manager positions, the Fund is well placed to weather the storm with low property exposure and no equity exposure. There has also been an increase in allocations to cash, which positions the Fund more defensively.