Over the last six months to end March 2023, the (ASISA) South African Multi-Asset Income category has seen over R17bn net flows, and R25bn net flows over a 12-month period. This is in stark contrast to the net outflows from (ASISA) South African Equity General category of over R9bn over six months, and net outflows of almost R20bn over 12 months. This would indicate that investors’ appetite for risky assets has faded somewhat, given the tumultuous start to the year. The first quarter of 2023 witnessed wild swings in global market sentiment. Market sentiment changed abruptly in February as incoming US data contradicted the earlier optimism that inflation was decelerating and that a Fed pivot may be in sight.
A string of US data indicating that the US labour market remains exceptionally tight (with the unemployment rate falling to a 53-year low of 3.4%), upward revisions to inflation data from late 2022 (showing that CPI had stronger momentum into year-end than previously thought) and stronger than expected January inflation numbers all heightened market fears over the stickiness of the inflation path.
In South Africa, 2023 began with concerns escalating around SA’s deepening electricity crisis, with loadshedding at higher levels seemingly becoming a permanent feature and grave repercussions emerging across a range of sectors across the economy.
This has material negative implications for economic growth, and presents a headwind to the near-term inflation outlook as food prices may remain elevated as a result in the coming months. At the same time, the crisis received intense focus from stakeholders and policymakers, and an increased sense of urgency to find additional power sources intensified.
The Laurium BCI Strategic Income Fund is a Regulation 28 compliant multi-asset income fund that allows for maximum 10% in equity. The fund has a flexible mandate with no prescribed maturity limits for the securities in which it invests.
It also has a flexible duration policy and seeks to protect capital in times of bond market weakness by following a defensive asset allocation strategy. The aim of this low-volatility, low-risk fund is to provide cash- beating returns, and since its inception has had 96 positive months out of 101 months, which translates into positive monthly returns 95% of the time.
Risk-adjusted returns from bonds in South Africa look very attractive now, with ten-year maturity bonds trading at a yield to maturity of 11% against long-term expected inflation of about 5%. In fact, in Laurium’s multi-asset funds (low, medium, high and flexible mandates), we have the highest bond exposure we have ever had.
Within the Laurium BCI Strategic Income Fund we currently hold a healthy position in nominal fixed rate bonds in the shorter to medium end of the yield curve – we anticipate these bonds (out to 10 years in maturity) will perform well as the current interest rate hiking cycle matures and the market (eventually) begins to position for interest rate cuts.
Pockets of weakness in the bond market will be used to add any marginal duration positioning to this area of the yield curve, within our targeted duration risk measures. We are tactically adding some exposure to 5-to-10-year maturity inflation linked bonds at real yields that have reached attractive levels. We hold broad diversification across both fixed and floating rate exposure.
For conservative investors, looking for stability of capital and a high level of sustainable income, consider the Laurium BCI Strategic Income Fund.