A unique opportunity for improved fixed income yields - Prescient's China Conservative Fund

Liang Du, Head of Balanced and China Funds at Prescient Investment Management.

Quantitative easing around the world has driven global bond yields to all-time lows while credit spreads have narrowed dramatically. Such is the extent of QE that overnight European bank deposits attract a negative yield, effectively costing the investor money.

Prescient Investment Management’s Qualified Foreign Institutional Investor (QFII) license in China creates a unique opportunity to address this problem.

Liang Du, Head of Balanced and China Funds at Prescient Investment Management, commented that limiting maturity to two years and selecting only investment grade issuers results in a credit spread, or yield pick-up, of between 20 and 30 basis points (bps) in developed markets and between 70 and 80 bps in South Africa.

“This extremely low level of yield shows the extent of yield chasing around the world.

“Our QFII license allows Prescient to invest directly into mainland China’s currency market and hence we are able to access renminbi assets that are generally not available to other investors.

“Because the renminbi is a limited and non-free float currency, interest rate markets in China are less efficient and provide opportunities for arbitrage through the exchange rate market.

“This means that non- renminbi currency investors who are buying investment grade renminbi assets shorter than two years can capture a spread of around 200 to 300 bps without additional risk,” said Mr Du.

However, he noted that Prescient’s ability to access this opportunity is limited by its license, which allows for a maximum of US$50 million to be invested.

The investments are housed in the Prescient China Conservative Fund, which is closely regulated under the Undertaking for Collective Investment in Transferable Securities (UCITS) by the Irish Central Bank.

Two of Prescient’s unit trusts will be taking advantage of the opportunity to increase their exposure to Chinese assets via the Prescient China Conservative Fund.

As a result, the Prescient Global Positive Return (Euro) Fund, which currently invests in offshore bank deposits yielding a pick-up of 20 to 30bps and the Prescient Income Provider Fund, which has short-term rand assets earning the SA floating rate plus 75bps, will now have the ability to earn up to 300bps without any increase in risk.