Cadiz Absolute Yield Fund
The Cadiz Absolute Yield Fund aims to provide investors with a return of 3% in excess of inflation over rolling three years, and a positive return over any rolling 12-month period. The fund is expected to deliver more consistent returns than an income fund and reduce the volatility normally inherent in the bond market. The Cadiz Absolute Yield Fund continues to achieve these objectives as discussed below.
Performance: If it’s consistency you’re after, this is the fund for you. The Cadiz Absolute Yield Fund has outperformed all bond, income, money market and flexible fixed interest funds over the three year period to 30 September 2009, with an annualized return of 13.68% (CPI+3% = 11.07% per annum); and is also number 1 over a one year period, with a return of 13.69% (source: Morningstar).
This speaks to its consistency. We will very rarely ‘shoot the lights out’ over the short term but will aim to deliver solid, consistent performance over the longer term and the fund is thus suitable for investors with a medium to longer term view. On a risk adjusted basis, the Cadiz Absolute Yield Fund also has an impressive Sharpe Ratio, which measures the performance of the fund relative to the risk undertaken. Again, the fund has one of the highest Sharpe Ratios in its category of unit trusts, meaning excessive risk is certainly not a reason for the consistent outperformance of the fund.
How we manage the Cadiz Absolute Yield Fund: The Cadiz Absolute Yield Fund focuses on maximization of total return over the long term, while preserving capital. It is important to have no negative returns, which means minimizing volatility. We believe that minimal interest rate risk is optimal, and that we can outperform a target of CPI+3% (as we have done) by focusing on yield, rather than by taking large duration bets. The risk return trade-off for long duration bonds for this type of fund is not appealing. Yield enhancement is key and rather than managing the fund against a specific benchmark, we focus on achieving a high total return for investors by using a wide range of fixed interest investments (cash and bonds), property stocks and preference shares. The downside market risk is managed through diversification across a broad spectrum of instruments, and by using derivatives to minimize interest rate risk. The fund very much relies on a team-based approach where it utilizes the strengths of a very experienced fixed interest team with core strengths in all the areas of the fixed income market.
How we achieve our total return target: Since the fund is focused on yield enhancement, credit bonds are a very important part of our investable universe. Here it is important to make sure we are receiving a sufficient yield spread above the risk free (government bond) rate. To do this, we have a thorough credit process which focuses on fundamental analysis of companies, and ultimately, a fair value yield spread which forms the basis of all our investments. Our aim is to make sure that we are being compensated fairly for the credit risk assumed, and that there is minimal downgrade or default risk. Of course, the internal diversification limits of the fund provide an extra layer of protection for investors. The downside of using corporate bonds is that they are less liquid. This is where derivatives are key - to allow flexibility in the fund, and to provide a hedge against unwanted volatility.
Current positioning: The fund now finds itself in a position to take advantage of the recovery in the credit markets. Credit spreads are at unprecedented levels due to the recent global recession, while credit fundamentals generally remain solid. We are finding particular value in parastatals, where government entities are under huge pressure to fund their massive capital expenditure programs, and banks, which are refinancing due to regulatory and other pressures. We continue to scan the market for opportunities to add value to the fund through mispricing of solid credit assets. Our positive view on credit should translate into a healthy inflation related return for the fund going forward.
