Prescient Investment Management launches EMH Prescient Money Market Fund for Namibian investors
EMH Prescient Investment Management has announced that it has launched a money market solution in the form of the EMH Prescient Money Market Fund. In a volatile market environment, the Fund invests in cash and high quality capital market instruments and i
According to portfolio managers, Farzana Bayat and Sara Nangolo, the Fund is managed actively using quantitative techniques. “Returns achieved above the benchmark are used in specialist strategies designed to enhance yield,” she explains. “Further value-adds can be included by using duration positions, credit exposure, sweeteners and derivatives, while the Fund can also invest in nominal and real instruments as well as structured notes.
The Fund looks at a broad universe of investments that are chosen to fit within the mandate, such as Jibar/prime linked notes, credit linked notes, inflation-linked notes, short bonds, interest rate swaps and structured products. Bayat explains that the team looks at money market scenario analyses where they model the returns of the universe of interest-bearing assets under different interest rate scenarios. “Each instrument is considered on its valuation and the investment risk and return under different rate scenarios. Only those instruments that offer better return opportunities that won’t increase risk will be considered for investment,” they say.
On the topic of risk, Bayat explains against the backdrop of Prescient’s core process, being risk management. “We identify various sources of outperformance for the Fund, such as duration and credit, and then we are also able to quantify our risk. For every strategy, we measure the risk of underperforming our benchmark and investment decisions are then based on that risk factor. The ultimate portfolio goal is to maximise performance while minimising risk.”
When it comes to credit risk, Bayat says that the Fund is very conservative in this regard. “This is because we strongly believe that a cash fund should never lose capital. By chasing marginal increases in yield through investing lower down in the credit spectrum, one increases the risk of capital loss.”
With the search for higher yield in a negative real interest rate environment, many funds have felt pressured into holding longer dated floating rate deposits. However, while the duration of these assets is essentially that of a three month asset, there is significant risk embedded in the notes which is known as spread risk. This is the risk of the credit worthiness of the issuer deteriorating. “To give you an example of the magnitude of spread risk, if spreads widen one percent on seven-year floating rate notes, the entire yield will be wiped out for the year with the possibility of that portion of the money market fund delivering zero return for the year,” explains Bayat. “In managing a money market fund, we are aware of the risk presented by spreads and have tempered our investments in such long dated floating rate notes.”
Bayat expects flat rates for the year ahead, according to what the market is pricing in. “As a result, we will maintain our current strategy of investing in low-risk yield enhancing assets,” she says. “We will avoid locking in to fixed rates or long dated floating rate notes because we believe we are at the bottom of the interest rate cycle, and spreads have also compressed to very low levels. So on the whole, by investing now, one would be locked into exceptionally low levels of rates and spreads.
“We have therefore positioned the Fund for a flat or rising interest rate scenario, and should rates remain flat the Fund will perform in line with 2012. However, if rates increase, most of the assets in the Fund will reset to the higher rate leading more return in the Fund,” Bayat goes on to explain. “With regard to rate cuts, the Fund is not positioned for this, however there is enough yield pick-up accumulated in the Fund to protect against this.”
Yields have compressed by 700 basis points since 2008 and with interest rates bottoming out; short-term real yields have turned negative. Bayat and her team believe that continued currency depreciation, electricity hikes and wage increases will add upward pressure on inflation expectations, making it harder for the Reserve Bank to cut interest rates any further. “As mentioned, the market is pricing in flat rates for the year ahead, with rates expected to start ticking up in the third and fourth quarters of 2014,” she says. “It’s likely that we will see rates remaining flat for longer. However, Prescient does not take a view on rates and monitors pricing, only investing in assets that offer good value across all interest rate scenarios.”
