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Safe, steady holds secret to investment success

12 October 2018Sanlam Investments
Melville du Plessis, fixed interest portfolio manager at Sanlam Investments

Melville du Plessis, fixed interest portfolio manager at Sanlam Investments

“I’m here to share a key ingredient to investment success with you,” said fixed interest portfolio manager Melville du Plessis at the recent All Access Summit hosted by Sanlam Investments.

“Though fixed interest returns are capped, unlike equity, there is a higher degree of certainty around returns than is the case with equity,” Du Plessis reminded investors. “Fixed interest as an investment vehicle is unapologetically boring and unsexy and the upside is capped, but the small variation in annual returns is what makes them attractive to investors wanting a steady, low-stress investment.”

South African fixed interest assets have been offering fantastic returns over the past few years. “Nonetheless, we are still able to extract attractive returns in the fixed interest space, and one of the vehicles through which we make these returns available is the SIM Enhanced Yield Fund,” said Du Plessis.

The power of compounding


The benchmark of the SIM Enhanced Yield Fund is SteFI+0.5%, which the Fund has outperformed since inception by around 1% p.a. (net of fees) and which means it has outperformed the STeFI index itself by around 1.5% p.a. Which brings us back to the secret of investment success: the power of compounding strong inflation- and cash-beating returns over time.

“With the SIM Enhanced Yield Fund we’ve been successful at not only meeting our investment objectives over the past five to six years, but also at outperforming them. We benchmark the fund against cash, so this is an alternative to saving money in the bank or putting it in a money market fund.”

Back to the fundamentals


Du Plessis manages fixed interest funds for Sanlam Investments, a pragmatic value house. He defines this as buying assets below their intrinsic value and selling them when they become expensive, i.e. “buying low and selling high”. According to Du Plessis this approach is well understood in the equity and balanced space but less so in a fixed interest environment.

“However, the same principle applies,” said Du Plessis. “We look at what the market is pricing in on the fixed interest curve and we compare that to the fundamentals when we consider monetary policy, fiscal policy, and inflation expectations.”

Negative sentiment toward EM markets creates opportunities


“We’ll look at yield curves and look for mispricings, which we then exploit to add value to client portfolios,” said Du Plessis.

For example, over the past three years with policy uncertainty and market shocks such as Nenegate, SA bonds have traded at yields much higher than their fundamental value. Sanlam Investments (SI) took advantage of the opportunity to buy in at low bond prices. The unwinding of the negative sentiment in the fourth quarter of 2017 also led to some “kickers” in the SI portfolios – opportunities to sell high. More recently we’ve seen negative international sentiment towards emerging market bonds, pushing SA yields higher and creating opportunities to buy low.

Why leave your money in the bank?


“We feel that the SIM Enhanced Yield Fund is the best-kept secret in the market. It’s a high-quality, low risk product and a much better alternative to saving money in the bank. And it’s competitively priced,” said Du Plessis.

The Fund has been able to consistently outperform its peer group because the management team has two levers to pull: interest and credit (some of its peers do only one or the other). They are the sustainable performance drivers. The political uncertainty and the opportunities created were a nice tailwind, but not sustainable through all market cycles.

Sustainable top-quartile performance


Du Plessis still sees more investment opportunities, which means that the Fund is well positioned for the future.

“We think fixed interest is a great investment opportunity. This asset class has such an appealing proposition. We’ve seen the global search for yield as the world has become flush with money, pushing up asset prices across the world. But not so much in SA. In SA we are still sitting with juicy real returns. Yes, international money has flown into our government bonds, but foreigners are hesitant to touch SA credit. That’s still available for us as locals to take advantage of. They are still offering value and one of the best-kept secrets in the investment industry.”

 

 

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