“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.”
Negtive 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 uncetainty 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 flushed 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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Melville du Plessis
Melville joined Sanlam Investments in 2011. As portfolio manager within the fixed interest team, his responsibilities include portfolio management, research, trading, valuations, investment process management and development, as well as product development and execution. He manages both institutional and retail portfolios totalling R50 billion. After obtaining a B.Comm. (Honours) degree from the University of Stellenbosch, Melville joined Novare Investments as a consulting team member of hedge funds, multi-manager and pension funds and then as portfolio manager for multi-manager products. Melville is a certified Financial Risk Manager, a Chartered Financial Analyst and a Chartered Alternative Investment Analyst.
The Sanlam Group is a full member of the Association for Savings and Investment SA. Collective investment schemes are generally medium- to long-term investments. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments / units / unit trusts may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager, Sanlam Collective Investments (RF) Pty Ltd, a registered and approved Manager in Collective Investment Schemes in Securities. Additional information of the proposed investment, including brochures, application forms and annual or quarterly reports, can be obtained from the Manager, free of charge. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total market value of all assets in the portfolio including any income accruals and less any deductible expenses such as audit fees, brokerage and service fees. Actual investment performance of the portfolio and the investor will differ depending on the initial fees applicable, the actual investment date, and the date of reinvestment of income as well as dividend withholding tax. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The performance of the portfolio depends on the underlying assets and variable market factors. Performance is based on NAV to NAV calculations with income reinvestments done on the ex-div date. Lump sum investment performances are quoted. The portfolio may invest in other unit trust portfolios which levy their own fees, and may result is a higher fee structure for our portfolio. All the portfolio options presented are approved collective investment schemes in terms of Collective Investment Schemes Control Act, No 45 of 2002 (“CISCA”). The fund may from time to time invest in foreign instruments which could be accompanied by additional risks as well as potential limitations on the availability of market information. The Manager has the right to close any portfolios to new investors to manage them more efficiently in accordance with their mandates. The portfolio management of all the portfolios is outsourced to financial services providers authorized in terms of the Financial Advisory and Intermediary Services Act, 2002. Standard Bank of South Africa Ltd is the appointed trustee of the Sanlam Collective Investments Scheme/ Standard Chartered Bank is the appointed trustee of the Satrix Managers Scheme.
The SIM Enhanced Yield Fund is an interest-bearing fund that invests in a wide range of debt instruments. The Retail class is the most expensive class offered by the Manager. The maximum fund charges include (including VAT): An initial advice fee of 0.34%; annual advice fee of 1.15% and annual manager fee of 0.48%. The most recent total expense ratio (TER) is 0.49%. The source of the performance data is Morningstar – to 31 August 2018. The worst 12-month performance for the Fund is 5.26%. The best 12-month performance is 10.14%.
Please note that past performances are not necessarily an accurate guide of future performances, and that the value of investments / collective investment units / unit trusts may go down as well as up. Commission may be paid and, if so, would be included with the brokerage charges, securities transfer tax, auditor’s fees, bank charges, trustee fees and levies in the overall costs, which will be levied against the fund. A schedule of fees and charges and maximum commissions is available from the manager, Sanlam Collective Investments(RF) Pty Ltd on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Collective investments are calculated on a net asset value basis, which is the total value of all assets in the portfolio including any income accrual and less any permissible deductions from the portfolio. Portfolio performance is calculated on a NAV to NAV basis and does not take any initial fees into account. An annualised growth rate is used for all performance data of 12 months or longer. Income is reinvested on the ex-dividend date. Total return performances are published. The source of performance data and risk statistics is Morningstar. Actual investment performance will differ based on the initial fees applicable, the actual investment date and the date of reinvestment of income. Forward pricing is used. The Manager does not provide any guarantee either with respect to the capital or the return of a portfolio. The manager has the right to close the portfolio to new investors in order to manager it more efficiently in accordance with its mandate.