Old Mutual Investment Group SA (OMIGSA) was incorporated in 1993 as a wholly owned subsidiary of the Old Mutual Group. In June 1997 it became a fully contained and independent asset management company.
Based in Cape Town OMIGSA is a major player in the local institutional and retail market and offers a wide range of investment products to local and international investors as well as administering a variety of life fund products on behalf of the Old Mutual Group.
A team of over 30 investment analysts conducts in-depth, independent, in-house research. This makes OMIGSA unique due to the proprietary nature of the research as well as the fact that it is current across all sectors, markets and economies. In South Africa, OMIGSA provides institutional and retail investors with access to a spread of international markets and investment opportunities through its operations in the United Kingdom and USA.
Daphne manages the money market and active bond fund portfolios. In addition, she trades fixed interest instruments and is responsible for risk monitoring and fund exposures and she oversees asset administration.
Daphne joined Futuregrowth in April 2001 from NIB Asset Management.
Old Mutual Bond comment - Sept 18
The third quarter of this year was particularly cruel for emerging markets, especially due to the barrage of persistent negative news fl ow from Turkey and Argentina. This was in addition to existing headwinds, like the escalating risk of more international trade restrictions between the US and key trading partners, which, if they come to fruition, may have potentially dire consequences for emerging markets. As market sentiment soured, foreign investors predictably responded by becoming large-scale sellers of emerging market bonds and currencies.
In the case of South Africa, foreign investors sold R17 billion worth of rand-denominated RSA government bonds over the quarter, contributing to net sales of just short of R60 billion for the fi rst nine months of this year. Although dwarfed by the excessively sharp depreciation of the Turkish lira and Argentinian peso, the rand (like most other emerging market currencies), failed to escape the carnage and depreciated by around 11% against the US dollar from the end of June to early September. In the process, the local currency reached its weakest level against the greenback since June 2016. Although the rand regained some lost ground during the last three weeks of September, it is still about 20% weaker than its best level this year. This, in turn, contributed to heightened market fears of additional future infl ationary pressure and a possible rate increase by the South African Reserve Bank (SARB). Although the SARB has thus far resisted the temptation to hike its policy rate, it did use every single opportunity to warn against the risks to higher infl ation, which implies higher future rates should infl ation indeed accelerate too fast for its liking.
While negative international developments had been prominent, local data releases also contributed to negative market sentiment. The rate of infl ation at both consumer and producer levels continued to tick higher, with the latter now just outside the top end of the infl ation target range. Most disappointing was the release of gross domestic product (GDP) data for the second quarter of this year, which confi rmed a 'technical' recession (that is, negative growth for two consecutive quarters). From a bond market perspective, it is noteworthy that weak economic growth could hamper tax revenue collection, particularly corporate income tax, and if unmatched by expenditure cuts, put fi scal consolidation at risk. This, in turn, would lead to a higher funding requirement and possibly more sovereign credit rating downgrades. Fortunately, the latest available data shows that South Africa’s cumulative main budget fi scal defi cit for the fi rst fi ve months of the 2018/19 fi scal year is still largely on track relative to the Budget presented in February this year.
The events described above not only forced bond yields across the yield curve to higher levels (yields rise as bond prices fall), but also contributed to signifi cant intra-quarter volatility. The extent of this volatility is demonstrated by the trading range of 8.57% to 9.25% of the benchmark R186 (maturity 2026). A late quarter relief rally caused the R186 to gain some lost ground, but it still closed the quarter 15 basis points (bps) higher at 8.99%. The net increase in yields during the quarter led to a disappointing JSE ACSA All Bond Index (ALBI) return of 0.8%. Although the infl ationlinked bond market initially failed to escape negative market sentiment, real yields stabilised at higher levels towards the end of the quarter, bringing to an end the sharp rise in real yields that started in April this year. As a result, the JSE ASSA Government Infl ation-linked Index (IGOV) returned only 0.5% for the quarter. However, this was a signifi cant improvement considering the second-quarter return of -4.6%. Cash retained the top position for the period under consideration, returning 1.6%.
Investment view and strategy
The recent more sustained pick-up in global bond yields notwithstanding, our view remains that most developed bond markets are still not appropriately priced. In the case of the US, the strong pace of economic growth, the low level of unemployment and evidence of sustained higher infl ation support further US monetary policy tightening. We believe that the US Federal Reserve (Fed) is in a position to lift its policy rate by at least another 25bps this year. More importantly, at a global level, the trend continues to gradually shift from quantitative easing to quantitative tightening.
Locally, our main concern with regard to the bond market remains the strong link between lacklustre economic growth and fi scal consolidation - or more specifi cally, the rising debt burden of Government, which arises as a consequence of a lack of fi scal consolidation and therefore continues to threaten the country’s sovereign risk profi le. The risk of a failed economic recovery has risen following a slew of disappointing data releases the last few weeks. This makes us question the quality of tax revenue collections, which, in turn, keeps the risk of a budget defi cit overrun at elevated levels.
On the monetary policy front, we maintain our view that the central bank will remain hostage to the opposite forces of a lacklustre economic growth outlook and upside risks to infl ation. For now, to us this suggests a stable policy path. The risk to this view is skewed in favour of some upside risk to infl ation and thus interest rates.
While the observable investment theme and related realtime developments mostly have negative consequences for the local bond market, it is important to note that current market valuation is largely refl ective of this. Cheaper market valuations following the sell-off during the second and third quarters of this year afforded us an opportunity to cautiously increase risk by selectively buying nominal bonds. We shall continue to look for opportunities to increase bond market exposure, but only into bouts of weakness, considering the level of uncertainty discussed above.
The fund underperformed its benchmark performance on a net basis for the 12-month period ending September 2018. This was mainly attributed to the underweight exposure to the top performing long-dated nominal bonds over the period under review.
The fund is conservatively positioned, with a small underweight modifi ed duration position. We will continue to look for opportunities to increase our holding of fi xed rate nominal bonds, with a preference for those bonds with a higher running yield.
The fund aims to offer a combination of capital growth and high income yields. Capital growth is primarily achieved by actively taking advantage of interest rate cycles.
This fund is suited to astute investors who have a particular view on relative asset class performance. The investor understands the impact of the interest rate cycle and accepts this risk in exchange for moderate long-term growth potential.
The fund invests across the full spectrum of the yield curve. It invests in public and private sector bonds and deposits, with at least 50% invested in bonds with an effective government guarantee.
The fund is not required to be Regulation 28 compliant in terms of its Deed, but the fund manager is mandated to comply with Regulation 28 on a day-to-day basis.