2019/05/24 00:00:00

The Monetary Policy Committee unanimously kept the repo rate unchanged at 6.75% last month. From the meeting, mention was made that upside risks remain locally with administered prices and the oil price named as specific concerns. Meanwhile, global factors countered these to some degree with downside risks of lower global inflation amidst the revision lower for the global growth outlook, and thus the accommodative monetary policies in place. The National Energy Regulation Agency (NERSA) granted Eskom tariff increases of 9.4%, 8.1% and 5.22% for years through 2019-2021 respectively. Towards month-end, the rand weakened with most other emerging market currencies as Turkey implemented additional foreign exchange controls to prevent the lira from depreciating further. After waiting on tenterhooks for an extended period, Moody's eventually refrained from publishing any ratings review on SA. With the low inflation prints over the previous three months, the forward rates priced in the market, continued to show no move in rates over the next 12 months. The Fund earned an attractive real yield of between 3.5% and 4%. Should interest rates rise, it would benefit from the low duration profile as yield earned will rise with the market. In our view, the bigger risk is rising inflation, which will threaten the portfolio's real return target. To this end, the portfolio holds an inflation swap, a dollar currency option structure and an emerging market hedge position. These will provide some performance enhancements to the portfolio should EM/rand/inflation risk materialise.
The Fund outperformed its benchmark in March, as well as over the last 12 months. The bulk of the performance came from good quality credit held in the portfolio, which generated yield over and above the benchmark. The actively managed duration positioning over the year additionally added to the above benchmark performance. There were no detractors to performance for the month of March.