This fund is suitable for investors seeking a cash-plus return and is conservatively managed. The return from investing in SA cash (up 7.4% over the past year) has exceeded our long-term expectation of CPI+2% per annum (p.a.) based on SA inflation surprising somewhat on the downside, and the South African Reserve Bank (SARB) remaining hawkish on its interest rate view. The fund in turn has delivered a return comfortably more than the benchmark, given the yield pick-up the manager has obtained through its careful selection of the appropriate credits over time.
For the 2019 calendar year, cash (up 7.4%) has lagged SA nominal bonds (up 10.3%) as market expectation has increased that the SARB will cut interest rates soon. All else being equal, interest rate cuts will reduce the attractiveness of cash relative to other asset classes. Benign inflation has however resulted in cash outperforming inflation-linked bonds (up 2.6%).
The manager only invests in instruments that are linked to cash rates. The manager is highly selective to the issuers it invests in, and able to choose what it regards as most appropriate on risk-adjusted grounds. More than 90% of the fund is invested with the top five banks, and sensibly diversified across maturities up to 7 years. The manager does not invest in sub-investment grade paper, and all the instruments in the fund are domestic-only. The state-owned enterprise allocation at under 7% is limited to high quality Landbank paper and shorter-dated Sanral notes, with a low outlook to increase that allocation any time soon.