This multi-managed multi-asset fund aims to outperform an index of shorter-dated government bonds over rolling one-year periods. Managers in the fund can invest in bonds across the maturity spectrum, as well as hold property, preference shares, floating rate instruments, and other fixed interest assets including foreign bonds and cash. The fund is diversified across managers who themselves implement their best investment view.
Shorter-dated South African (SA) bonds have returned 7.5% over the past year, and outperformed SA cash (up 7.3%), SA inflation-linked bonds (up 2.6%) and SA property (up 1.9%), and underperformed longer-dated SA bonds (up 10.3%). Foreign bonds experienced a particularly difficult final quarter of 2019 resulting in meagre 2.9% return in rands for the year. Given its relatively low allocation to property and inflation-linked bonds and the exposure to nominal bonds, the PPS Flexible Income Fund has outperformed its benchmark for the year.
The more recent uncertainties with SAA and Eskom have resulted in an increased likelihood of a ratings downgrade in 2020. Inflation has continued to edge lower and remains subdued at well below the midpoint of the target band which has been beneficial for nominal bonds. This has also led to sentiment shifting towards more interest rate cuts (but has not yet materialised) which together with the inflation expectations have been a drag on cash and inflation-linked bonds.
There were no changes to the manager line-up over the quarter. The fund deliberately combines two managers that follow quite distinct processes to deliver on a more consistent outcome. Prudential continues to find relative value in SA inflation-linked bonds and selective longer-dated bonds, while Prescient has persisted with an overweight to shorterdated cash-like instruments.