NAV on 2019/09/13
|NAV on 2019/09/12
|52 week high on 2019/06/28
|52 week low on 2018/10/25
|Total Expense Ratio on 2019/06/30
|Total Expense Ratio (performance fee) on 2019/06/30
Satrix Managers (Pty) Ltd.
South African--Interest Bearing--Variable Term
FTSE/JSE All Bond Index
Fund Manager Comment - Jun 19
Developed market yields continued to trend lower. Yields on the benchmark US 10- year bond declined 47 basis points during the quarter from 2.479% to 2.005%. In Europe, the yield on the 10-year German Bund touched a new all-time low of - 0.329%. In its June statement the Federal Open Market Committee (FOMC) acknowledged that economic growth was slowing somewhat and in describing future interest rate changes the statement said the FOMC will ‘closely monitor/ will act as appropriate’. While the FOMC did not signal a July rate cut, the Fed dot plot showed that most participants expect the federal funds rate to be at 2.1% at the end of 2020, compared to 2.6% previously. The federal funds futures market continues to expect much deeper cuts than the FOMC. The primary driver for the more dovish stance has been inflation that has remained below the 2% target despite low unemployment. However, the ongoing ‘trade war’ between the US and its trading partners is leading to an uncertain economic environment and greater demand for safe assets. The stock of debt with negative yields reached a new record of US$12.5 trillion.
Among the G20 countries, six have lowered monetary policy rates so far this year, with only the Czech Republic that has raised rates.
Bond market review
Cyril Ramaphosa’s ANC was victorious in the April general elections. While a victory was never in doubt, the markets were worried that the ANC might not achieve a convincing win, which could result in a weakened president and political uncertainty. However, Ramaphoria Part Two has not taken place because investors have a more realistic appreciation of the challenges that South Africa faces. It has emerged that Eskom is likely to need bigger bailouts than was provided for in the February budget. Secondly, the poor economic growth performance in the first quarter, and the expectation of sub-1% growth for 2019, has heightened the fiscal risks that the country is facing. The front and intermediate bonds rallied along with developed market bonds but the back-end bonds did not follow, resulting in a sharply steeper curve. The yield on the R2023 (5-year) bond rallied 41 basis points, while the yields on the R2048 (30-year) bond rose 9 basis points. The FTSE/JSE All Bond Index returned 3.7% for the quarter, with the ‘belly’ of the curve delivering the best performance. The 7-12-year sector delivered a return of 4.61%. Foreign investors sold roughly R20 billion worth of bonds during the quarter, despite the more favourable global bond environment.
With inflation remaining at or below target, demand for inflation protection was quite variable. In April yields on inflation-linked bonds rallied across the curve only to give up some of the gains in May and June as yields rose and the curve steepened. Despite that, the CILI (JSE Total Return Inflation-Linked Series) returned 2.76%, outperforming the STeFI return of 1.8%.
Demand for corporate credit was again robust, with credit spreads continuing to compress. Our exposures remained largely unchanged owing to the obvious signs of economic stress in a number of sectors.
Bond market outlook
Over the next three months we expect global forces to overwhelm local factors. The ‘coordinated’ global monetary policy easing is likely to create demand for SA bonds as our bonds offer some of the highest yields in developing markets. However, we remain concerned with the fiscal trajectory and seemingly low appetite for structural reforms that will lead to short-term pain but better growth prospects in the future.
The South African Reserve Bank (SARB) said that their Quarterly Projection Model indicated that there is scope to reduce the repo rate. For some time now we held the view that the SARB’s monetary policy stance was restrictive rather than accommodative and should the economy continue to falter, then the SARB could cut rates. We think that the SARB will cut rates soon but given the risks of downgrades and capital outflows, the cutting cycle is unlikely to be deep.
The investment objective of the Satrix Bond Index Fund is to achieve a return which will equate to the annual return of the portfolio benchmark which is the BEASSA All Bond Index. This will be a passively managed portfolio which will track the BEASSA All Bond Index.
This portfolio will invest in assets in liquid form, and in high yielding non-equity securities and interest bearing securities including but not limited to public, parastatel, municipal and corporate bonds, inflation linked bonds, loan stock, debentures, fixed deposits and money market instruments. When investing in derivatives, the Manager will adhere to prevailing derivative regulations. The portfolio manager will invest in derivatives for cash flow management purposes, as this is more cost effective, and to enable the investment manager to achieve the objective of tracking the BEASSA All Bond Index more effectively.