Portfolio Positioning In The Current Environment - May 2017
Both Strategic Income and Global Strategic USD Income have benefited from having exposure to assets with a higher expected return than cash. In the case of Strategic Income, over its almost 16-year track record, the fund has delivered an annualised return of 10.5%* (which is roughly 2.7% p.a. ahead of cash after fees). In turn, Global Strategic USD Income has delivered an annualised US dollar return of 2.7%* (2.3% p.a. ahead of cash after fees) since its inception more than five years ago.
We continue to maintain a decent allocation to assets that are not influenced by short-term volatility in both Strategic Income and Global Strategic USD Income (see Figure 3). In the case of Strategic Income, we remain vigilant of risks emanating from the dislocations between stretched valuations and the underlying fundamentals of the SA economy. However, we believe that the fund’s current positioning correctly reflects appropriate levels of caution. The fund’s yield of 9.1% continues to be attractive relative to its duration risk. We continue to believe that this yield is an adequate proxy for expected fund performance over the next 12 months. As is evident, we remain cautious in our management of the fund. We continue to invest only in assets and instruments that we believe have the correct risk and term premium, to limit investor downside and enhance yield.
In the case of Global Strategic USD Income, the fund increased its duration slightly as US yields rose in anticipation of the Fed’s rate hike. However, duration remains conservative as we expect another rate rise in June. Our exposure to corporate bonds remains in the short-dated area as we believe the steepness of the credit curve remains too flat. We believe that property stocks offer reasonable value, but they remain sensitive to higher bond yields and our fund positioning reflects this.
* As at 31 March 2017