Income investing

Overview 

Most investors hold a portion of their savings outside of long-term growth assets. This includes money earmarked for a specific purpose that needs to be kept accessible or simply set aside from the volatility of equity markets.

Cash and money market funds serve an obvious role here. They offer daily access, capital stability, and predictable returns. But for savings with a slightly longer horizon, money you won't need tomorrow but may need within the next one to three years, cash alone may not be working hard enough. This is where income funds (specifically managed income funds) become relevant.

This edition of Corolab is aimed at helping you make that choice. It explains where the different types of income funds fit within a broader portfolio, what distinguishes one type from another, how Coronation constructs its income fund range, and what you can reasonably expect in terms of returns.

What is an income fund?

An income fund is designed for money that needs to work harder than cash, without taking on the risk that comes with longer-term growth investments.

In practice, this means the fund aims to generate a competitive return while keeping a careful eye on capital stability. It is not designed for long-term wealth building. It is designed for money with a purpose in the near to medium term, typically within the next one to three years, whether that is covering planned expenses, providing a withdrawal buffer in retirement, or holding savings productively while longer-term decisions are made. The balance it seeks is a better return than cash (with access to your money when you need it), and a disciplined approach to managing risk along the way.

The balance it seeks is a better return than cash (with access to your money when you need it), and a disciplined approach to managing risk along the way.

Choosing between cash, money market, and managed income funds

Cash and money market funds are generally used for money you may need on short notice, with capital preservation and day-to-day access as priorities.

Managed income funds sit a step up on the risk spectrum, between money market funds and bond funds. They aim to deliver an attractive income and, over time, the potential to earn more than cash. But investors should be comfortable with some movement in capital value over shorter periods.

For longer-term objectives, where you can stay invested through market ups and downs, growth assets are typically more appropriate as the core of your investment portfolio. Managed income funds should generally be used as part of the more defensive portion of a portfolio, rather than as the primary home for long-term growth capital.

When a managed income fund can be useful

• Planned spend in 12-36 months: School fees starting soon, a home deposit, or starting capital for a new business.
• Recent retirees: a 12-36 month “income buffer” for expected withdrawals, with the rest invested for longer-term growth (read more in our Investing for Income and Growth Corolab).
• Business owners: a 12-36 month cash-flow reserve for predictable costs like bills and salaries (with day-to-day cash kept in the bank).

What does a managed income fund invest in?

Managed income funds can invest across a wide range of assets, including cash, bonds, listed property, and equities, with the primary objective of maximising income on behalf of investors. The category allows for a meaningful degree of flexibility, with portfolios able to invest up to 45% offshore, 10% in equity, and 25% in listed property. That flexibility is worth understanding before you choose a fund. Different managed income funds will make different use of it, which means the risks they take and the returns they target can vary considerably from one fund to the next. Knowing what your fund invests in, and why, helps you form a realistic picture of what to expect.

Understanding those building blocks, and how each one contributes to returns, is what the table below sets out. For managed income funds, the return comes primarily from interest income (the regular income paid out by assets like bonds, cash instruments, and credit) and to a lesser extent from capital growth and dividends (which typically drive growth funds' returns). But earning more than cash still requires deliberate risk-taking, and the skill lies in knowing which levers to pull and when. We will explain our approach to risk deployment later on in this guide.

What are the benefits of considering a managed income fund?

• Access
  Unlike a fixed deposit at a bank, you maintain access to your money while invested.
• More than just interest
  Managed income funds aim to deliver a better return than what you would achieve via a deposit at a bank.
• Active management across multiple instruments
  Managed income funds seek to invest across a diversified pool of interest-bearing instruments (as per the table above) and actively adjust these holdings in response to changing market conditions and factors affecting returns.
• Expert guidance
  Rather than navigating the complex fixed income landscape yourself, an experienced fund manager/fund management team make decisions and adjustments to a portfolio on your behalf when interest rates change, or certain investments become more attractive than others.

Coronation’s managed income fund solutions

Coronation offers a range of managed income funds designed to suit different return objectives and risk appetites. While each fund occupies a different position on the risk spectrum, all of them are managed by the same team and built around the same core principles.

Built on a shared foundation

The first is a commitment to capital preservation over rolling 12-month periods. The second is a disciplined approach to risk – we never take more risk than is required to deliver on a fund's stated return profile. And underpinning both is a commitment to transparency: we provide clear disclosure of where returns are coming from and what risks are being taken across each strategy, so investors always know what they own and why.

Choosing the right fund for your needs

Within the managed income range, the two funds investors can consider for local rand-denominated savings are Coronation Strategic Income and Coronation Active Income Plus. Both target returns above cash and are managed within a disciplined risk framework, but they are designed for different investor needs and time horizons.

Coronation Strategic Income is our traditional managed income fund. It is designed for investors with a 12-36-month horizon who want a competitive return above cash with a more contained risk profile. Coronation Active Income Plus is a more flexible managed income fund designed for investors who can take a slightly longer view, at least 36 months, and are comfortable with a broader opportunity set in pursuit of a higher return target.

The table below sets out the key differences (and similarities) between the two funds.

How Active Income Plus deploys risk relative to Strategic Income

To pursue a higher return over a longer horizon, Coronation Active Income Plus is built to take on more risk than Coronation Strategic Income – but in a structured and deliberate way.

Let’s say Coronation Strategic Income sets the baseline. The fund operates within a defined risk budget (see risk limits in the table above), sized to deliver its return target over a 12-36-month period. Coronation Active Income Plus uses that same baseline as its reference point, but has the flexibility to deploy a multiple of that risk budget depending on market conditions and where the team sees the best opportunities.

In periods demanding heightened caution, Coronation Active Income Plus might deploy around 1.5 times the risk of Coronation Strategic Income. When the opportunity set is more compelling and the probability of outperformance is higher, it may deploy closer to 2 times. This greater participation in capital cycles – whether through longer duration, wider credit exposure, or offshore positioning – is the engine behind the fund's higher return target.

Importantly, this is never simply a case of doubling up on existing risk positions. Each allocation decision is made holistically, with the full portfolio in mind – considering how different instruments interact, where diversification can be preserved, and whether the overall risk being taken is proportionate to the opportunity on offer. The flexibility is always exercised within the same underlying discipline that governs the broader income fund range.

A track record built on discipline

The charts below show what a consistent, disciplined approach to income investing has produced for our clients – across different interest rate environments, periods of market stress, and more than two decades of changing conditions.

Twenty-five years of outperformance

Since its inception in July 2001, Coronation Strategic Income has consistently outperformed cash, generating a value uplift of ~72% above local cash over its almost 25-year history. That is not the result of taking outsized risk. It is the result of making careful, considered decisions across a diversified set of income-generating assets, year after year.

Building on this multi-decade track record in managed income investing

Although Coronation Active Income Plus has a much shorter track record than Coronation Strategic Income, it builds on the years of experience gained in managing this type of portfolio. Since inception in 2023, the Fund has comfortably outperformed its cash benchmark, delivering annualised returns of 11.9% against a benchmark return of 7.9%.

Delivering value in US dollars

For investors with offshore savings or dollar-denominated needs, Coronation Global Strategic USD Income has delivered a consistent story over more than 14 years – producing a value uplift of ~13% above USD cash since inception.

How we do it

A consistent performance track record does not happen by accident. It is the product of a rigorous investment process, a well-resourced team, and a disciplined approach to risk that never loses sight of what our income fund investors need most – competitive returns and capital stability.

A deep and experienced team

Our fixed income portfolios are managed by a dedicated team of eight specialists, fully integrated into Coronation's broader investment team of 50 professionals – including three former CIOs and 45 CFA charterholders. This integration matters. It means our fixed income team draws on the same depth of research that drives our equity portfolios, with dual coverage of both local and international credit issuers shared across our South African and global equity teams. The result is a level of insight into the companies and institutions we lend to that goes well beyond what a standalone fixed income team could achieve.

Rigorous portfolio construction

As with equities, we believe we can add value to investors in our income funds through bottom-up security selection when assets are mispriced. Our approach to asset allocation within the local and global fixed income universes mirrors that of the broader Coronation investment team, but the process is overlaid with constraints given the needs of our income fund investors. These include allocating to a blend of assets that can deliver on our income funds’ respective performance objectives, while supporting capital preservation and liquidity for investors with immediate income needs.

Taking the right risks, in the right measure

To outperform cash, our income funds need to take some risk. But we are deliberate about which risks we take and how much exposure we carry at any point in time. The two risks that matter most in fixed income are interest rate risk (the sensitivity of bond prices to changes in market rates) and credit risk (which is the possibility that a borrower cannot meet its obligations). We manage both actively, within clearly defined limits, and with independent oversight from our Credit Committee.

This means our positioning is never static. As market conditions change and the relative attractiveness of different instruments shifts, we adjust our exposure accordingly, reducing holdings where we see risk building and rotating into better opportunities where we find them. It is this active, considered approach to risk-taking that allows us to pursue our return targets without compromising our commitment to capital stability.

Beyond these core risks, we actively manage exposure to a range of alternative return sources (including inflation-linked bonds, floating rate notes, corporate credit, listed property, preference shares, and convertible bonds), adjusting our positioning as market conditions change and the likelihood of outperformance shifts.

Never reaching for return at the expense of capital preservation

One principle sits above all others in how we manage our income funds: we never aim to increase our income funds' risk profile or performance by increasing the possibility of investor downside.

In practice, this means we will not attempt to deliver more than the stated return target if we believe it will put our capital preservation commitment at risk. We use quantitative modelling to arrive at a blend of assets that allows us to meet our risk and return objectives with a high degree of certainty, and we do not deviate from that discipline in pursuit of short-term performance.

What to expect along the way

Understanding the long-term track record matters. So does understanding what the journey can look like. Unlike a money market fund, our managed income funds will not deliver a perfectly smooth return series from one month to the next. This is not a flaw in the design. Rather a natural consequence of holding a diversified mix of assets, some of which move with interest rates (credit spreads, and market conditions), so there will be periods where short-term returns fluctuate. In rising interest rate environments particularly, delivering cash-plus returns becomes more challenging. When rates are falling, conditions become more supportive. What matters is performance through the cycle, and over any meaningful horizon our income funds have consistently delivered ahead of cash.

The rolling three-year return chart below illustrates the point well. While there are periods where the fund tracks closer to cash, the direction of travel over any meaningful horizon has consistently been ahead of it.

The considered way to hold one of these funds is with a clear sense of the job it is doing and a time horizon that matches its mandate. For money you need within 12 to 36 months, Coronation Strategic Income is built for that purpose. For a slightly longer horizon where a higher return target is appropriate, Coronation Active Income Plus is designed to deliver. And for savings held in US dollars, or for investors who want rand-denominated exposure to a dollar-based income strategy, Coronation Global Strategic USD Income  offers the same disciplined approach to capital stability and income generation, applied to the global fixed income opportunity set.

Accessing our managed income funds

Our managed income funds are available in both rands and US dollars, making them accessible whether you are investing local savings or looking to put offshore capital to work.

A note on the Coronation Global Strategic USD Income AMET

For investors who want US dollar exposure within a JSE-listed portfolio, the Coronation Global Strategic USD Income is also available as an Actively Managed Exchange-Traded Fund (AMETF). Despite being held in rands, it gives you access to an actively managed dollar-denominated income portfolio, global diversification across a broad range of yielding asset classes, and the simplicity of trading on the JSE alongside your other listed investments.

Conclusion

Income investing is not complicated in principle. You have money with a purpose, a time horizon, and a need to earn more than cash without taking on unnecessary risk. What makes the difference is choosing a fund that is genuinely built for that job – one that is clear about its return target, disciplined about the risks it takes to get there, and clear about what the journey will look like.

That is what Coronation's managed income range is designed to deliver. The longterm track records of Coronation Strategic Income and Coronation Global Strategic USD Income reflect what that discipline looks like in practice – not a single good year, but consistent outperformance above cash across multiple interest rate cycles and market environments over decades.

If you are unsure which fund is right for your needs, or would like to discuss how income funds fit within your broader portfolio, we encourage you to speak to your financial adviser or contact Coronation directly. The right choice starts with being clear about the job the money needs to do.

Disclaimer
SA retail readers