2018 Compelling Cash Alternatives - April 2018
Portfolio Positioning In The Current Environment - April 2018
Both Strategic Income and Global Strategic USD Income have benefited from exposure to assets with a higher expected return than cash. In the case of Strategic Income, over its almost 17-year track record, the fund has delivered an annualised return of 10.4% (which is roughly 2.6% p.a. ahead of cash after fees). In turn, Global Strategic USD Income has delivered an annualised US dollar return of 2.5% (1.9% p.a. ahead of cash after fees) since its inception more than six 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 8.8% 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 has begun to increase its duration in recent months as US yields have risen sharply, especially in shorter maturities. We anticipate several more US rate hikes in 2018 and 2019, but believe it is unlikely for the Fed Funds rate to reach the level implied by the Federal Reserve’s forward guidance. Our exposure to corporate bonds is predominately short dated as the credit curve is now quite flat at the short end. We believe that property stocks offer reasonable value, but they remain sensitive to higher bond yields and our fund positioning reflects this. The negative sentiment within the property sector is at times difficult to reconcile with the outlook for growth ascribed to the wider market.