Page 161 - Profiles's Unit Trusts & Collective Investments - September 2024
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Fund Manager Interviews
Please comment on your investment year (July 2023 – June 2024) from a fund manager’s
point of view.
The Argon BCI Flexible Income Fund returned 13.6% compared to cash (STeFI) and SA Bonds
(ALBI), which returned 8.5% and 13.7% respectively.
The benchmark for this fund is STeFI x 110%, which means that the fund outperformed its
benchmark by 4.2% for the one-year period to 30 June 2024. In terms of the outperformance, the
bulk of the alpha was generated via capital appreciation in the bond market, with the balance being
credit. In terms of the risk spectrum, the Argon BCI Flexible Income Fund sits in-between cash and
SA bonds, with cash being low risk and SA bonds being high risk (ie, more volatile). This would
imply that the fund should produce returns somewhere between cash and SA bonds. In fact, the
fund has produced similar returns to that of the SA bond market, but with lower risk than bonds.
Moreover, after adjusting for average inflation of 5.3 % over the period, the Argon BCI Flexible
Income Fund has given a healthy real return of 8.3%.
In terms of risk management, what methods or strategies are you able to use to protect your
clients’ investments?
It is worth noting that the Argon BCI Flexible Income Fund acts like a money market fund
when we are negative on the SA bond market, and a constrained bond fund when we are
constructive on SA bonds.
The fund is primarily driven by duration and credit exposures, and as such we control risk by
implementing duration and credit limits.
The duration limits of the fund are 0.1 years and 4.5 years, so no negative duration is allowed.
For example, when we are constructive on SA bonds, the duration of the fund rises to 4.5 years,
and when we are negative, it falls to around 0.1 year. For comparative purposes, the ALBI duration
is 5.6 years. So, the higher the duration the greater the risk. In simple terms, if interest rates fall by
1.0%, the Argon BCI Flexible Income Fund (with a duration of 4.5 years) will appreciate by
roughly 4.5% and vice versa.
For the fund’s credit limits, we impose a maximum exposure to FRNs of 50%. This is to
manage liquidity in the fund as FRNs tend to be less liquid, while the remaining 50% is highly
liquid as it comprises government bonds and money market instruments. We generally tend to
hold our FRN exposures to maturity. In terms of credit default risk, all our credit issuers are
subjected to a rigorous research process where our seasoned Credit Analyst produces a credit
report on a particular credit and presents the research to the Credit Committee. Only after the
Credit Committee approves the credit can the Fund Manager buy that instrument. This is designed
solely to significantly reduce credit default risk in the fund.
Please comment on the year ahead and, if possible, estimate the performance of your fund
over 2 or 3 years. What are your targets and objectives for the year ahead?
We expect the Argon BCI Flexible Income Fund to yield double-digit returns over the next few
years, largely driven by our combined strategy of interest income and capital appreciation. The
capital appreciation portion of the expected returns are driven by our bond investments, ie buying
bonds when it is cheap, and selling after bond yields have rallied. With at least 10% per annum
anticipated over the next few years, this expected return can be expressed in terms of real or
inflation-adjusted returns, which implies a healthy real return of 5.5% as we expect inflation to be
anchored around 4.5%.
Which asset classes do you expect will give the best total rates of return over the next few
years?
On a risk-adjusted basis, we believe that SA bonds can deliver double-digit returns over the
next few years as the Government of National Unity delivers on structural reforms, and this in turn
will boost GDP growth in SA. Growth above 2% is needed to create jobs, boost tax revenues and
ultimately reduce the budget deficits. With good SA bond returns expected, the Argon BCI Flexible
Income Fund will be well-placed to generate good returns over the next few years.
Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 159