Page 187 - Profile's Unit Trusts & Collective Investments - September 2025

Fund manager interviews Chapter 9

well-diversified exposure to credit, duration and bond type. 90% to 95% of our credit exposure is
investment grade. We have lower credit risk and lower volatility than our peer average.

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?
The performance of the fund depends on three factors: the performance of global bonds in
general, our asset mix in terms of the fund’s exposure to duration, credit and inflation-linked bonds
and how these will perform on a relative basis, and the performance of the rand.
Overall, the global bond market will be influenced by inflation, policy and economic growth
expectations. Internationally, the odds of a real recession are still seen as low at present. The
euro-zone is near-stagnation, but given what has already happened, and the EU’s fiscal impulses
(especially out of Germany), the downside from here appears limited, despite the export challenges
posed by US tariff policy. The change in US foreign policy has forced Europe to spend and invest
more in its own defence, which, if anything, forebodes somewhat weaker bond prices.
The US economy continues to expand, but at a slower rate since the start of the year. This has
pushed 10-year Treasury yields down by some 30bp in 2025 and taken some of the momentum out
of equity markets, other than for AI stocks. But with inflation trending closer to 3% than 2%, and no
reversal in sight, the 10-year yield is unlikely to decline much further from here unless the US slides
into a severe recession. As the US economy is now dominated by the services sector, and growth is
driven by consumer spending and AI capex, this appears unlikely at present. The prospect of rising
US debt levels is likely to keep the pressure on 30-year yields, which have run up from under 4% in
August last year to almost 5% by the end of June. Policy rates are expected to come off by some 150
bp over the next 18 months, but that is already discounted. From that perspective, the return outlook
for the two-to-three years will continue to lean heavily on the running yield and currency movements.
Traditionally, a slow-down in US growth (causing bond prices to rise) has put pressure on the rand,
augmenting local returns. That dynamic may change given the factors driving dollar weakness of
late, South Africa’s lower inflation outlook and high real interest rates, and the improved outlook
for precious metals. While it is unrealistic to form accurate expectations about global bond returns
in rand, given the many moving parts, and future unknowns, some of which may offset and others
compound each other, the current economic and geopolitical landscape suggests that returns are
likely to be modest for the foreseeable future, barring a locally-induced rand collapse.
Investors should however not base their portfolio around such forecasts, and rather view the fund
as a source of diversification, a counterweight to offshore equities, and a hedge against economic
surprises and geopolitical tensions within a balanced portfolio.

Offshore investments are heavily influenced by the rand. Give your view on the rand over the
next 1, 3 and 5 years.
The one certainty we have about the rand’s dollar value is that it will fluctuate with the daily news
flow, more so than hard currencies. Especially over the short term, the exchange rate ebbs and
flow according to interest rate expectations (local and overseas), risk-on/risk-off trading, emerging
market sentiment, the commodity cycle, developments in China and our relationship-status with
the US. It also reacts to local economic and political developments, and significant changes in the
country’s fiscal outlook. With so many factors in play, it is impossible to reliably predict where the
rand will be in 12 months’ time.
Having said that, the rand has traded in a relatively narrow range with the US dollar over the last
three years (R/USD17-19). The steady decline since 2018 (from around the R/USD13 level) has
been arrested, helped by the formation of the GNU and the end of load-shedding. The rand’s country
risk premium related to political risk, structural challenges and the fiscal outlook has narrowed by
over 100bp over the last two years, in our estimate and it would have been more, were it not for
our strained relationship with the new US administration. Hopes that South Africa will soon shed
its FATF grey listing is another positive for the rand. Investors’ focus is shifting back to the macro
fundamentals such as inflation, policy rates and growth prospects. In that context, the narrower
inflation differential with the US (both at present, and in light of a lower inflation target in future) is
another factor that should also support the rand’s relative performance longer term.

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