Page 166 - Profile's Unit Trusts & Collective Investments - March 2026

Chapter 9 Fund manager interviews

We dynamically manage our interest rate sensitivity, ensuring that the portfolio’s duration exposure
aligns with market conditions while maintaining an optimal yield. Ultimately, it is this balance that
drives returns for investors. Our strategy remains simple and transparent, as we believe that when
investors clearly understand our approach and risk management framework, it helps reduce the
behaviour gap - the tendency for investors to make emotional decisions in response to market
volatility.
By investing in high-quality credit issuers, we also ensure that the portfolio is backed by financially
stable institutions with strong balance sheets and proven track records. These issuers have a
significantly lower probability of default, which provides greater capital preservation for investors.
Additionally, well-rated issuers tend to have better access to funding, reducing refinancing risk and
enhancing overall stability.
By maintaining a portfolio of high-quality, listed instruments, we ensure that we can efficiently
adjust exposures, manage risk, and meet investor redemptions without significant price distortions.
This disciplined approach allows us to construct a resilient portfolio that prioritises both risk
mitigation and return optimisation, ensuring that investors benefit from a well-balanced, liquid, and
stable fixed income strategy.

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?
South African fixed income markets will be shaped by a combination of global policy developments
and domestic reform momentum. Shifting tariff dynamics and broader geopolitical uncertainty will
continue to influence capital flows and risk appetite. Locally, the focus will remain firmly on fiscal
consolidation, the credibility of Treasury’s funding path, and tangible progress under Operation
Vulindlela. Ratings agency outlooks will also be key, as further positive action or the maintenance of
recent upgrades, could continue to attract foreign demand for South African bonds.
Within the fund’s investment universe we are fortunate that fixed income investing has a high level
of predictability thanks to the frequent and steady cash flows, and nearly all long-term performance
can be explained by these cash flows.
Starting the year with a current fund yield of 9.8% (gross of fees), investors can expect returns
broadly in line with this figure over the next two to three years (annualised), barring any major
disruptions. This remains our base case, with potential upside and well-managed downside
scenarios.
Which asset classes do you expect will give the best total rates of return over the next few
years?
Forecasting which asset class will deliver the best returns is inherently difficult. Rather than
attempting to predict winners, we focus on where the most attractive risk-adjusted and predictable
returns can be found. In that respect, fixed income stands out, as it offers far greater certainty around
future cash flows and expected returns than most other asset classes.
Corporate credit spreads have continued to tighten, limiting opportunities and reducing
compensation for incremental risk, which makes selectivity essential. Newly issued FLAC (Financial
Loss-Absorbing Capital) instruments, driven by evolving regulatory requirements for banks, may
create pockets of value, while credit-linked notes remain attractive when referencing high-quality
issuers such as the South African government and major banks.
South African nominal government bonds continue to offer compelling real yields of inflation plus
4% to 5%, while inflation-linked bonds appear relatively expensive versus nominals.
Give your views regarding interest rate trends and the yield curve over the next 1 to 2 years.
What interest rates can investors expect? Do you anticipate further repo rate cuts?
Over the past year we saw a meaningful easing cycle, with rates reduced by 100bps as inflation
surprised to the downside and policy credibility strengthened. That shift provided important support
to the front end of the curve and reinforced the case for duration as the curve flattened significantly.
Looking ahead, we expect the direction of travel to remain, with more cuts to come over the next
12 to 24 months, but likely at a more measured pace. SARB’s adoption of a lower 3% inflation target

164 Profile’s Unit Trusts & Collective Investments March 2026