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this programme has been created so you can put your questions directly to the experts. This is in the hot seat.

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Welcome to In the hot seat, Flexible income with me, Joanne Ham. And today I'm joined by

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Albert Beter, head of fixed income Ashburton Investments. Carl Chetty, portfolio manager in Nate Best

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and Noma Tana Olo, managing director, portfolio manager capital Welcome to you all Flexible income.

Speaker 0:
It's a space that not a lot of people really understand. And Carl, as somebody who buys funds, can you explain to us in layman's terms, what does flexible income entail? Yeah, So, traditionally, I think flexible income, um, refers to funds that sit in the multi asset income category. So when you look at the fixed income universe of funds that you can buy there, there are three main categories starting off with the money market. The lowest risk interest bearing short term,

Speaker 0:
um, and then moving on to multi asset income, which is the most aggressive of the three. And in the in that category, uh, you do tend to find, um, quite a dispersion in terms of the types of mandates, uh, that are there, But I think one of the key. Um, commonalities is there tends to be no, uh, restrictions on on things like duration.

Speaker 0:
Um, no restriction on things like, um, credit quality. Um, but there is a wide variety of mandates in there, Uh, and typically in flexible income funds. Um, the managers will be targeting higher returns than a money market fund or an interest bearing short term funds. And so the time horizon for the investment is also a bit longer. Typically, uh, you wouldn't go into a flexible income fund if you've got a time horizon less than one year.

Speaker 0:
OK, so on that, uh, is it? What is your benchmark? Given that you've got more risk than, say, a pure money market fund. OK, so for the flexible income fund that we manage, uh, we have one of the highest benchmark in the category at ST E plus one. So in terms of the flexible fund that we manage, we have a, uh, a benchmark of E plus one and then a performance target of, uh to beat that benchmark by an additional 1%. OK? And Albert, are you the same? Is your benchmark similar?

Speaker 1:
It's, uh,

Speaker 1:
most of the funds in those space have a benchmark relating in one way or another to Steffie, right? Uh, generally, it's a Steffy composite, Um, and ST V plus one is is one of the ours is Steffie, uh, composite multiplied by 100 and 10, which, given the rate environment at the moment, comes to about steffie times 1.2 times 0.8. So it's a little bit of a little bit lower than than their benchmark, Um, but the the idea is that when rates are lower,

Speaker 1:
uh, your benchmark is slightly low and your high performance targets slightly low and rates are a lot higher. Um, and it's a it's a It's a slightly different set of nuance than than they might be looking at, but, uh, I mean, it's an idea to try and give the clients an idea of what what type of fund they're going into. It doesn't necessarily mean one is better than the other. Uh, you you you try and

Speaker 1:
use it to describe what you're aiming for and that that lines up with the client needs rather than saying this is the right one.

Speaker 0:
OK, so back to the one year view concept number. Tamara is. Have you had a rolling 12 month period where you've lost money for clients that happened? Or has that never been the case? That's never been the case. I think in terms of the type of instruments that we hold in this in this space, it will be a combination of money market instruments that will have some floating rate protection to it because of the fact that they have a floating rate. So therefore they have limited duration,

Speaker 0:
and then you combine it with some high quality credit. In there, you will introduce some duration in order to enhance the return. But if you have proper risk management processes in place in these type of mandates, or or in terms of how we manage the portfolio, we have not had a rolling a negative rolling one year period all about the same for you guys.

Speaker 1:
Yeah, we haven't had a negative rolling one year period, either. It's

Speaker 1:
look, quite frankly, it's tough to you. You have to make a real big mess up to have a negative one year rolling period, given the initial yields that we have in South Africa, right? Um If you think the biggest one year drawdown that many of these funds suffered was to the 24th of April 2020 where some of the funds were down from a peak to trough basis, some of the worst ones were down 6 7%. Right, But, um, over a 12 month period, they were still

Speaker 1:
up because the initial yields were sitting at 8% or so. So it's very, very rare that funds get, uh, get negative 12 month performances in this space. Um, that doesn't mean that, uh, March 2020 was a lot of fun for people. Um, and I think a lot of people maybe got complacent going into that period because from 2012 to 2020 markets were

Speaker 1:
not. Not easy is not the right term, but, um, it's been it had been almost 10 years since the last crisis. So it's, uh,

Speaker 1:
I think a lot of people, as I mentioned earlier, may not have had the right risk management processes in

Speaker 0:
place. So, Carl, for you choosing flexible income managers, a multi asset income. Have you ever had a situation where someone's had a negative 12 month draw? Or is it more likely maybe a six month negative, but not a 12 month. I've personally never seen a negative 12 month return in an M income fund, but I think negative monthly returns do happen from time to time. Certainly seen that from time to time, but they do also tend to recover

Speaker 0:
quite quickly after that. But I think that's definitely a risk that investors into a flexible income fund need to be aware of, that they don't get a surprise one day that the fund is down in a given month when they didn't expect that those those are quite possible from time to time. OK, so let's talk about interest rates and the global cost of capital. Can

Speaker 1:
I make a point on what was said there, Right? I mean,

Speaker 1:
the income category and you mentioned that is not well understood, right? There are probably close to 1000 different income funds. Maybe not quite 1000 but close to them, and they range everywhere, if anything, from funds that

Speaker 1:
barely see a negative day. The only time they see a negative day is when it's down 0.01% post to a meeting and they are called an income fund, and then you go all the way through to your enhanced income funds that can be down 34. Some of them were down 5% in March 2020. And if you're an investor, you say, Well, this is an income fund, and that's an income fund. But the goals and the methodologies and things vary so widely right that it's sometimes difficult to describe. One of the

Speaker 1:
one of the things that also happens is a 12 month or a 36 month performance table hides the inherent volatility. So if you see five income funds and this one did 10 and this one did seven and this one did eight and they are all three income funds, one might be something just a little bit more aggressive than a money market fund, which might suit you better. Um, but the other one is maybe a multi asset income fund. It so,

Speaker 1:
um, just because something says income doesn't mean that they are necessarily compa compatible or comparable. So it's very, very important that when you start looking at this income space that a performance number is not the only thing you look at Ask for a one year or two or a three year return chart to see if you're comfortable with the degree of volatility that might be inherent to that income solution.

Speaker 0:
So just talk about monthly volatility. Sorry. So what kind of numbers are you looking for? When you look at volatility is daily volatility. Is it? Monthly volatility, quarterly volatility. When you're looking at the space, we would typically look at monthly volatility and then annualize that and then compare that across the different managers. I think that's pretty standard. OK? And within this space, which flexible income managers are you finding interesting at the moment? Where are you looking?

Speaker 0:
Yeah. So, um, we do use, um, the fund in in our innate invest, uh, DFM solutions. But, um, we blend, we blend the fund with, uh, some other highly rated income funds. Um, if you want me to throw some names around in our in our unit trust fund, for example, we've actually awarded segregated mandates, uh, to the likes of awa, um 91 and, uh, prescient, uh, which are not actually

Speaker 0:
100% aligned to the unit trust funds. We've actually tweaked the mandate specifically for a little bit of our needs. OK, so now let's get back to the knitting of flexible income funds. And before you can start, you have to look at the global interest rate scenario. So all but my question to you is

Speaker 0:
some of the chatter at the moment is higher for longer. Inflation is stickier, so the global interest rate argument is higher interest rates for longer. Do you agree with that? Or are you thinking that US Treasuries are going to fall when we go back to the races like we did in the last 10 years?

Speaker 1:
So

Speaker 1:
regardless of what eventually happens, or what the Fed's view even is, they have to have higher for longer, right? Because the moment that they don't say it, they negatively impact their own goals. That by changing the rhetoric just by changing the rhetoric, they would effectively loosen financial conditions and thereby they would undermine their own goals. So you can't necessarily just listen to what the Fed is saying to understand what they might do. So that's the first point

Speaker 1:
in this case. I actually do tend to agree that higher for longer is likely on the cards. Um, the

Speaker 1:
expected recession, which is now starting to be called the most anticipated recession of all time, just doesn't seem like it wants to start. And the Fed we know kind of wants it to start, at least to some extent. Right? Um, and until it either starts or inflation is back kind of close to the band, they are close to their targets. They're probably gonna keep their, uh, their interest rates elevated. They have no real reason to cut them.

Speaker 1:
Um, until inflation is either at, let's say, 2.5 or below in the US. Or there's some form of crisis that forces it to cut forces them to cut. And neither of those seem imminent. We've gone through some banking issues.

Speaker 1:
Um, but once again, last week there was some positive economic surprise data out. So it's It's, I think, at least for now, higher for longer. Uh, at least from a fed funds rate. It's certainly, uh, probably one of the best cases.

Speaker 0:
Do you have a different view, or do you agree with the whole?

Speaker 0:
I mean, 100% agree with the concept that they have to speak the language. They they need to be hawkish in order to maintain tight financial conditions. Um, and and And the reason is because they still have this inflation that's, uh, above the target that needs to come back to within their target. So therefore, they need the market because we we in a market that tends to front, run any any potential news. So therefore them needing to be to be hawkish is very important at this point in time.

Speaker 0:
But then now I think we need to then dig deep in terms of the data that we are currently seeing, because the risk is that we rely so much on the more recent information and not take into account the lagged effects of what tight monetary policy does in an economy.

Speaker 0:
I will say that in this instance, the effect of high interest rates has taken time to philtre into those interest sensitive sectors in the market. But not to say that I mean, history does show that eventually does come through, so therefore, it's a matter of, as Albert says, it's the timing. It's one of those recessions that's highly anticipated. Everyone is trying to put timelines to it, but outside of a time

Speaker 0:
you need to consider that a high interest rate environment tight financial conditions will eventually start to constrain. Consumption will start to constrain those sectors that are interest rate sensitive and therefore, in order for the for the Reserve Bank to support the economy. When we head into that point, they're going to start to bring down those interest rates. OK, so you see the Fed at some point being forced to cut because the economy slows,

Speaker 0:
make you a buyer of US Treasuries From a risk perspective at the moment, at current levels, I do think there is scope for US Treasury yields to have a bounce from where they currently are because, as Albert mentioned, the most recent data is positive, so there is still some growth that's in the system. So therefore, while the market it will not be pricing that decline in inflation, those Treasury yields have

Speaker 0:
There's a higher risk for them moving higher than actually coming down. So therefore there will be a window for those yields to actually push up and and and at that window I do think that there will be an opportunity to actually start nibbling into those, Not yet. You're going to wait for it to be a bit of a sell off and then and then buy and later Correct. OK, I can make one observation with the With the latest US CP print, it came out at around 4%.

Speaker 0:
But if you dig a bit deeper, it's really being driven by by shelter. Inflation, right? And I saw an interesting stat that if you strip out the shelter component, the rest of the Inflation bastard is actually running at 2 2%

Speaker 0:
which is within the Fed's target line. So maybe that that does mean that they will have scope to cut rates maybe a little bit sooner. The only problem is, I think home builders in the US are 12 month highs. And if you take that into consideration, if everyone is bullet by the property market, rental income might go up again. And you're definitely seeing higher rental income in the UK. Just talking about the UK for a second. Albert, we've had some horrible inflation numbers out of the UK, and their interest rates are lower than ours. Please explain how they get away with it.

Speaker 1:
Um,

Speaker 1:
so there's a a lot of strange things and and that and that sometimes happens in the global economy, right? The US gets away with a degree of quantitative easing because their monetary base is stretched across the entire global economy, whereas the the, um, their economy is is effectively contained to the US. So effectively you think about it.

Speaker 1:
The effects of inflation is stretched not just in the US, but because the because the dollar is used as transactions and reserves all over the world. So the amount of dollars in issuance right can increase a lot. All of that benefit accrues to your country, whereas all of the costs accrue to the global system.

Speaker 1:
That's the benefit of having your currency be part of the reserve currency set up right. You get to do things that

Speaker 1:
other countries might not. Right then, there's also the effect that

Speaker 1:
we shouldn't discount the fact that many of these central banks have just been wrong, right consistently wrong, consistently late. Um, and one of the reasons their rates might not be higher than inflation is they didn't think it's gonna go this high. They didn't think it's gonna rise this fast they didn't think it's gonna be this sticky. Um,

Speaker 1:
I mean, I've been on on this before, and I think I've said this a couple of times. Is that the The Fed has the Fed, and I know we're talking about the UK now, but the Fed has always been late, but this Fed has been later than others, right? In many ways, the same thing is true with the with the UK.

Speaker 1:
And we also forget that the UK has had almost no actual real GDP growth of over the last 14 years. Since 2008, there's been very, very little actual real productivity growth in the in in the UK compared to many other countries. So, um, all of those things kind of come home to roost, and

Speaker 1:
I think part of it is that

Speaker 1:
they just don't know how to deal with it. Right. Um, there was an interesting comment made by, uh uh, uh, one of the traders recently that were used in the EU markets. He said he had a AAA guy in his desk who had been trading, uh, German bonds for seven years,

Speaker 1:
and he had never seen a positive German bond yield. He didn't know it was

Speaker 0:
OK. I have to bring this back to South Africa because we can debate the global. So it sent the interest rates globally. To your point, they might get a bit higher, but they're probably going to come down as the recession, which is inevitable. The most price in recession ever comes to the fore. We've got the SOB, and to Albert's point, we're importing monetary policy from the US because ultimately that's what's happening.

Speaker 0:
Do you think the sob is ahead of the game? Do you think the SB is doing a good job? Are you from a fixed income perspective? Are you comfortable with what's happening with monetary policy in South Africa? I do think that the so, unlike as Albert was mentioning that countries like the US, UK and Europe, et cetera, they have the luxury of running

Speaker 0:
higher lower interest rates relative to the inflation. Because of the currencies, we don't have that luxury we have. There is an element of if we run very hot inflation and we don't do anything about it, then it's going to hurt the rand and therefore there's going to be repli effects into the into inflation.

Speaker 0:
So therefore, when it comes to the to the So, um, I do think I I can sympathise with them having to be hawkish at this point in the cycle, while the developed markets have are fighting inflation and therefore are remaining hawkish. So therefore from that sentiment and the fact that it has a philtre through effect to the currency and therefore inflation, you can sympathise with that view.

Speaker 0:
OK, so just on this point, the being quite good at keeping inflation under control or trying their best to from a flexible income perspective, Albert, are you referring nominal to inflation link within within a flexible income fund at the moment? What? What are you thinking?

Speaker 1:
One of the nice things about the multi income space is that you can have a pretty interesting amount of risk allocation to a variety of assets, and even though we don't necessarily think of it, we tend to think of saying, Well, links nominal, etcetera. But

Speaker 1:
But in many ways, all of those assets are substitutes for each other in in at at least to some extent, um, and at the moment where we are and I know it's boring, but I mean, you you can get as of yesterday you got a one year N CD at 9.6% a couple of weeks ago. You get one at 9.8% right for one year. Bank paper, liquid safe banks. We We also shouldn't forget that many of these banks in 2020 traded at low

Speaker 1:
rates in the South African government. They traded through the S a government. Because many investors, I think, maybe accurately believed that these go that these banks might even be safer than, um, South African government. Right, that happened in the past. It happened with Eskom versus the government as well, uh, 20 years ago or more. Um so when I look at these bonds and all of these various instruments

Speaker 1:
um, three years ago, it was nominal bonds easily. Then a couple of years, a year or two ago, link has really started catching up as inflation started rising. At the moment, there's honestly a solid place for low duration cash, credit bank paper, one year, two year NC DS, uh, relatively safe floating rate notes uh, Jabar, sitting at 8.5 might go soon go to 8.75.

Speaker 1:
And if you just buy basic credit on top of that, plus 1.2% you're sitting on 10% right, 10% for investment rate, credit, floating rate, um, and inflation is going to print at 5.5 or less in the next two months. Right? So it's 4.5% real rate return on

Speaker 1:
very, very, very little risk. Yes, you can get 11% or 12% of government bonds. But if your target is steady, plus one or steady composite multiplied by 1 10 and your clients happy with 3% above inflation, um, that's reaching for the additional 1% reaching, reaching, reaching for 11 when 10 is easy,

Speaker 1:
it's it. It it It's not something I I like to do at the moment. So, yes, obviously we do hold government bonds. Um, we hold them in maybe somewhat more conservative ways, um, and and and and the smaller allocation that we may have um, given where everything else sits. Uh, but we try to compare link to cash to bonds, um, to some extent, global assets with with the current implications as well So we try to try and balance all of these various assets. It's why it's called Multi Asset.

Speaker 1:
There there is a there is a There is the short term category that was mentioned earlier. Is your cash bond cash bond category Multi asset? You're supposed to do more

Speaker 0:
than that. OK, but no. I've been interviewing flexible income manager for years, and I've never heard one of them ever increase their duration. They always sit to your point. It's always so exciting buying short term money because it's always so attractive. Do you agree? Do you go and maybe increase the

Speaker 0:
duration above four? Do you do this, or do you sit there very low? Um, I think the highest we've gone is closer to the three level we want. We're not one of those managers that do think that there is a fixed band at which you should be playing your duration. In line with the concept of this is a multi asset income portfolio. You have the flexibility to move. Duration is one of your levers.

Speaker 0:
Therefore, there will be times when you should be. You are really not getting paid for taking on high duration assets in which case you should be bringing down your duration down. But there will be times when you actually you're being paid you being compensated to take on that duration risk, and it's worth taking it on. But I just wanted to respond to this point about the Java plus credit being

Speaker 0:
risk and being safe. Credit risk is risk, and especially at this part in the cycle where there is potentially earnings risk that's going to come with. I mean, I know the recession story is one that's been floated around and could potentially happen and not happen. But if you if you if you think that growth is going to slow down, it's going to impact earnings, so therefore it's going to have an impact on credit.

Speaker 0:
So therefore, um, as credit being one of your tools that you utilise, you need to also think about should I be at, uh, 80 plus percent in credit at this point in the cycle? So in summary, I think for us how we look at these portfolios, we don't think we don't position the portfolio for any single outcome,

Speaker 0:
because although inflation is slowing down, there's still inflation in the system, for instance, so therefore, if in case of a risk, that inflation actually moves higher, you want to have some inflation protection in the portfolio. So we always try to build a portfolio that's resilient across multiple scenarios that we typically build, we assess. We always look at a base case scenario, and we stress that on a bare case and a board case scenario, and we try to build portfolios that would be resilient under multiple scenarios.

Speaker 0:
So call back to you in choosing funds you can choose, like a pure cash money market fund or flex multi asset income or through a bond fund. Given that the flexible income managers are probably more tactical than you are, why not give them all the money

Speaker 0:
and let them decide and let them decide to be overweight cash or let them decide to be overweight bonds? Why do you even play in the bond space when you have these guys doing this job? Yeah, that's that's exactly what we do. So you don't give money to bond managers Not in the mandates that are in the multi asset income category? No, but I'm not talking about multi asset income I'm talking about. Why not give it these guys? They are saying we can look at duration management. We can decide when to be in credit. Why give it to? Because now you're taking asset location decision. Why you let them do it?

Speaker 0:
Yeah, I think. Um

Speaker 0:
um the skill set of some of these managers not only limited to flexible income, I think that's one of the many mandates that they can. They can manage. But they would also manage, uh, pure bond mandates, even pure ILB mandates in some instances. And so we would look to exploit the skill set depending on the asset class we're looking at. So one could think of flexible income as an asset class on its own and identify who the best managers in that asset class are. You can think of bonds as an asset class on its own and identify who the most skillful managers are there.

Speaker 0:
OK, certainly, Al. But let's get back to this question, OK? Within flexible income, you're saying is why push the boat out for additional yields when I don't really have to? Because N CD are giving me 9.6 whatever number you quoted OK,

Speaker 0:
if I had open architecture and I wasn't doing Steffie plus 1.5 or how you described it, how much would I have in a fixed income, long duration assets? And how much would I have in cash at the moment in an open architecture fund where I'm trying to get the best bang for Buck?

Speaker 1:
So

Speaker 1:
it's say,

Speaker 1:
given that you're putting me on the spot, I'm gonna I'm gonna I'm gonna switch it back. Let's say Let's say I'm designing a portfolio for you, Joe and and and you, South African fixed South Africans are fortunate in that our fixed income environment works. Works very well, right? Uh, it gets it tends to be very high yielding, um, almost across the board. Now, that's because there are some risks there. Um,

Speaker 1:
I think

Speaker 1:
it it it truly does depend on what you're trying to solve. For we've sat with clients where they are looking for a mine rehabilitation,

Speaker 1:
uh, projects 10 years out, and then it's 100% S a bond. Um, where you try and match the duration Maturity. It it turns into an LD. I problem where you match the liability purely and the best way to do that is with Bonds, right? If you are a young, relatively aggressive, um, investor, um,

Speaker 1:
uh, we we spoke about the different types of funds. The funds it specifically that can that can probably boost your R a allocation. The best is, um, if you use a combination of funds, you don't use a core satellite approach and you effectively select every asset class. And for fixed income, you just go 100% bond. It's it's yielding 12%. Yes, it's gonna be volatile, but I only care for the 30 year outcome.

Speaker 1:
Um, but in the mandates that that we that we specifically run and we're talking about today, there's there is, unfortunately, the the absolute return constraint. Right. Um, we spoke earlier about the fact that he hasn't seen AAA negative 12 month outcome, because if

Speaker 1:
that

Speaker 1:
there was a famous manager that said, I've never Whenever someone says they're they're not, um uh, a peer group cognizant right. They at least they at least they're willing to admit they're peer group afraid. Right, But you might not. You might not look at what your peers are doing to follow them, but you at least need to know that this is the product that is selling and and something that's gonna give you minus 3% of a 12 month period won't sell. It's not what S a clients are looking for. Um,

Speaker 1:
if you're trying to absolutely maximise returns right, you would probably have something

Speaker 1:
that would approach anywhere from 30%. Uh, bonds. Maybe another 20% link is a very, very low allocation to cash 10 20%

Speaker 1:
uh, and then a little bit of allocation to at one or two other asset losses. But that's not really what we're trying to do. We're trying to maximise the sharp ratio, the risk allocation ratio relative to a couple of constraints, of which the absolute return constraint is a vital one. Because if if they look back through your 12 month period and they go, Oh, there's a

Speaker 1:
there's a negative 12 month performance number you don't you don't sell the fund. OK,

Speaker 0:
so this is don't lose money. So let's talk about credit because back to your point about earnings disappointments and companies might struggle. Are are there any kind of credit at the moment in your funds, even though you might be additional yield that you're avoiding because you're you're a bit worried. Is there any sectors? Not not not companies, but any sectors. You're saying I don't I'm not comfortable at the moment.

Speaker 0:
I mean, the the one that we pretty much I don't want to lump them. But there are just some potential bombs in the SOE space, so therefore, it's just important at this point in the cycle. I think we all focus on the recession fear, but we just potentially the governance concerns there. So therefore, you just need to clean up that book. Um, but before I speak to the specific sectors, I think again just to emphasise at this point in the cycle, you want to keep the high quality names in your portfolio and this

Speaker 0:
in terms of how we manage the portfolio. It goes without saying we go for high quality because, yes, credit is one of your return tools. But it's not the only return tool that we utilise, so we don't have the incentive to go down the credit spectrum in that case. So when you look at our portfolio as it currently is, it's really a combination of credit where we are comfortable with the spread. I won't necessarily go sector specific because when it comes to credit in South Africa, you really need to do the bottom up analysis

Speaker 0:
because it's not like the US where you can go by this sector in this sector. Yes, you can do that to a certain extent from a top down perspective. But in order for you to select, you need to do you do you need to do the analysis? Looking at those balance sheet, looking at the income statements, uh, project do a projection of the income statement and the balance sheet and just get comfort that you're gonna get your money back at the end. So it becomes really a, um a name specific sector.

Speaker 1:
If I may add something to what said I think

Speaker 1:
that credit specifically is something that's quite frequently misunderstood. Uh, people are deathly afraid of it, right? Even though in African Bank, the senior creditors got back 99% of the assets, right, they they had 1% reduction in yield. Um, the one point I wanna make is on credit specifically is that people should realise that equity as a as a class is asymmetric to the upside. You invest 100 rand,

Speaker 1:
you can lose 100 rand or you can make 10,000 rand. Right? If if you're the person that didn't invest in Tesla in 2020 you underperformed, right? That doesn't happen in credit. Credit is asymmetric to the downside. You can only get the 8% which we promised you. But you can also lose everything, right? Therefore, there's a difference in nuance to how you approach the process. Because if you think about it, you will. If you missed the Tesla equity,

Speaker 1:
you underperformed. If you missed Tesla credit, no one cares because it's there is no OK, you had the Tesla credit. You had a good year. No, that doesn't happen. But if you had,

Speaker 1:
uh, first strut credit in 2012 2013, you underperformed quite a bit. So it's It's, um um, in equity. It's the winners, you miss. And in credit, it's the losers that you miss that make that that that make you the winner for those years. So So being overly aggressive in credit outside of a AAA high yield credit portfolio,

Speaker 1:
uh, is not really something that I agree with boner completely. It's not really something that we tend to do in many of our portfolios unless we've properly done the bottom up. And in South Africa, specifically the governance, because every single credit we've seen fail in S A in the last decade has been a governance issue. Not a uh uh, a business strength issue.

Speaker 0:
So talking you kind of mentioned absolute returns. Ideology you don't want to lose money is where you're coming from across the board. When you look at the sector as a whole, what's the kind of return dispersion between, like the best performing, flexible income or multi asset income manager and the worst? Is there a a big kind of equity to get a very large dispersion of returns? Because a lot of flexible income managers seem to be anchoring to not losing money. Is there a big dispersion?

Speaker 0:
No, definitely obviously not as wide as the equity space, but I think it also depends on the time horizon. So if you look at shorter period returns, you will find a bigger money over over 12 months. There will be some dispersion as well. Um, just depending on the duration positioning of the different managers. Whether or not they're buying offshore, that can result in a big dispersion as well. Um, so it's not as maybe tight as as money market for sure, but not as dispersed as equities.

Speaker 0:
OK, so if I get the wrong flexible income manager in a sector, am I gonna be 5% worse off than the best? Or am I gonna be half a percent worse off than the best? I'm trying to get a feel for what this means.

Speaker 0:
Yeah, I think. I think if you if you look at the inter quartile ranges like the differences between the first quartile performance and and fourth quarter performance probably on average, about 2 to 3%. Uh, you you could say

Speaker 0:
OK, all right. So let's look at this asset class. I mean, I'm hearing dripping roast yields. I'm like, I can't believe how exciting this is. OK, so look at your like what kind of yield? What's your effect of the yield? Where are you seeing at the moment? Where have you been 12 months ago? Come on, Get your clients excited about this because I, I can't believe these yields. So we're really at a point in the cycle where the yields are quite attractive and and especially given the duration that you you need to take in order to get that yield. So currently our portfolio is sitting at a yield of just over

Speaker 0:
10%. It's sitting at 10.5% and with a duration of just under 2.8. And if you compare that to a bond fund, a bond fund with a duration of close to seven and the yield of 11 11.5, so therefore, for an extra 1% in yield, you have to take 34 worth of duration. So really, this part of the cycle, it's really attractive to be in the multi asset but in the

Speaker 0:
as income funds. But I will say that all these instruments are cyclical. The risk of that is sitting in the comfort zone of those Java plus yields is the is the reinvestment risk that you or reinvestment, that you lose out on because based on our view, we don't think this is just a cycle that's going to go on forever. We can have a change in the cycle where interest rates will start being cut, and therefore your base rate, that Java rate that everyone is banking

Speaker 0:
will go down and, in which case, all those those under five year, especially those under five year instruments will, because they have a high beater to report will go down. If you have not locked in those rates, those fixed rates by then that means the yield in your portfolio will also go down. So although it's an attractive yield, there is still merit in having some fixed rate paper in there in order to to avoid some of that risk. How much fixed rate paper do you have in

Speaker 0:
your portfolio? So I think we look at it more from a duration perspective, because when you look at fixed rate paper, we fixed rate paper sitting in bank N. CD is fixed rate paper sitting in government bonds in a B. I mean, you have to strip out some of that a B exposure also, so I think in order for us to have a better sense of the duration or or the the the the risk in the portfolio. If I put it that way, it's more looking at the duration in the portfolio, which is C a 2.8. Ok, Albert, in this kind of space at the moment,

Speaker 0:
I think the point is a very valid one because we're expecting the to cut rates at some point. How are you positioning the portfolio for a changing environment?

Speaker 1:
So, um, we've been at, I think, at the peak of the cycle we sat on,

Speaker 1:
um, almost 40% of the portfolio between bonds and link. We are selling about, uh, probably 2025% of the portfolio and bonds and link is, um, roughly duration of two, in S a paper. But we also have recently bought, uh We also recently bought some not long duration, but some duration assets in the US markets, Um, and some duration assets in, uh, EM markets. So,

Speaker 1:
um, so we've we've specifically shifted some of our duration allocation from the local market to the offshore market, uh, partly because, um, a consistent theme in these markets and the reason you started on global rates is because our rates are generally highly correlated, um, to to global rates. And when those rates rally, um, so will last and much the same way you mentioned that our rates are forced up by the US rate cycle. Um, so will they follow the US rate cycle down? So,

Speaker 1:
um, we probably have shifted. Not probably. We have shifted some of our of our duration exposure to the offshore markets from the local markets due to some of the more recent

Speaker 1:
economic and political concerns in the market. We

Speaker 0:
just have the same question. Effective yield. What's the effect of yield in your? It's about 10%. 10%? Unbelievable for low risk assets. Can I just Can I just make this point around duration? I think when assessing the multi asset income portfolios, I do understand that most clients want to see our

Speaker 0:
our duration number. But I think in terms of how we look at duration, we need to split it up in terms of where, exactly, it's sitting on the curve because at this part of the circle that curve is going to do a couple of things. It is going to have a period where it's going to boost deepen, and then it's going to have a bull flattening trend. So therefore not just looking at that overall and flat. Essentially, it's going to start going down when interest rates are being cut. And then when the inflation

Speaker 0:
credentials are being priced in, we're going to have that back end coming down. So therefore, when we look at that duration number, I'll just say, Don't look at the absolute number. It looks it may look high, but actually look at where exactly, it's concentrated for that particular manager. OK, so you produce fact sheets, right? And you're telling me it's important to understand that duration number? What should I look for in your fact sheet to see how you're playing that duration?

Speaker 0:
I mean, a couple of things you can look at where we we split it up, We'll give it to you in terms of where the money market instruments is. So the N CD. So the N CD space will go from one month up to five year paper, so that gives you an idea of how much duration you're actually building up in the front

Speaker 0:
end of the curve. And then the manager should give you a breakdown of the type of bonds. So those you can easily see from this, uh, from the national treasury website to actually see how long they are. So there are some bonds that are sitting in the front end of the curve in the belly of the curve in the back end of the curve. So that will also give you an idea. Great. Thank you. Because I do find fact sheets sometimes aren't great. So I'm glad to see that you're actually producing really good information. Last question with you, I'm sitting in front of a client. It's a it's a conservative client.

Speaker 0:
Should I be filling my boots with flexible income? Multi asset. Yeah. Uh, look, I think if if you've got if you got if you've got at least a one year time horizon and your money is sitting in a bank account or in a money market fund, it certainly a fantastic opportunity. Even on our funds, the yields are on a net basis now about 10%. Uh, so I think it's a really exciting space for the current environment.

Speaker 0:
And we did have a good inflation print here recently, I think a little bit better than we're expecting. So happy days for real returns. Thanks very much, guys. Thank you. Thank you.