Page 184 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 9

uncertainty around US inflation and the Fed's stance on tapering and hikes in policy rates. Overall,
the SA yield curve flattened over the first half of 2021, as the market adjusted to the decrease in the
weekly auctions and the fear of the SARB becoming less accommodative in the coming months.
The fund held a combination of fixed-rate nominal bonds, which were yielding attractive returns,
as well as floating-rate bonds which provided an acceptable running yield and also protected our
investors' capital. When considering the funds' performance, for the six months ended June 2021,
the fund was ranked 2nd in its category out of 38 peers.
In terms of risk management, what methods or strategies are you able to use to protect your
clients' investments?
To protect our clients' capital, we combine risk-averse positioning to the investment process
we follow:
Diversification: smaller bets on different names, maturities, and credit types.

Once our research indicates that the risk/return profile is deteriorating, we exit the position.
We consider carefully before including duration to the fund, as it can lose capital if rates rise

unexpectedly.
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?
The biggest challenge for all income funds in 2021 is to stay relevant in a market that could see
other asset classes deliver significantly higher returns. Year-to-date local SA equities have returned
over 13.5%, outperforming returns from the fixed income markets. Given the cuts to short term
interest rates over the last year, investors might look to the higher returns on offer in longer
duration bonds to supplement their incomes, however, it comes at an increased level of capital risk
and income volatility.
The key objective of the fund is to protect capital and deliver an attractive and stable income
stream. We are confident that we can continue to live up to our client expectations, despite the
lower prevailing rates. We do this without adding unnecessary risk by using a combination of
floating-rate bonds and longer-dated fixed-rate instruments. We expect to return between 6.0%
and 7.5% per annum to our investors.
Please 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?
We do not anticipate further cuts to the repo rate during 2021. Inflation started to push higher, and
we expect it to stabilise between 4% and 4.5%, which is the midpoint of the SARB's inflation target.
We anticipate the SARB to gradually phase in the interest rate hikes from Q2 2022 unless the
inflation forecast, or risks, worsen.
The domestic yield curve remains relatively steep and has seen increased volatility post the civil
unrest in July. Over the next year, we could see the yield curve flatten if we continue to see an
improvement in the fiscus and an increased pace of structural reform. Against these positives, we
expect an increasing US 10-year rate to put a floor under our yields and potentially introduce
higher levels of volatility.

182 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts