Income funds are critical building blocks of a balanced fund

Where is SA's top-rated fund manager seeing risk and opportunity?

Volatile equity markets emphasise the need for balance.

By Marcia Klein

Mixing income funds with equity in a balanced fund’s portfolio offers additional predictability and helps to protect capital and maximise income growth.

The Fairtree Flexible Income Plus fund invests in interest bearing and non-equity securities, including bonds, cash deposits, money market instruments, non-equity derivatives and JSE-listed preference shares.

The fund, which is largely invested in local money market and bonds but has some foreign exposure, is one of the investments of the Fairtree Balanced Prescient Fund and provides it with exposure to assets that balance risk and maximise returns for the fund.

Efficient construction

Louis Antelme, one of the portfolio managers of Fairtree Flexible Income Plus Fund, says the fund is a credit fund, with a portfolio of credit instruments aimed at extracting the credit spread. “Our whole thesis is that by efficiently constructing credit portfolios, we can make losses due to defaults more predictable and manageable and that we are overcompensated for the default risk that we assume.” The R2.1 billion fund can run some limited interest rate risk, although at the moment it has no exposure to interest rates.

Antelme says the credits pay a floating rate over a three-month Jibar (Johannesburg Interbank Average Rate; the money market rate used in South Africa). The fund can take up to 40% offshore, with the currency exposure always hedged.


“We try to diversify this fund as much as we can, to make losses due to defaults more predictable and manageable and so that we don’t suffer any catastrophic defaults,” Antelme says.

The fund was launched in 2013 and returns have been good, says Antelme, with an average annualised return since 2013 of 9.84% and a standard deviation of 1.82%.

He says Fairtree believes it improves the efficiency of a balanced portfolio to have some of the assets of a balanced fund in this fund due to its very low correlation to equity and other asset classes. Modern Portfolio Theory posits that if you combine many non-unity or negatively correlated assets you will reduce variance of the overall portfolio and hence optimise return for a given level of risk. The fund has very low correlation to other asset classes.


The fund managers “are not in the business of forecasting and don’t attempt to forecast currency movements or economic cycles and don’t try to time the credit cycle,” says Antelme. They do, however, believe they have an edge in the pricing of credit instruments.

The result is that the fund “has performed really well, and going back five years we have shown a steady return”, with a return of over 10% over one, two, three and five years, and a steady ranking near the top of its peer group.

Investors should bear in mind that income funds are a good building block for broader portfolios, with low correlation with other asset classes and lower variance.

Brought to you by Fairtree.

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