By Paul Crawford,
Fairtree Fixed Income Portfolio Manager
In an ever-evolving financial landscape, the demand for diversified investment opportunities is at an all-time high. The BCI Fairtree Global Flexible Income Plus Feeder Fund offers South African investors a gateway to the global credit market, leveraging Fairtree’s proven expertise in navigating this complex asset class. In this article, we’ll explore the key aspects of this fund, breaking it down into three essential components: What it is, How it is done, and What it isn’t.
What is it?
The BCI Fairtree Global Flexible Income Plus Feeder Fund was created in response to growing demand from clients who wanted access to global credit through an offshore vehicle, specifically an offshore version of the BCI Income Plus Fund. Initially, Fairtree launched the Euro-denominated Fairtree Global Flexible Income Plus Fund, targeting Euro-hard currency-based investors. However, this raised the question: How could ZAR-based investors participate?
The solution was the BCI Fairtree Global Flexible Income Plus Feeder Fund (“Feeder Fund”). This Feeder Fund enables ZAR-based investors to gain unhedged exposure to global credit by feeding directly into the Euro-denominated Fairtree Global Flexible Income Plus Fund. Essentially, it allows investors to use their offshore investment allowances to access global credit without the complexity of managing foreign currency accounts or navigating the mix of domestic and offshore investments present in the BCI Income Plus Fund.
Launched in April 2019, the Feeder Fund has established a robust five-year track record, mirroring the success of the BCI Income Plus Fund, which celebrated its 10-year anniversary this year. With the Feeder Fund, investors can conveniently invest using their rand-based accounts while enjoying the advantages of global diversification.
How is it done?
The Fairtree Global Flexible Income Plus Fund, domiciled in Ireland and launched in January 2019, focuses on capturing spread premiums (EURIBOR + Spread) while hedging all FX risk and taking no duration risk. The fund’s benchmark is the iTraxx XOver Total Return Index, and it invests in a diversified portfolio of corporate bonds, government bonds, AT1 bank instruments, and index-linked notes. With 39 instruments and 350 underlying names, the fund is well-diversified and positioned to navigate the complexities of global credit markets.
The Feeder Fund operates through a straightforward structure, as shown in Figure 1 below.
- Investor contributions: South African investors contribute rands to the Feeder Fund.
- Currency conversion: These rands are converted into euros, which are then used to purchase units in the Euro-denominated Fairtree Global Flexible Income Plus Fund.
- Performance translation: The performance of the Euro-denominated assets is then translated back into rands, allowing investors to benefit from global credit exposure while managing currency risk.
Figure 1: The Feeder Fund structure
Source: Fairtree
The Feeder Fund’s structure is designed to optimise liquidity and minimise cash drag. While 94% of the Feeder Fund is invested in the Euro-denominated Fairtree Global Flexible Income Plus Fund, the remaining portion is held in rands to facilitate daily flows and ensure efficient cash management. At Fairtree, we don’t sidepocket and we never needed to. Figure 2 below shows how the Feeder Fund has performed since its inception (April 2019) compared to its benchmark, the iTraxx Crossover 5-year Total Return Index.
Figure 2: The Feeder Fund performance since inception until the end of July 2024
Source: Morningstar
What it isn’t.
Investing in global credit can seem daunting, especially with various myths circulating about the risks involved. Let’s debunk some of the most common misconceptions:
- “Credit is too risky; you can have a permanent loss of capital.”
It’s true that credit carries risk, but the notion of inevitable capital loss is misleading. For instance, the BCI Income Plus Fund, which shares a similar strategy, has demonstrated consistent capital appreciation over time. Despite the inherent risks in credit markets, the unit price of the BCI Income Plus Fund has grown from 100 to 122. This was driven by capital appreciation even after regular interest distributions and we haven’t sidepocketed. Similarly, the Feeder Fund has also shown capital growth since its inception. - “Now is not the time to invest in credit; defaults are on the rise.”
Contrary to this belief, the data tells a different story. While defaults are a natural part of credit markets, they have not shown a significant increase recently. Historical performance of the iTraxx XOver Index, which the Fairtree Global Flexible Income Plus Fund uses as a benchmark, illustrates that the market remains resilient. Defaults are not spiralling out of control, and credit continues to offer attractive risk-adjusted returns. - “High interest rates mean high defaults.”
There’s a misconception that rising interest rates automatically lead to an increase in defaults. However, the reality is that there is no direct correlation between high interest rates and credit losses. The Fairtree Global Income Plus Fund, with its diversified portfolio, has continued to perform well even in environments with varying interest rates, demonstrating that credit can remain stable regardless of rate fluctuations. - “Defaults are unexpected and catastrophic.”
Many investors fear that defaults come out of nowhere, wiping out significant portions of their investments overnight. While defaults do happen, they are often anticipated and priced into the market well before they occur. For example, recent defaults in European credit markets have been well-anticipated by the market, with bond prices gradually adjusting to reflect the increased risk. By the time a default is officially recorded, the bond’s price has often already dropped to a level that reflects the expected loss, reducing the impact on the overall portfolio.
Conclusion.
The BCI Fairtree Global Flexible Income Plus Feeder Fund offers ZAR-based investors a unique opportunity to tap into the global credit market. With a proven track record and a clear strategy for managing risks, the Feeder Fund has delivered STeFI + 2.61% p.a. since its launch, underscoring the value of credit risk premiums as a reliable, uncorrelated return stream. By addressing common misconceptions, we hope to provide investors with the confidence to explore the potential of global credit as part of a diversified portfolio.
Disclaimer:
Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms, please go to www.fairtree.com
