De-risk on autopilot during the turbulence

04 November 2022

The current financial market environment has seen some of the biggest drawdowns in fixed income assets in decades. The Bloomberg Global Bond Aggregate Index (the world's largest fixed income index) is a measure of global investment grade debt from 28 local currency markets.

Year to date the index is down 18.7%. Previously, the poorest performances by this index were -4.2% in 2021 and -4.1% in 1999, making the current year its worst performance to date - more than doubling the previous two record low drawdowns combined.

Turning to the United States (US), US Treasury bonds have returned -12.41% year-to-date and continue to be volatile, with the US 10-year trading at over 4% in September and October. The elevated inflation has meant that real yields remain high (year-to-end September US 10-year real yields were up 272 basis points), but looking at inflation expectations, breakeven yields have fallen from the peak of 4.93% in March to 2.01% at the end of September as the US Federal Reserve hiked by 3% year to-date. This has raised concerns about central banks hiking the global economy into a recession to pull inflation down to within the target range.

THE EMERGING MARKET SITUATION

Within emerging markets, the Bloomberg Emerging Markets Hard Currency Aggregate Bond Index is down 19.38% year-to-end date with more than US$70 billion in emerging market bond outflows, compared to the US$50 billion in inflows seen last year.

The South African market has been echoing global trends, with the JSE All Bond Total Return Index down 1.34% year-to-date. The South African five-year credit default swap (CDS) is up at 345 basis points (bps) from below 200 bps in 2021. Looking at the currency, the rand has depreciated by R2.15 to the US dollar on the back of a strong greenback. Although the rand has remained under pressure, it has held up remarkably well compared to other currencies considering it is one of the most volatile currencies in the world with a tendency to depreciate during times of crises.

STRATEGIES FOR ADDRESSING THE LIQUIDITY ISSUE

With so many uncertainties, and given the pressure on risky assets, liquidity has been a primary focus for investors of late; more particularly now that rates are starting to rise.

We are increasingly being approached by investors or existing clients looking for defensive products to add some level of protection in the current market environment. Many find the right fit in Ashburton Investments' range of liquidity strategies.

All the funds below are designed to protect capital and provide liquidity, both in the current turbulent environment and during normal economic functioning. They are low risk, highly liquid and provide competitive returns in their respective Association for Savings and Investment South Africa fund categories.

ASHBURTON MONEY MARKET FUND

Investors are attracted to the Ashburton Money Market Fund as it provides competitive interest rates and aims to achieve returns in excess of call rates (the return target is STeFI three-month negotiable certificate of deposit + 0.5%). The fund provides regular income distributions, and capital preservation and has four payment runs to cover immediate liquidity on a same day (T+0) basis. Clients tend to invest in this fund to de-risk from volatile asset classes. The fund is run extremely conservatively with no corporate credit risk and invests solely in premier bank assets and short term government Treasury bills. This is in addition to the maximum and average term limits of 13 months and 120 days respectively. The Ashburton Money Market Fund is our most conservative investment offering with a high degree of safety backed by the Global Credit Rating Company (GCR) credit rating of AA+(ZA)(f).

ASHBURTON CORE PLUS INCOME FUND (MONEY MARKET WITH ADDED TERM)

This recently launched fund is very similar to the Ashburton Money Market Fund, with two key differences. The fund allows for longer-term instruments and liquidity moves from the same day to the next day (T+1). The portfolio has a higher return target of STeFI Composite + 0.5%, which is done by sourcing additional yield from longer dated assets. The portfolio is permitted to hold instruments issued by the South African government and senior bank issued/guaranteed paper while corporate debt is not allowed. As with the Ashburton Money Market Fund, the Ashburton Core Plus Income Fund is also able to buy assets from foreign banks that have a local branch. The fund is also rated by GCR and holds an AA(ZA)(f) rating.

ASHBURTON STABLE INCOME FUND (CORE WITH CORPORATE CREDIT)

The Ashburton Stable Income Fund is the largest of the portfolios and was created with a slightly longer- term investment in mind. This fund is suited for investors looking for a short- to mediumterm parking place for cash (three months plus) and it has a higher return target than the other two funds of STeFI Composite + 1.0%. The fund also provides liquidity on a T+1 basis. The portfolio is constructed using only instruments that have a duration of 0.25 or less, resulting in far less volatility than more aggressively mandated portfolios. As a result, the probability of long-term capital loss is extremely low. The fund is actively managed and designed to invest in income-generating instruments with a longer maturity than that of a traditional money market fund. The investment objective of the portfolio is to maximise the current level of income while maintaining capital stability and liquidity. The fund is allowed to hold corporate credit and will vary this exposure between 30% and 50% of assets under management depending on pricing, availability and the current credit outlook. GCR has rated this portfolio as AA(ZA)(f).

These funds are all regulated under Board Notice 90 (BN90) of the Collective Investment Schemes Control Act 45 of 2002 and are Regulation 28 compliant. We believe a combination of these funds can be used to meet any investor need within the low-risk liquidity space. An investor has the freedom to choose and change their portfolio construction as their needs change - selecting one fund or diversifying between all three, without friction or transaction costs. The end result is an investment that is safe, secure and liquid at all times.