Much has been said about the extraordinary performance of South African fixed income funds over the past four years. But the interest rate cycle may be nearing its bottom and the fundamentals which have driven the market may be changing. The question then arises as to whether fixed income funds can continue their stellar performance.
The performance of fixed income funds has been helped by opportunities created by uncertainty around the timing of rate cuts as well as the timing of the bottom of the rate-cutting cycle. Since December 2008, rates have been cut by 600 basis points, and are now at the lowest level since 1999.
The continuous rate cutting, combined with the debate and uncertainty which has accompanied the current cycle, has allowed fixed income funds to not only outperform their counterparts in the equity market but also to exceed any of their own previous performance results. For example, over the past year some of the star performers have been KADD’s Validus Plus fund with an annual compounded return of 76%, the Validus fund 28%, Green Oak’s Go Green fund 33.95%, Fairtree’s Fixed Income fund 33.57% and Acumen Capital’s AcuityOne fund 44.16%.
We believe that fixed income funds will maintain this performance for a while longer. The Monetary Policy Committee has not closed the door to further rate cuts particularly with rand strength and low inflation numbers providing ample ammunition for lower interest rates. However, even once the cycle has bottomed, and interest rates are on the rise again, further opportunities will be created by elements such as new instruments which will soon be introduced to the South African market.
Up until now, fixed income players in South Africa have had a fairly small number of instruments at their disposal such as bonds, swaps, forward rate agreements and interest rate options. This will soon be changing as the JSE Limited has said that it will introduce a number of new listed interest rate derivatives to complement the existing set of instruments available.
They have already launched a Jibar future, an exchange-traded version of the over-the-counter forward rate agreement…
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