STANLIB Flexible Income Fund: Abundant opportunities in 2023

“The party will be in fixed income this year.” That’s how Sylvester Kobo, our Deputy Head of Fixed Income, sums up the opportunities that await investors in this asset class in 2023.

Sylvester Kobo

Deputy Head of Fixed Income

Key takeouts

The STANLIB Flexible Income Fund is ideally positioned for current market conditions, with a flexible, less constrained mandate that includes a broader set of building blocks and active tactical asset allocation. The fund’s mandate allows our fund managers the agility to position the fund with the optimal mix of assets through the cycle, accounting for the often uncertain and complex market environment.
The aims to protect and grow investors’ capital by allocating more actively than its peer group across the entire spectrum of income-generating asset classes in SA and offshore. In addition, a focus on active duration management in changing market conditions contributes to long-term outperformance in the fund.
The fund is an excellent solution for anyone invested in cash and money market funds as it offers better returns with downside risk protection. The risk of being under-exposed to growth assets is well-documented in the industry and this fund is a great option when encouraging clients to move incrementally up the risk spectrum from money market and income fund strategies.
The fund is also an ideal pre- and post-retirement income solution, offering bond-like returns but with less volatility and a focus on preserving investors’ hard-earned capital.
Leveraging the experience and diversity of our team and access to global insights through our strategic offshore partnerships, the STANLIB Flexible Income fund gives investors exposure to every class of fixed income asset via a dynamic asset management process which actively moves positions exploit opportunities presented by the market, at an appropriate level of risk.

Abundant opportunities in 2023

On Wednesday, 1 March we hosted a webinar which explored the STANLIB Flexible Income Fund and its philosophy, mandate and the practical investment strategies its managers employ.

The webinar took the form of a Q&A session between Sylvester Kobo, co-manager of the fund, and Henry Munzara, STANLIB’s Deputy Head of Investments.

About the STANLIB Flexible Income Fund

STANLIB is the largest fixed income asset manager in SA. The Flexible Income Fund’s managers leverage STANLIB’s resources to offer investors access to sophisticated, active tactical asset allocation across all classes of income-generating securities in SA and offshore. The fund is an important part of STANLIB’s market-leading range of fixed income products.

The Flexible Income Fund’s official benchmark is 1.1x the total return of the STEFI Composite Index which tracks the returns available in the South African money market.

While established April 2004, the appropriate period to evaluate its performance is from January 2020. At this time, the fund adopted a new strategic asset allocation framework, which limited exposure to property and added offshore exposure. Since then the fund has delivered on its mandate, with a total gross annualised return over the 36 months to the end of January 2023 of 8.2% versus STEFI’s 5.3%.

The following chart captures the essence of the Flexible Income Fund’s value proposition. Over the last 36 months the fund’s total return has exceeded that of the FTSE/JSE All Bond Index (ALBI) with much lower volatility.

Active allocation across asset classes and offshore

We are living through uncertain economic times: markets appear to be benignly priced for inflation to roll over as the year proceeds and a corresponding inflection in central bank rates.

This corresponds with our view and we recognise the risks: whether or not inflation surprises on the upside as China reopens, central bankers may prove more reluctant to start cutting rates than expected. In this environment, investors would be well-advised to invest with managers that can move quickly if news headlines take an unexpected turn.

The Flexible Income Fund’s mission is to protect and grow investors’ capital by allocating more actively than its peer group across the entire spectrum of income-generating asset classes in SA and offshore.

Since 2019 the fund has also been able to take offshore exposure; the managers have the advantage of being able to lean on STANLIB’s powerful offshore partnerships. These give the managers of the Flexible Income Fund access to world-class expertise and research across a universe of offshore fixed income assets.

The fund’s mandate allows its managers to invest in fixed income securities of any maturity issued by governments, state-owned enterprises, municipalities and companies. The fund’s managers can therefore protect and grow investors’ capital by identifying mispricing of various types of security as well as by changing the duration of the portfolio, as is demonstrated by the positioning across asset classes below.

Each asset class is a potential source of return for the fund; the following chart shows how they have driven the fund’s performance in the last three years.

This philosophy of active management is demonstrated in the following chart which shows the fund’s modified duration and the yield on the R186 SA Government bond. The big increase in duration in mid-2020 correctly anticipated the next six months of falling yields; the managers reduced duration around the end of 2021, protecting clients’ capital while bond yields kept climbing until October 2022. The managers have recently increased the duration of the fund, expecting the bond market to rally as headline inflation retreats and investors start to price in rate cuts by the SARB.

Liquidity

Truly active allocation demands liquidity within the portfolio. The Flexible Income Fund’s managers maintain a strict liquidity discipline as a necessary complement to their active management philosophy. By only investing in liquid assets the managers know that they can rapidly change the fund’s allocations when required.

The fund’s holdings in SA government bonds are concentrated in issues with maturities between three years and seven ears, the most liquid part of the yield curve. To gain access to credit, a less liquid asset class than sovereign bonds, the fund allocates to STANLIB’s Income Fund and Extra Income Fund, both of which offer daily liquidity.

In a nutshell, if you’re looking for truly active management and top-quartile, inflation-beating returns with capital protection, consider the STANLIB Flexible Income Fund.