STANLIB Income Fund: Investing through the cycles, and staying nimble

Income funds offer good risk-adjusted returns with lower volatility than other asset classes, especially in times of macroeconomic uncertainty. In a world of sticky inflation, rising interest rates and slowing growth, the STANLIB Fixed Income team has the experience and the tactical agility to protect and grow investors’ capital.

Victor Mphaphuli

Head of Fixed Income

Key takeouts

The STANLIB Income Fund offers a smoother journey for investors, helping them stay invested through the cycles. The Fund aims to deliver stable income and returns in excess of cash, while preserving investors’ capital. Our portfolio managers achieve this by allocating across a wide range of fixed income instruments and actively managing the Fund’s duration based on their expert view of South African interest rates.
The Fund does not chase returns by investing in illiquid or lower quality assets; STANLIB’s Fixed Income team maintains explicit disciplines around the credit quality and liquidity of the underlying investments in the Fund.
The Fund is an excellent alternative to cash and money market funds, offering better returns with minimal incremental risk.
It is also a good option for investors considering fixed rate Not only are its forward yields strong but it offers liquidity and capital appreciation while reaping the benefits of compounding.
The Fund is an ideal pre- and post-retirement income solution.

Staying nimble through cycles

On Tuesday, 20 June we hosted a webinar which presented the STANLIB Income Fund: its philosophy, mandate and the investment strategies its managers employ.

The webinar took the form of a Q&A session between Victor Mphaphuli, our Head of Fixed Income, Tarryn Sankar, Head of Credit and Kevin Lings, STANLIB’s Chief Economist.

About the STANLIB Income Fund

STANLIB is the largest fixed income asset manager in SA; the STANLIB Income Fund’s managers can therefore leverage the firm’s resources to offer investors sophisticated, active asset allocation across a range of high-yielding fixed income instruments. STANLIB’s scale gives the Fund a competitive advantage in negotiating preferential rates when investing. The Fund’s mission is to generate returns in excess of cash while protecting investors’ capital in an environment of changing interest rates.

The fund is an important part of STANLIB’s market-leading range of fixed income products.

Active management for diversification and enhanced returns with minimal risk

Even though STANLIB’s Chief Economist Kevin Lings expects the South African economy to improve next year and into 2025, he recognises that a broad range of possible outcomes lies ahead. Load-shedding is just one of the issues facing the South African economy while the world remains in a period of macroeconomic and geopolitical uncertainty. Hopes that inflation would ease have been dashed and central banks have only one rather blunt weapon with which to fight it; in the name of price stability they will keep hiking rates even if their economies must fall into recession before the inflationary genie is back in the bottle. Volatility is set to persist.

As the charts below illustrate, the STANLIB Income Fund has been generating returns comparable to those of listed South African bonds for years at dramatically lower volatility. In the current environment of persistent inflation rates we expect the Fund to perform well; the portfolio managers’ proven expertise in managing duration offers investors superior capital protection if rates continue to rise.

Our yield forecast shows that the total return for the fund could reach 10.40% as interest rates move higher and floating rate instruments price higher – effectively offering a real return of 5% for very little risk.

Credit quality

A key focus of STANLIB’s Fixed Income team is on the credit quality of the underlying investments within the Fund. Credit quality is central to our risk management philosophy; the team makes a disciplined, detailed assessment of any proposed investment to ensure that the Fund is adequately rewarded for the risk it is taking. Currently, the portfolio is conservatively positioned in terms of credit quality and concentration risk. 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.

Liquidity

For a portfolio manager liquidity is a valuable attribute in any asset so less liquid assets are priced at a discount; in the world of fixed income, cheaper assets mean higher yields. This means that a fund manager can achieve higher returns by investing in assets which are harder to sell but the risk of the portfolio must increase in the process. STANLIB’s mission is to achieve strong risk-adjusted returns for our investors: we seek the greatest return available for a given level of risk. The Income Fund’s managers invest actively, buying and selling assets to optimise the Fund’s duration and credit profile in response to events; maintaining a liquid portfolio is therefore an essential part of their philosophy.

By only investing in liquid assets the managers know they have the flexibility to rapidly change the fund’s allocations when required – unlike the liquidity opportunity cost of, for example, fixed term investments.

In summary

The STANLIB Income Fund continues to deliver consistent returns which beat inflation and the Fund’s benchmark. Investors in the Fund benefit from the experience and deep expertise of STANLIB’s fixed income team and the power of the firm’s status as the largest fixed income manager in South Africa.

The Fund’s managers build a high-quality portfolio from the widest range of fixed income investments and then manage it actively, pursuing opportunities as they arise while carefully managing risk. This approach results in a fully diversified portfolio that benefits immediately from instrument price changes, in contrast to investing in a single asset that could default and lead to large losses. Their mission is to deliver strong risk-adjusted returns with lower volatility than any other asset class.

In a nutshell, if you’re looking for truly active management and stable income with capital preservation through the cycle, consider the STANLIB Income Fund.