Figure 1: Asset Allocation
With the highest percentage allocated to local bonds - as a diversifier to equities and a cash enhancement - and a specific focus on higher coupons to dampen volatility, asymmetric risk and inflation-linked bonds (as a hedge against inflation rather than cash), as well as focusing on off-the-run bonds and the term structure of interest rates. One of the reasons they find South African bonds attractive is the provision of active returns relative to cash in a deteriorating economic environment. SA Bonds offer a unique opportunity as the market is fixated on credit risk for the Government as well as downgrade risk, and Inflation risk.
The fund is concerned about the South African property valuations as yields have gone too far. This is the foremost reason they do not hold any listed property investments at present, with listed property including retail property, it could be an expensive reality.
Through the funds’ fundamental research and analysis, they seek to employ the best combination of quality, growth and yield. With recent market events, Index equity (locally and offshore) appears risky - where stock selection remains important - the high quality shares included in the selection are on a discount to the market. They remain cautious overall with higher cash as interest rates could also rise, but overall low double digit returns look achievable for the Investec Cautious Managed Fund.
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