By: Raihan Allie, Portfolio Manager at Truffle Asset Management, gives an overview of the current fixed income trends.
The fixed income universe has grown and evolved. What are some of the more interesting instruments, and why are they advantageous in the current environment for a relatively low-risk fixed income fund?
Inflation linked bonds (ILBs) are piquing our interest. In the past, we’ve advocated a preference for nominal bonds over ILBs, largely because of the inherent inflation risk premia embedded in a nominal bond. Significant underperformance versus the fixed rate government bonds means ILB’s present value in the form of attractive real returns (approximately 4.5%), with limited downside on a relative basis. At current pricing levels, investors should be able to earn similar returns to the fixed rate bonds, while hedging inflation. The inflation risk premia has significantly compressed, offering cheap insurance.
The macro-economic environment has been uncertain and markets volatile recently. Following a protracted cycle of high short rates, where is the opportunity in the fixed income market?
The current macro-economic environment broadly favours investing into fixed income instruments. Inflation is the biggest erosion of value for this asset class. In most regions we’re now experiencing falling inflation rates, implying strong real returns on fixed income instruments. Global growth also appears to be slowing down, dampening return expectations for equities, and narrowing prospective returns versus fixed income. Furthermore, changes in yield curves are approximately 90% explained by expectations of short-term interest rates. A declining interest rate environment would more likely than not result in lower yields across the curve, further advancing the price of bonds.
Have you seen the role of fixed income shifting over the last year?
The recent rate-hiking cycle has driven concerns about generalising correlations and the diversification benefits of different asset classes. It’s important not to fall into the trap of static assumptions based on history. Over the last year, the role of fixed income investments has shifted from more of a diversification play globally to one that now also includes a return play. Investors are afforded attractive real yields in hard currencies, which have not been prevalent for over a decade. We’re past the stage of artificially low interest rates.
Truffle has a strong track record in managing the award-winning Truffle SCI* Income Plus fund. You’ve recently launched a multi-asset income fund. Can you provide a brief outline of this fund?
The fixed income component of the Truffle SCI* Enhanced Income fund is managed in line with other fixed income mandates as we aim to build from a robust proven investment strategy. We have the flexibility to enhance return on the multi-asset income mandates through increasing duration and adding exposure to risk assets such as equities, property and preference shares. While this does add some risk and volatility, we select assets carefully. Truffle’s open, dynamic team-based approach means we leverage the success of the broader investment team in selecting stocks and property. We focus on choosing assets with strong cashflow, and high dividend yields. Our aim is to manage this fund to deliver an enhanced income return with an added focus on growing capital.
*SCI – Sanlam Collective Investments
