Inflation and interest-rate uncertainty are top of mind for investment managers
Fixed income investments currently provide meaningful real returns for investors and are therefore an attractive asset class, according to several managers of Amplify Investment Partners’ fixed income and multi-asset funds.
They also point out, however, that uncertainty over the direction and timing of inflation and interest-rate movements pose some challenges for fixed income investment managers this year.
Nomathibana Matshoba, managing director and portfolio manager at Terebinth Capital, which manages the Amplify SCI Strategic Income Fund, says the fund has many strategies. The most typical is inflation-linked bonds, which are of benefit in a rising inflation environment. A risk, she says, is the possibility of the South African Reserve Bank (SARB) and Treasury reducing the target inflation band. While the fund continues to favour inflation-linked bonds, its managers are tactical in how they invest in the portfolio, as the asset class would be negatively impacted should the target be reduced.
From a post-Covid perspective, she says that easy gains have been made in most asset classes, including fixed income. However, this year, downside protection is key.
Lourens Pretorius, head of fixed income at Matrix Fund Managers, which manages the Amplify SCI Defensive Balanced Fund, Amplify SCI Absolute Fund and Amplify SCI Income Plus Retail Hedge Fund, says that in a multi-asset context, SA government bonds, using the 10-year bond as a benchmark, have shifted in terms of real returns from in the region of 3%-3.5% to 4%-4.5%. Recognising the shift in yield, Matrix considers this asset class as an intelligent return driver of real return outcomes and real return objectives.
However, Matrix’s strategy is skewed towards an active investment and asset allocation process. For that nimbleness and agility, it requires liquidity, hence the focus on the more liquid side of the market across equities and fixed income. “If you incorporate credit to your investment process, we think of it as a rather static driver of return rather than something you can actively move into an alternative asset class or alternative opportunity. So, for example, if you want to change your duration, you can’t necessarily sell credit bonds and buy longer-dated credit bonds or vice versa.”
Should Matrix venture into credit, it would limit itself to bank senior debt, with a strong emphasis on liquidity.
Marble Rock asset management chief investment officer Barry Ross said his firm has a similar philosophy on credit. Marble Rock, which manages the SCI Real Income Retail Hedge Fund, considers that portion of its portfolio as a cash enhancement portion and not an active part of the portfolio, as there’s not a lot of trade, and prices can be static, giving managers very little feedback from the market. “There becomes incrementally less information in the price the less something trades, so that creates extra risk for taking on that credit,” he says, adding that the market hasn’t validated that credit. “We stick to senior bank paper to soak up cash and manage the credit in that regard, but it isn’t an active part of the portfolio at all.”