Anxiety over an imminent reduction in the purchase of bonds by First World Central Banks (tapering), corporate credit issues in China (Evergrande), and escalating energy prices, has resulted in one of the better bond-buying opportunities we've seen in the last decade, especially with cash yields at historic lows. This presents a compelling opportunity for income-seeking investors.
The chart outlines the value on offer in the South African bond market: local 5-year government bonds have never been this attractive relative to cash (based on all available data) by a substantial margin.
Despite the highly attractive yields on offer, we have moved cautiously when increasing the Fund's exposure to medium term government bonds and have been mindful of the potential short-term impact which tapering could have on yields. However, with the US Federal Reserve indicating that the tapering process will likely start in November 2021 we have begun actively buying into market weakness more assertively in order to lock in these high yields while they are available. In the last two weeks we have increased the portfolio's exposure to South African government 5-year bonds (yielding nearly 8%) and 8-year bonds (yielding 9.5%) by more than 10% – a move that will meaningfully improve investor outcomes over the next 24 months.
The immediate benefit for investors is that the Fund's income yield has increased from 6% to 6.5% (Class C) and should increase further as we continue to buy into any additional market weakness. This is an attractive income yield considering cash rates are offering approximately 4%.
Over the last decade there have been four compelling bond-buying opportunities: "Nenegate", "Junk status", the 2017 ANC elective conference uncertainty; and Covid-19. We are currently in the midst of a fifth buying opportunity which we believe will enable us to deliver outcomes very similar to those achieved in the past. The current lower returns investors are experiencing are therefore expected to be short-term in nature.
From a total return perspective, making good use of the Fund's unique flexible mandate to take advantage of investment opportunities has resulted in an excellent long-term track record as highlighted in the table below:
|Core Income Fund – Income Produced on R1,000,000 invested (as at 28 Feb 2021)|
|Term||1 year||2 years||3 years||4 years||5 years|
|Marriott Core Income Fund Class C*||5.2%||7.4%||8.4%||8.4%||8.4%|
|Marriott Core Income Fund Class A||4.9%||7.1%||8.0%||8.1%||8.0%|
|Money Market Fund Sector Average||3.8%||5.1%||5.6%||6.2%||6.5%|
|Difference (Core Income Fund Class C* vs Money Market Sector)||+1.4%||+2.3%||+2.8%||+2.2%||+1.9%|
*Class C is only available via LISPs Source: Profile Data
Taking advantage of current bond market volatility has resulted in a significant improvement in the income and return outlook of the Core Income Fund. The Fund is now producing a 6.5%+ income yield with an expected total return close to 8% p.a. over the next 24-months (for Class C) – a compelling option for moderately conservative, income-seeking investors.
|Fund||Direct Marriott Unit Trusts||Via a LISP|
|Core Income Fund||✓||✓|
*The Marriott High Income Fund of Funds invests into the Core Income Fund and has the same outlook.
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Please note that Marriott does not charge any performance fees across its fund range.
|Fund/CPI||Marriott Annual Management Fee (excl. VAT)|
|Core Income Fund Class A||9.0%|
|Core Income Fund Class C (LISPs)||0.65%|
Collective investment schemes are generally medium to long-term investments. The value of participatory interests or the investment may go down as well as up. Past performance is not necessarily a guide to future performance. Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. If required, the manager may borrow up to 10% of the market value of the portfolio to bridge insufficient liquidity. Forward pricing is used. The ruling price of the day is calculated at approximately 15h00 SA time each day. Purchase and repurchase requests must be received by the manager by 15h00 SA time each business day. Prices are published on a daily basis on the Marriott website, www.marriott.co.za. Unit trusts are calculated on a net asset value basis. Net asset value is the value of all assets in the portfolio including any income accrual and less any permissible deductions from the portfolio. Marriott does not provide any guarantees with respect to the capital or the return of the portfolio. A schedule of fees and charges and maximum commissions is available on request from Marriott. Where initial fees are applicable, these fees are deducted from the investment consideration and the balance invested in units at the net asset value. Commissions and incentives may be paid and if so, would be included in the overall costs. Different classes of units apply to the fund and are subject to different fees and charges. Declaration of income accruals are monthly. Performance figures are based on lump sum investment. Individual investor performance may differ as a result of initial fees, the actual investment date, the date of reinvestment and dividend withholding tax. Past performance is not indicative of future performance. This portfolio may be closed to new investors in order to manage it more efficiently in accordance with its mandate. The TER shows the percentage of the average Net Asset Value of the portfolio that was incurred as charges, levies and fees relating to the management of the portfolio. A higher TER ratio does not necessarily imply poor return, nor does a low TER imply a good return. The current TER cannot be regarded as an indication of future TERs. Transaction Costs are a necessary cost in administering the Financial Product and impacts Financial Product returns. It should not be considered in isolation as returns may be impacted by many other factors over time including market returns, the type of Financial Product, the investment decisions of the investment manager and the TER. Marriott Unit Trust Management Company (RF) (Pty) Ltd is a member of the Old Mutual Investment Group. Old Mutual is a member of the Association for Savings and Investment South Africa (ASISA).
Please note that where the term ‘yield/yields’ is used, these are historic yields