As a result of rising bond yields in the US, the yields of medium-term South African government bonds have risen to above 7% since the beginning of the year. When one considers that the increase in yields has coincided with improving investment fundamentals, such as a better than expected medium-term budget, improved government revenue collection, reduced bond issuances and well-anchored inflation, current valuations appear very attractive.
The Marriott Core and High Income Funds have a high exposure to government bonds (weighted average term ±5 years), as illustrated in the chart, and are therefore well-positioned to deliver better returns than money market and inflation over the next 24 months. In this note we outline five reasons why we believe South African medium-term government bonds are currently offering investors great value, and therefore present potential new investors with an attractive entry point into the funds:
The average yield difference between SA Government Bonds (5yr) and short-term cash rates over the last 20 years has been approximately 1%, significantly less than the 3.5% yield differential currently on offer.
5-year bank deposit yields have on average (10yrs) been 1% higher than the equivalent term government bonds due to lower credit ratings/higher credit risk. Currently, medium- term government bond yields are slightly higher than deposit rates and present investors with a unique opportunity to reduce risk in their portfolio while maintaining a high yield. The chart to the right shows how rates have moved since 2015.
The market is currently pricing in more than a 6% increase in interest rates over the next 5 years. We believe this is highly unlikely given the absence of demand-driven price pressures.
“As long as inflation is remaining contained, the central bank would have no reason to remove the accommodation that we are currently providing.” Reserve Bank Governor Lesetja Kganyago (April 2021)
The graph to the left shows the real yields (5-year government yields minus inflation, per country) on offer across the globe and highlights how attractive South African yields are.
The current South African 5-year CDS spread (this is the cost to ensure against a sovereign default) remains higher than the average emerging economy’s spread despite improving fundamentals such as:
In summary, medium-term South African government bonds currently offer good value to investors. However, volatility might continue in the short-term, due mostly to anxiety over rising interest rates and higher inflation in the US, as opposed to South Africa-specific concerns. Moderately conservative investors looking for higher levels of income with a two-year time horizon should welcome this, as it presents an opportunity to invest in relatively safe and secure instruments offering yields twice as high as current cash rates. Consequently, we will be looking to take advantage of opportunities to improve investor outcomes.
|Fund/CPI||Direct Marriott Unit Trusts||Direct Marriott Solutions||Via a LISP|
|Living Annuity||Income Solution|
|Core Income Fund||✓||n/a||n/a||✓|
|High Income Fund of Funds*||✓||✓||✓||✓|
*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||1.00%|
|Core Income Fund Class C (LISPs)||0.75%|
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