Caption: Lyle Sankar, Ané Craig and John Gilchrist from PSG Asset Management collect the Raging Bull Award from Personal Finance editor Dieketseng Maleke (second from left). Picture: Ayanda Ndamane.
PSG Diversified income fund won: • Raging Bull Certificate: Best South African Multi-Asset Income Fund for Straight Performance over Three Years to December 31, 2023.
• Raging Bull Award: Best South African Interest-Bearing Fund for Straight Performance over Three Years to December 31, 2023.
This is the second year in a row that the PSG Diversified Income Fund has won the trophy for Best South African Interest-Bearing Fund. Launched in September 2013, it is aimed at investors wanting a steady above-inflation income from their investment without the risk of capital loss. Over three years to the end of last year it provided an annualised net return of 9.10%, over 3% more than average Consumer Price Index (CPI) inflation of 6.13%. Its benchmark is CPI+1%.
Personal Finance interviewed Lyle Sankar, Ané Craig and John Gilchrist, who jointly manage the fund.
PF: The Asisa multi-asset income category mandate limits the fund to 10% equities and 25% listed property. How do you work within these limits to accomplish the fund’s objectives?
LS, AC & JG: The PSG Diversified Income Fund holds in excess of 90% local fixed-income/interest-bearing assets over time, making it suitable as a core income portfolio. We follow a globally integrated investment process and are able to use the full spectrum of interest-bearing assets, extracting value from money markets, government and corporate bonds, both locally and offshore.
Capital preservation is one of the fund’s key objectives, thus we typically hold less than 10% exposure to property, preference shares and equity holdings in totality. The fund’s expanded investment toolkit provides additional avenues to mitigate risk and also provides additional sources of returns. The objective of this component of the portfolio is to add 0.5% to returns annually, rather than drive the performance of the fund.
PF: What is your strategy regarding your allocation to bonds and cash instruments?
LS, AC & JG: When considering allocations across asset classes, PSG Asset Management starts with cash as a default position. We do not follow a strategic asset allocation framework. We consider this a key strength, as we only allocate away from cash into opportunities that meet our required real returns, buying only when we see sufficient margin of safety against permanent capital losses. This has enabled us to avoid the costly pitfalls of permanent capital loss. For example, we have not had a default (such as a Steinhoff or African Bank) and have typically bought government bonds only when real yields are sufficiently wide to protect client capital.
PF: To what do you attribute the fund’s superior performance over the last few years?
LS, AC & JG: We have an explicit focus on protecting capital but are willing to consider periods of extreme market pessimism as buying opportunities. This is a key behavioural differentiator in the market. In addition, we have a dynamic asset-allocation process and focus on the best risk-adjusted ideas across various buy lists. This allows us to use a broader range of assets than the typical multi-asset fixed income fund, at various periods in the cycle. Our team-based decision-making framework allows portfolio managers the freedom to express ideas best aligned to the fund’s objectives. In the case of the PSG Diversified Income Fund, the objectives are both generating high levels of income and maintaining a high degree of capital preservation.
PF: The global interest-rate/inflation environment appears to have eased. How do you see prospects for income-focused investments panning out in the next year or two?
LS, AC & JG: We believe the sharp moderation in developed-market inflation in 2023 will result in short-term inflation reaching the US Federal Reserve’s 2% target during 2024. However, over the long term we believe a re-emergence of inflation poses the risk of disappointing market expectations of significantly lower interest rates. Against this backdrop, the Fed is likely to take a more balanced approach and we do not expect as many rate cuts as what is currently priced into developed-market curves. The local backdrop, however, is significantly different, as South Africa is entering a phase where rate cuts are now possible. In a low-growth environment and with SA’s inflation likely to remain within target for the foreseeable future, the South African Reserve Bank is likely to commence its rate-cutting cycle during 2024.
We continue to believe the best risk-adjusted opportunities lie in government bonds and bank funding curves, which come at low risk of default. These assets offer very attractive yields and will benefit from the tailwind of interest rate cuts. In contrast, we see the corporate bond market as holding greater risk to investors than commonly perceived with corporates and the consumer struggling in the current economic environment.
As a result, the fund is predominantly invested in government bonds and bank funding instruments with very low exposure to corporate bonds. We expect that in the prevailing environment, investors should expect healthy inflation-beating returns with a high degree of capital preservation.