The Foord Flex Income Fund Turns One
Foord’s fixed interest product suite has now reached its one-year anniversary. The funds have gained good traction with retail and institutional investors alike. Portfolio manager Farzana Bayat takes a closer look at the Foord Flex Income Fund — the flagship of the fixed interest product range.
Readers will recall that Foord launched three fixed income funds on 1 October 2022. The range included a specialist bond fund and two income funds. Foremost of interest for retail investors is the Foord Flex Income Fund. As the name suggests, the managers aim to ‘flex’ the fund’s investment parameters to safely deliver returns well ahead of bank deposits or money market funds.
The fund is suitable for investors looking to earn a high and stable income and who can tolerate small amounts of volatility. The fund aims to:
- Protect investor capital by avoiding negative returns over periods as short as three months
- Generate high levels of stable and consistent income and
- Beat inflation by up to 3% per year over time.
To achieve these objectives, the portfolio has at its disposal a broad universe of income-producing investments. These include fixed and floating rate money market instruments, government and corporate bonds, inflation-linked bonds, credit instruments, convertible bonds, listed property and preference shares. The fund can invest judiciously offshore, but we typically hedge out the currency risk for investors.
We aim to hold an optimal blend of investments based on how cheap they are, the yield pickup as well as the additional risk they add to the portfolio. Where an attractively priced investment introduces material risks to the fund, we ration how much we buy to limit drawdowns should the market move against us. We structure the portfolio to at least deliver cash returns in worst-case outcomes. In our good-case scenarios, we expect the fund to produce returns of 2 – 3% more than cash deposits.
Over the year, the fund has returned 8.6% after fees and expenses when official inflation averaged 5.3%. The fund also outperformed its benchmark, which returned 8.0% for the year. The benchmark is 110% of the Alexander Forbes Short-term Fixed-interest Call Deposit Index (Stefi Call). The Stefi Call is a recognised benchmark of returns in the South African money market.
Foord is a safety-first investment manager — we don’t gamble with investors’ money. The Foord Flex Income Fund is accordingly conservatively positioned against a myriad of rising risks in the fixed interest universe. Nevertheless, the fund is still delivering an attractive yield of over 10% with a very low level of credit and interest rate risk. We are comfortable that the fund will achieve its investment objectives and will do so with very little risk of drawdown.
After a year of building resilience in the portfolio, the fund is split 90:10 in favour of South African investments, with very little currency risk. The main investments we hold in the fund are:
- Short-term bank deposits — which earn low-risk yields of around 9.0% to 9.5%
- Short-dated inflation-linked bonds, where we have locked in yields of close to 4.5% above inflation — unlike normal bonds, these instruments provide an excellent return if inflation surprises the market to the upside, which is our base-case scenario
- Inflation-protected US Treasury bonds (TIPS), which will earn excellent returns if US inflation runs higher than about 2% — we feel that it is unlikely that US inflation will quickly retreat to the 2% level, given the tight US labour market, elevated wage inflation and high US government spending
- US dollar-denominated convertible bonds, which are bonds that may convert into shares and which therefore offer an asymmetric return profile — we like these investments for their decent yield and ability to deliver share-like returns if the issuer’s shares rise in price, and
- A small allocation to bank preference shares, with a dividend yield of around 11% — although not without credit risk, these investments have good upside potential over time.
Given the elevated (and rising) fiscal, political and credit risks in South Africa, there are two areas of the market we are actively avoiding. The first is SA government fixed-rate bonds, also called ‘nominal’ bonds. These offer a high fixed rate of interest but disappoint if interest rates rise or inflation runs higher than we expect. At best, we feel that nominal bonds are only fairly priced — there are better alternatives in inflation-linked bonds. We aim to buy nominal bonds tactically during bond market selloffs.
The other area of the market we are cautious on is the South African corporate credit market. Given higher yields, investors are pouring money into cash and income funds, which in turn are driving up the prices of credit instruments. In essence, too much cash is chasing too few assets — driving prices up and yields down (prices move inversely to yields). For only a small reduction in yield, we prefer the risk profile of South Africa’s well-capitalised banks over most of the corporate credit instruments available. Unlike many competitor funds, we are steering clear of credit instruments until the market normalises.
Looking ahead, we are likely to see additional selloffs in this volatile environment. The fund is well positioned to protect capital in a selloff and has ample liquidity to take advantage of opportunities that arise.
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