PSG DIVERSIFIED INCOME FUND

Raging Bull Award for the Best South African Interest-Bearing Fund for straight performance over three years to December 31, 2022.

PSG’S Diversified Income Fund is in the multi-asset income Asisa category, one of three income categories (the other two being the interest-bearing variable and interestbearing short-term) that fall within the ambit of this award. According to its fact sheet, the fund delivered an annualised 7.99% a year for investors over the three-year period, considerably more than its benchmark, CPI+1%, which averaged 6.33%.

The fund’s managers, Lyle Sankar, Ané Craig and John Gilchrist, responded to the following questions from Personal Finance:

The fund is essentially an interestbearing income fund, limited to only 10% exposure to equity. What is the significance of this in accomplishing the fund's objectives?

LS, AC & JG:The fund is a core fixed-income portfolio and over time consists of around 90% fixed-income/interest-bearing assets. With a globally integrated investment process, we are able to use the full spectrum of interest-bearing assets, extracting value from money markets and government and corporate bonds, locally and offshore.

In terms of the mandate, the fund can allocate 10% to equities and a further 25% to listed property. However, in line with the key objective of capital preservation, we limit property, preference shares and equity holdings to less than 10% of the fund in aggregate.

The ability to use more than just local property in addition to traditional fixedincome assets enables us to both mitigate risk and add additional sources of returns to the portfolio in a differentiated way.

What is your strategy regarding your allocation to bonds and cash instruments?

Our philosophy across asset classes is to start with cash as a default position, rather than a strategic asset allocation framework. This is a key strength, as we only allocate out of cash into opportunities that meet our real required 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.

To what do you attribute the fund's superior performance over the last few years?

We explicitly focus on always protecting capital, but are willing to be offensive when markets become extremely pessimistic. This is a key behavioural differentiator in the market.

Through our globally integrated investment process the fund has access to nine buy lists of securities across asset classes. This allows us to use a broader range of assets than the typical multi-asset fixed income fund, at various periods in the cycle.

We have a dynamic asset-allocation process and focus on the best risk-adjusted ideas. 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.

Looking forward, how do you see the global (and domestic) inflation/interest rate scenario playing out and how are you positioning the fund accordingly?

We believe we have seen a global inflection point with inflation and interest rates moving structurally higher. Thus we anticipate inflation being higher for longer.

We expect supply-side dynamics to provide an underpin for commodity exporters.

Developed market assets that benefited from a low inflation environment are unlikely to perform well in the years ahead, while emerging market commodity exporters are set to continue to outperform.

We believe we are in the early stages of a multi-year opportunity. SA government bonds look extremely attractive against this backdrop, especially with moderating inflation and an interest-rate cycle close to the top.

We continue to manage risk and opportunity in a balanced manner, believing the wider diversification offered by our global buy lists is likely to result in attractive income returns generated in a risk-conscious manner.

Chief investment officer at PSG, John Gilchrist, and portfolio managers Lyle Sankar and Ané Craig, with their Raging Bull trophy.

Photo: Mike Hardenberg