Downgrades draw attention to SA All Bond Index


Cape Town - Despite its transparency and being well represented in the market, the SA All Bond Index (ALBI) is highly concentrated and dominated by South Africa Government exposure, as government issued debt constitutes a weighting of over 94% in the index.

According to Paul Crawford, a fixed income portfolio manager at Fairtree Capital, the non-government debt exposure within the ALBI index is less than 6% and this is made up of Government backed debt including Transnet and Eskom.

“In fact, the ALBI index highlights that South Africa still has a poorly developed corporate bond market compared to more developed global bond markets where often Government issued debt only makes up 50-60% of the index,” said Crawford.

The recent political turmoil and ratings downgrade have brought the increased risk of a South African Government default to investors’ attention again.
“We should not forget that most governments have had to restructure debt at one time or another effectively defaulting on their obligations. A simple Google search of 'List of sovereign debt crises' illustrates that even governments in developed markets default on debt obligations," he said.

“The modified duration of the ALBI index has increased steadily from roughly 4.5% at the inception of the index in 2001 at the time of the financial crisis, to around 7.25% at the moment.
“Simply, a modified duration of 7.25% means for every 1% increase in interest rates, there will be a corresponding 7.25% reduction in the capital invested in a portfolio that tracks the ALBI index. As a result, if local interest rates increase further, investors’ capital might be at risk over at least the short term."

Growing risks

Most fixed income funds with an ALBI benchmark form part of the South African IB Variable Term category, which Morningstar estimates to be about R32bn as at 31 March 2017. However, the growing risks associated with the ALBI should also be considered in multi-asset solutions where fixed income allocations range between 15% and 50%.

According to Morningstar more than R1trn was invested in multi-asset funds as at 31 March 2017.

With this as the backdrop, Fairtree Capital has launched the Fairtree ALBI Plus Prescient Fund with the objective to provide investors ALBI-type interest rate exposure but with the added benefit of diversified exposure to multiple debt issuers. Thus, in effect, giving investors a more predictable diffusion of returns as one would expect from more mature, balanced bond markets.

The new ALBI Plus mandate will also form a key part of the recently launched Fairtree Balanced Prescient fund, a Regulation 28 compliant high equity multi-asset fund.
Fairtree Capital also announced that it has entered into a co-naming agreement with Prescient Management Company on August 5 2016 on the existing Fairtree Capital range of unit trusts. This resulted in certain name changes of certain Fairtree funds being effective as of April 28 2017.

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