SVS Sanlam Fixed Interest Fund

• Core corporate bond fund - can either be a standalone corporate credit investment or the credit component of a wider portfolio
• Expertise in financials – a key segment of the corporate bond market
• Active duration management – credit is a long duration asset class and thus sensitive to changes in risk-free rates
• Good access to the primary market
• Sophisticated management of risk and ESG factors

September 2021

Market/macro backdrop
Interest rate volatility created a healthy re-pricing of credit risk during the month and the tone remained weak heading into the final days of trading. In the UK, hawkish comments from the Bank of England led to speculation that interest rates could rise early next year, and importantly the Bank made it very clear that any tightening would be implemented through an increase in Bank Rate, even if that meant raising rates before the end of the current asset purchase programme.

 
Performance
The Fund produced a performance of -0.9% in September (source: Morningstar – A Inc units).

For comparison, the IA £ Corporate Bond sector median produced a performance of -1.80%.


Past performance is not a guide to future performance. Total return, NAV to NAV basis, net of charges.



Positive and negative contributors
The general positive contributor in comparison to the peer group was our shorter duration stance as longer-dated yields sold off aggressively in the second half of the month; to give some context here, the 10y gilt yield started the month at just 0.62% but had soared to 1.02% by the month end.

The broad allocation to credit, and in particular our exposure to financials, produced a satisfactory outcome for the Fund given that credit risk overall re-priced during the month.


Significant portfolio changes - buy/sells
In the primary market, we participated in Investec’s Tier 2 issue. Outside of financials, we bought some of Ford’s 3.683% December 2024 bond. In terms of sales activity, we took profits in AA.


Fund/corporate/team highlights
We are pleased to report that the Sanlam Credit Fund, which is managed by the same team that manages the SVS Sanlam Fixed Interest Fund, has achieved a 5* Morningstar rating.


Outlook
Our recent monthly reports have regularly noted the risk of interest rate volatility caused by ‘transitionary’ inflationary expectations. Recent inflation prints have surprised to the upside however, and so central banks’ credibility will likely be tested in Q4 as they will need to navigate the prospect of a slowing macro environment and above-target inflation.
 
Valuations in the corporate bond market remain stretched, although the government bond sell-off has at the very least contributed to a more attractive entry level for investors who have kept some powder dry. Overall, technicals of the European corporate bond market remains solid, and should offset, at least partly, the negative impact from higher rates and economic slowdown concerns. Nonetheless, investors should note the caution within the investment team as we enter the final quarter of the year.