Sandile Malinga

Portfolio Manager

February 2017

Prudential launches new Income Fund

The new fund is designed to be an ideal 1-2+ year savings vehicle to provide a consistent, high monthly income at low risk, explains Sandile Malinga, portfolio manager.

For investors looking for a relatively steady but shorter-term income above that earned by bank deposits or typical money market returns, income funds are designed to deliver exactly this. They can help protect against inflation and market downturns, making them a prudent savings vehicle for a family’s emergency savings, school expenses or a down payment on a new car, for example. 

How do income funds work?

Income funds invest across a range of interest-earning assets, with the specific type of assets held depending on the risk profile of the fund - generally income funds are low-risk investments, but the exact risk can differ across funds. Income fund may hold bonds of varying kinds (government, corporate and inflation-linked, for example) and of different terms (anywhere from one year to 30 years). They can also hold floating-rate notes and shorter-term money market and near-cash securities.

Income funds typically earn their “above-money market” returns from two primary sources: the higher interest paid by borrowers for a longer borrowing period (also known as duration or maturity), and the higher interest paid by borrowers who have a higher credit risk (the risk of not paying back the investor). Active management of the funds’ maturity and credit profiles add value to investor returns.

Prudential’s Income Fund aims to beat money market returns

For example, the recently launched Prudential Income Fund is designed to maximise returns from both of these sources, drawing on the strong long-term track record of Prudential’s experienced fixed income team, managing approximately R70bn in assets. The team takes advantage of any market mispricing they identify in the credit, liquidity and duration of the debt instruments, as well as the market as a whole, to buy and sell securities in the portfolio.  

The fund managers aim to produce a return of at least 3-month JIBAR + 100 basis points, which is 50bps per year above a typical money market fund return. The fund is able to invest in a broad range of non-equity instruments, with no limit on the maturity of any one instrument, which helps it beat money market returns. The portfolio can have a maximum weighted average duration of 24 months, in line with the ASISA SA Interest-Bearing Short-Term unit trust category. This means it has the flexibility to invest not only in traditional short-dated money market instruments like bank negotiable certificates of deposit (NCDs), but also in securitised debt issues and longer-dated bank and corporate floating-rate notes (up to any maturity). This longer maturity gives the fund a higher return potential than money market funds, which are limited to a maximum average portfolio duration of 90 days.

The new fund also earns its returns from the credit risk it assumes from a variety of highly rated South African bank and corporate borrowers. Prudential’s fixed income team carefully analyse the creditworthiness of each borrower, while limiting exposure to any one borrower, to build a very well-diversified portfolio.

So for those with a one-, two-, or even three-year horizon for saving for a special event or significant purchase, income funds can be a valuable part of a portfolio, offering the opportunity to earn more than bank deposits or money market solutions while still at a low risk.  

Does this sound like a unit trust that might suit your investment needs? For more information on the Prudential Income Fund, contact your financial adviser or our Client Services team on 0860 105 775 or at info@prudential.co.za.

 

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