Prescient Income Provider Fund Update

Global markets are experiencing unchartered turmoil with virtually all asset classes selling down aggressively.  The extent of the carnage can be seen in the table below. It shows the returns for some of the major global assets, for the period 1 January 2020 to 23 March 2020:

Global Equities -32.8%
Global Bonds -0.7%
SA Equities -33.2%
SA Bonds -17.1%
Rand Dollar Exchange Rate -27.4%
Gold (USD) 2.4%
Oil (USD) -58.2%

 

Prescient Income Provider Performance Update:

 

Fund Return from 1 January to 23 March 2020 -3.0%
Fund Yield 23 March 2020 8.04% (gross)

 

Capital losses year-to-date have been contained as result of the Fund’s rigorous risk management process.  It is important to recognise that the bulk of the negative return can be attributed to the indiscriminate sell-off of risk assets such as property (-55% YTD) and preference shares (-26% YTD).  Fortunately, exposure to these two asset classes were below 6% at the beginning of the year, limiting the drawdown.   Although the capital value of the Fund is somewhat marked down, we do not foresee any credit defaults resulting in permanent losses, in fact predict a strong recovery once markets normalise.  It is reassuring that the income yield remained relatively stable.  We expect monthly income distributions, at 31 March 2020, to be in line with the recent past.

Some More Detail:

The Fund has active asset allocation across different sources of income, with exposure to all asset classes remaining strictly controlled:

  • The Prescient Income Provider is not a money market fund. The portfolio holds a combination of both local and offshore money market, bonds, preference shares, property and other income yielding assets.
  • Through the deployment of strict credit controls, we do not foresee any permanent losses arising in the Fund.  We believe the losses are short-term and that it will recover once sanity returns to investment markets.
  • In times of market turmoil, asset prices get marked down and this affects the Fund’s valuation.  Levels of income in the Fund remain adequate to meet the CPI +3% target return for the year.
  • Turmoil presents opportunities to acquire new assets at even higher yields and to enhance overall returns through time. We have been actively taking advantage of the market sell-off to do just this.  We have achieved this by buying the R186 government bond up to a 6.7% holding at Fund level. However, post the 1% interest rate cut, the R186 yield has moved higher by more than 3% (roughly 25% down in price) than where we started buying. The Fund is earning 11.50% on these 5-year government bonds versus cash of 5%, we are therefore comfortable with the position.  The overall fund duration is 0.7 years – conservatively positioned.
  • We are retaining our property exposure. We confident in the property specific shares we hold, along with the yields the Fund earns from these and therefore will not sell down exposure.  The prices have been marked down to unprecedented levels due to illiquidity. The market is searching for liquidity at all costs and this has had an unusual impact on all property counters.
  • We have increased our offshore holding marginal in favour of liquidity for now. All our offshore exposure is hedged, and we will look to add to this once we are more comfortable with the liquidity in global markets.

We urge clients to remain calm during these challenging times.  We are confident that the markets will recover and wish to stress that investment decisions should never be influenced by emotions.