Investec Specialist Investments (“ISI”) Search for yield in unprecedented times. July 2020
Search for yield in low interest rate environment The conservative portion of the efficient frontier is becoming a crowded space with 40% of total CIS assets (cR800bn) currently invested in interest bearing instruments – but it remains a compelling investment allocation as a component of an investors’ portfolio Optimal portfolios ASISA CIS Industry allocation should lie on this A portfolio above this curve (knows as the curve is impossible Efficient Frontier) High Risk / 15% High Return Medium Risk / Medium Return 34% Return % Low Risk / Low Return Portfolio’s below the curve are 2% not efficient, because for the 49% same risk one could achieve a greater return Risk Free Return Equity Multi Asset Real Estate Interest Bearing Risk % (Standard Deviation) 2 Source: ASISA, Investec
Sources of income and yield – multiple applications 3 Source: ASISA, Investec
Lifecycle accumulation and income needs of an individual Income needs become critical in the last few years as we approach retirement and in the years post-retirement Regulation 28 Capital preservation and predictable income are critical Contribution Phase Withdrawal Phase Company Pension Funds Guaranteed Retirement Annuity Living Annuity Annuity Secures a pre-determined income Flexibility to choose the desired income and 4 investment strategy (subject to regulatory limits)
Sources of income and yield for individuals and corporates “When people talk about cash being king, it's not king if it just sits there and never does anything” Warren Buffett But we need to ensure its appropriate and can enhance your return Money Fixed Income Dividend Retail Bonds Cash Market Deposit Funds Income Bonds 5
Income producing assets continue to outperform With many investment strategies utilising an inflation linked benchmark, investors are able to earn excess returns from their fixed income allocations with significant less volatility than the inclusion of equities. Income assets have recently been more volatile than historically but provide a substantial real return and on risk adjusted relative basis, continue to offer a compelling proposition despite the unprecedented fall in interest rates. 6
But in a discretionary world income decisions are impacted by the net income after tax is considered Money market investments have been able to produce a real return over time (approx. 1%-2%) but this is often eroded when tax is taken into consideration, specifically for investors at the top marginal income tax brackets Cumulative returns – effect of tax Historic real return 8.00% 170 160 7.00% 150 6.00% 140 5.00% 130 4.00% 120 3.00% 110 100 2.00% Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 01-01-15 01-04-15 01-07-15 01-10-15 01-01-16 01-04-16 01-07-16 01-10-16 01-01-17 01-04-17 01-07-17 01-10-17 01-01-18 01-04-18 01-07-18 01-10-18 01-01-19 01-04-19 01-07-19 01-10-19 01-01-20 01-04-20 3m Jibar MM net return 63% of Prime Net return post DWT CPI STeFI MM net (individual) MM net (Corporate) ALBI CPI 7 Source: Iress, Investec
What is the attractiveness of income Cash is the starting point for all portfolio construction. The relative riskiness for all investment decisions starts with the decision relative to risk free assets but all follow similar characteristics Capital Conservative Regular Low Liquidity Consistency Predictability Preservation Risk Profile Income Volatility 8
What about dividends as a source of income? Dividend income is an important component of the portfolio return but exposure to equities comes with volatility. Investors want the ability to earn a consistent and steady income return so you need to protect the capital and limit the volatility to isolate the dividend income. ALSI vs ALSI Total Return 215 195 175 155 135 115 95 01-Jan-12 01-Apr-12 01-Jul-12 01-Oct-12 01-Jan-13 01-Apr-13 01-Jul-13 01-Oct-13 01-Jan-14 01-Apr-14 01-Jul-14 01-Oct-14 01-Jan-15 01-Apr-15 01-Jul-15 01-Oct-15 01-Jan-16 01-Apr-16 01-Jul-16 01-Oct-16 01-Jan-17 01-Apr-17 01-Jul-17 01-Oct-17 01-Jan-18 01-Apr-18 01-Jul-18 01-Oct-18 01-Jan-19 01-Apr-19 01-Jul-19 01-Oct-19 01-Jan-20 01-Apr-20 01-Jul-20 ALSI ALSI TR 9 Source: Iress, Investec
Dividend income funds fit the profile for investors Excess Regular Capital Low Conservative Consistency Liquidity Predictability Return Income Preservation Volatility Risk Profile What are the primary income needs of a Corporate? What are the primary income needs of an Individual? - Protect the balance sheet - Access to liquidity for transactional requirements - Remain conservative - Preserve capital - Ensure access to liquidity - Opportunity cost for other investments Corporates therefore favour conservative investment offerings The conservative approach is not always appropriate for individuals depending on with most of the allocation to money market funds their lifecycle stage with cash balances specifically high in volatile environments 10
Preference shares provide an alternative source of dividend income Senior secured (covered bonds) Paid first DEBT Senior secured (asset backed) EQUITY • • Reflects obligation Reflects ownership • • Set repayment dates Undated term PREFERENCE Senior unsecured Depositors • • Debt provider is entitled SHARES Dividends are to interest at a discretionary Subordinated (lower Tier II) predetermined dates throughout the term Subordinated (upper Tier II) Subordinated (Tier I) HYBRID INSTRUMENT Preference shares Equity Paid last 11
ISI BCI Enhanced Income Fund (EIF)
ISI BCI Enhanced Income Fund (EIF) Investment philosophy “There is no single overriding investment philosophy that works under all market conditions at all times. Stock selection and asset allocation decisions are difficult to consistently predict.” We believe in utilising a systematic approach to focus on our core investment capabilities to provide clients with access to the full universe of instruments available in order to deliver on the desired client outcomes with the highest level of probability. 13
ISI BCI Enhanced Income Fund (EIF) Investment process Investment Strategy Regular Review Asset Allocation Investment Process Risk Profile Client Goals 14
ISI BCI Enhanced Income Fund (EIF) Investment objective Objective: ‒ To produce regular income largely in the form of dividends Aims to provide: ‒ Outperformance of money-market portfolios after fees and tax ‒ Diversified exposure to high quality assets issued by major banking groups, financial institutions and select large corporates ‒ A liquid investment ‒ Consistent and predictable income ‒ Low capital volatility Investment philosophy of providing a portfolio of dividend yielding assets that is diversified: ‒ Instrument type: instruments that are subject to different aspects of taxation ‒ Issuer type: spread across a variety of banks, financial institutions and corporates ‒ Flexible approach to take advantage of changing market dynamic and maintain consistent income with minimal capital variability Competitive advantage: ‒ Investec preference share team to issue or source competitively priced local redeemable preference shares ‒ Investec equity derivative and structuring capabilities to provide equity hedging capabilities ‒ Investec offshore balance sheets, Credit Investment teams enabling inward listed preference shares 15
ISI BCI Enhanced Income Fund (EIF) Sources of income - focus on what you can control and be flexible to adapt to changing market dynamics CLIENT OUTCOME AND INVESTMENT OBJECTIVE Define the target return, investment objective and investable universe Yield Investment Universe Risk Management Alternative Dividend Credit Duration Yield Curve Structuring Asset Allocation Strategies Liquidity Regulatory - Predictability - Predictability - Conservative - Low volatility - Liquidity - Liquidity - Consistency - Flexibility - Flexibility - Regular income - Excess return - Excess return Interest rates determine the Utilise the full investment universe to achieve the desired Evaluate assets that efficiently and sustainably absolute target level of returns. client outcome with the highest level of probability. meet our criteria for liquidity, risk, return, diversification and Investability. Does not take any interest rate Access to scarce and specialist investment opportunities. views and hedge duration (assets Credit worthiness of an asset provides the ability are variable). Leverage the collective expertise to leverage trading, earn risk adjusted returns. structuring and origination of assets with specialist support Utilise the term structure to expertise in tax and legal. provide yield enhancement. 16
ISI BCI Enhanced Income Fund (EIF) Risk mitigation in current environment Regulatory Diversification v Credit Dividend risk risk Liquidity Interest risk rate risk Accessibility Portfolio construction 17
Recommend
More recommend
