source: Nedgroup Investments
As you will have seen financial markets are currently very volatile. Please see a note below from Ray Wallace, CIO of Taquanta Asset Managers who manage the Nedgroup Investments Cash Solutions liquidity range. As Ray mentioned in a recent podcast the Nedgroup Investments Cash funds have never been so conservatively positioned. See link below:
The current COVID19 pandemic has highlighted the fragility of financial markets and the importance of trust and blind faith which underpins the global financial system – faith that populations and economies will continue growing, trust that banks will safeguard your cash and that borrowers will repay their debt, amongst other beliefs. Uncertainty and fear of the unknown, are the biggest risks to this traditional belief in the financial system; and the current information vacuum, combined with an already nervous and confused global population, has created the perfect environment for panic. We have not really seen any proper science regarding COVID19 so far, especially comparisons of its transmission, life-cycle and mortality rates compared to previous bouts of severe influenza, or even compared to normal annual flu statistics worldwide. Without a clearer, scientifically reasoned prognosis, people and markets will continue to panic in attempts to protect wealth.
So how does the average investor navigate these turbulent waters and try and minimise the effects of irrational (or even rational) market panic? Presumably existing and prospective investors into the Nedgroup Investments cash fund range have already started investigating prudent investments for keeping their cash safe, in anticipation of some market volatility, albeit initially from a potential ratings downgrade in South Africa.
These are some of the ways that we have positioned the Nedgroup Investments cash fund range for extreme market volatility, whilst still providing consistently competitive yields above the benchmark:
Liquidity Risk :
In our view, liquidity risk is by far the biggest potential risk in times of market turmoil and panic. Investors can, and do, make hasty and irrational decisions when faced with the fear of losing money and it has been our task to ensure that the Nedgroup Investments cash fund range is able to withstand substantial liquidity events, should these occur. Besides holding higher levels of cash or near-cash assets, one of the ways we do this is to ensure that the appropriate types of instruments are held within the portfolio. In this regard we currently hold a very high level of vanilla, bank issued negotiable certificates of deposit and floating rate notes, which in our experience are the most liquid and tradable instruments available in the South African market. Holding these types of assets versus corporate bonds or other debt, gives us the advantage of being able to liquidate large volumes of assets at short notice or under stressed conditions, if necessary.
Credit Risk :
Credit risk can add value to the returns of a portfolio, but in times of stress could result in downgrades of ratings and the subsequent drop in valuation of the issuers’ debt, or potentially even in the eventual default of issuers. Originally in anticipation of a sovereign rating downgrade later this year, Taquanta has already reduced as much unnecessary credit risk as we possibly could without materially reducing the yield on the fund. Currently the Nedgroup Investments cash fund range holds in excess of 95% of the portfolio in local and international bank assets, with the bulk of that (>90%) exposed to the big 5 domestic banks in South Africa. We do not believe the portfolio can be positioned much more conservatively from a credit and liquidity perspective without severely impacting on yields, or as compared to many other funds available in the market, in our view.
Interest Rate Risk :
One of Taquanta’s long-standing investment philosophies when managing money market and income funds, is that we do not expose our investors to interest rate “bets” and therefore it has been our strategy to predominantly hold floating rate assets. The majority of the assets in the Funds re-price every 3 months and therefore largely immunise the portfolio against changes in interest rates (or interest rate risk). Rather than taking interest rate bets, by focussing on sourcing quality floating rate assets at spreads better than those available in the general market, we have managed to provide consistent returns above the STeFI benchmarks, over all investment periods since inception. The Nedgroup Investments cash fund range is effectively 100% invested in floating rate assets at the moment.
In summary, we believe that the Nedgroup Investments cash fund range is as well-positioned as it could possibly be in order to provide a competitive yield, yet still be able to deal with any unusual market stress or volatility, in the hopefully unlikely event this should occur.
Chief Investment Officer – Taquanta Asset Managers