M&G Namibian Enhanced Income Fund outperforms with less volatility

The M&G Namibian Enhanced Income Fund continued outperforming its benchmark in 2023, building its attractive track record over the past three years as it ended with a strong performance in Q4. The fund’s broad diversification across lower-risk fixed income instruments like bonds and floating-rate notes during most of the year proved to be beneficial positioning: the fund delivered 3.0% in Q4 of 2023 versus the 2.9% from its cash benchmark (Namibia’s IJG Money Market Index), and for the 12 months produced 8.5%, outperforming its benchmark’s 8.1% return. For the three years to 31 December 2023 it has posted a 6.2% return versus 6.0% from the benchmark (all returns after fees). 

The fund can invest in a wide range of assets, including listed property, equity and offshore assets, but has been positioned more cautiously in the past year due partly to the relatively expensive valuations of global credit, and the higher risks and lower liquidity that have characterised SA and Namibian listed property.  As such the fund has modest exposure to SA listed property companies. M&G’s fund managers have also focused on protecting capital by avoiding drawdowns and reducing volatility through active asset management.

For Q4 and 2023 as a whole, Namibian bonds and South African bonds have produced attractive absolute returns for Namibian investors seeking higher income returns. Namibian bonds (IJG Bond Index) delivered a 6.7% return and SA bonds returned 8.1% over the quarter. Other fund holdings also boosted the quarter’s performance such as Namibian inflation-linked bonds, floating-rate notes from a selection of listed banks, and a variety of cash-type instruments.

In 2023 as a whole, Namibian bonds produced an extraordinary 18.7% return, which stemmed from a confluence of several factors, including improving government deficit projections and lower bond issuance, as well as higher demand due to the government’s localisation regulations. SA bonds, meanwhile, suffered from investors’ higher risk perceptions but still returned 9.7% for the year, well ahead of global bonds’ 5.7% return. As a consequence, Namibian yield spreads versus SA bonds narrowed to the extent that they were broadly offering lower yields than their SA counterparts, a very unusual development. This led us to favour higher-yielding and more liquid SA bonds in the portfolio. 

In addition, the fund has had a preference for Namibian inflation-linked bonds due to the high level of real yields on offer and the fact that they provide a form of insurance to the portfolio were the inflation outlook to deteriorate. Our preference has been in the short end of the Namibian yield curve as fund managers want to manage their interest rate risk.  In Q4 our preference was to maintain a decent amount of risk by holding some short-dated SA government bonds, which was beneficial considering the bond rally that ensued.

Looking ahead, the good news is that inflation is expected to continue to fall in both Namibia and South Africa, and both markets are forecasting that local interest rates will start to decline from mid-2024 (approximately), following the expected trend in the US and other global markets. This should be positive for the performance of SA bonds, equity and listed property, which could experience a re-rating in 2024 from their currently cheap levels. However, lower interest rates are less beneficial for cash-related instruments and hence in the current cycle, clients should consider an income fund solution like the M&G Namibian Enhanced Income fund. Given our active management approach, we will be continually monitoring conditions to determine at what point it may become more attractive to switch between different assets and asset classes. But no matter what the prevailing conditions, the fund managers of the M&G Namibian Enhanced Income Fund have the tools and flexibility to benefit from all types of investments, aiming to keep outperforming the benchmark and preserving capital for clients over time.