Investment Focus: Unpacking the M&G Namibian Enhanced Income Fund’s strong performance

Looking at M&G’s Namibian multi-asset funds’ performance over the past year, the lower-risk Enhanced Income Fund outperformed its higher-risk counterparts on an absolute basis. This is partly due to the increase in interest rates over the period, as well as M&G’s active management approach and focus on limiting losses. As shown in the table, the Fund has delivered 8.5% over the 12 months to end October 2023, versus 7.4% for the M&G Namibian Inflation Plus Fund and 6.9% for the M&G Namibian Balanced Fund. However, over the longer three-year period, the higher-risk funds, holding more growth assets, have outperformed: the Balanced Fund has delivered 10.9% p.a. compared to 9.5% p.a. for the Inflation Plus Fund and 6.1% p.a. for the Enhanced Income Fund. The three funds have also outperformed or been in line with their respective benchmarks over the past three years.

Focusing on limiting losses

How did the Namibian Enhanced Income Fund achieve its strong performance amid rising interest rates? Several tactics have been at play. Over the past year to 31 October 2023, Portfolio Managers Roshen Harry and David Knee have been focusing on limiting the Fund’s losses by keeping its risk at low levels, while also achieving returns above Namibia’s IJG Money Market Index. As such, they have avoided offshore assets due to their more expensive valuations, lower yields and exchange rate risk. They have also been holding no equity and an insignificant amount of listed property exposure (at around 1%) given that the sector faces a relatively high risk of poor earnings int the current challenging macroeconomic environment.

When it comes to bonds, diversification across issuers is always an important principle M&G Investments adheres to in order to reduce credit risk. Added to this, the managers have avoided longer-dated maturities, preferring to focus on 3- to 7-year South African bonds because of their lower vulnerability to growing fiscal risks than 12+-year bonds, while still offering better yields than maturities shorter than three years. They have also preferred 3-7 year maturities in Namibian inflation-linked bonds. The latter have made up just over 25% of the Fund’s holdings over the period, as they feature coupons that automatically rise in line with inflation and therefore serve as protection against inflation surprises. This strategy has certainly paid off – both the SA bond and Namibian ILB positions have contributed meaningfully to the Fund’s 8.5% return.

Additionally, the managers have opted for larger exposure to shorter-term “cash-type” debt, largely in the form of money market instruments and floating rate notes (FRNs) issued by banks. In a rising interest rate environment, floating-rate debt offers more safety than fixed-rate (or nominal) debt because interest rates paid to FRN investors rise as their base reference rate (JIBAR) is automatically adjusted upward when the SARB hikes its repo rate. Cash-type holdings in the Fund, across both Namibian and South African markets, have comprised some 50% of the fund, and this has contributed the most to the Fund’s outperformance during the last 12 months across asset classes. In short, the managers’ strategy of protecting the fund from losses in the rising interest rate environment, while simultaneously taking advantage of the attractive valuations of medium-term bonds, have been successful in producing strong performance in both absolute and relative terms.