WEBVTT

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You're listening to Strictly Business
Podcast with Lindsay Williams.

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Welcome, and today we are in conversation
with Malcolm Charles, Portfolio Manager

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for the 91 Diversified Income Fund.

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We have to start with performance as we
always do, Malcolm.

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How would you describe the key factors
that have contributed to the fund's

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performance so far this year?

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And indeed, what is the fund's
performance?

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Yeah, to be quite honest, it's been a
tough quarter.

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It's one of those...

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sort of periods where the relationship
sort of broke down.

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So bonds have not had a great time.

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South African listed property hasn't had a
great time.

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It's actually had a terrible quarter.

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And what normally is the saving grace and
the protector of the portfolio is the FX

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portion.

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In other words, the dollars and euros in
your portfolio that sort of counteract the

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South African risk.

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And what's happened...

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For most of the first quarters, the rand
has rallied as well.

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So the big levers in the fund have all
been a little bit on the wrong side of it.

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And the saving grace was the income
portion.

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The reasonably high income has managed to
give a cash-like,

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but uninspiring to what we would have
liked to have done.

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Yeah, so you haven't had quite the...

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perfect storm because of the income
element that you just described.

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But on the other hand, it hasn't been
great.

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Well, let's hope it gets better.

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And do you think it is going to get
better?

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How do you think that the current market
dynamics, and it is pretty dynamic,

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how do you anticipate these dynamics
influencing the fund in the coming months?

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Yeah,

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so it's difficult to say when the mood is
exactly going to

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turn.

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But at least the relationship between the
RAND and the markets have restored

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themselves.

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So in the very last couple of weeks, the
FX portion of the portfolio has done very

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well for the fund.

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It's more than protected.

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It's actually added a little bit of return
to the fund.

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Bonds, obviously, having sold off, are
showing a lot more value at these sort of

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levels.

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And even listed properties seem to have
stabilized a little bit in recent days.

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So I would say a combination of valuations
and better relationships between the asset

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classes

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are bearing a little bit better for the
fund than the first couple of months.

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OK, what about recent developments?

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We have to talk about it.

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And it's a very, very difficult question
indeed, if not an interesting one.

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I mean, the recent changes in U.S.

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trade policy.

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notably tariffs and notably on an almost
daily basis.

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What sort of impact do you think they will
have on global growth, first of all?

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Because some people are talking about a
slowdown.

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Some people, the real doomsters, are
talking about a recession.

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And we may already be in recession in the
United States, for example.

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No, it's been an incredible own goal from
the Trump administration.

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I think that's the consensus either way.

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You have...

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American exceptionalism the whole of last
year, you had a much more robust economy,

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things were going along very well,

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and then this crazy tariff calculation and
the fact that it went

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to every single country in the world, it
just killed confidence.

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So the recession, slowdown, we'll have
that debate,

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and as you said, there are two different
camps.

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both are are and were unnecessary to have
inflicted on the global economy.

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I think the fact that the trade war
continues to escalate between China and

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America,

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so we can look at the tariffs per se
around the world, and that is negative,

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and that is broken trust,

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and that will kill confidence, and all of
that leads to a slowdown and inevitably a

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recession.

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I think what people aren't really talking
about is the trade war between China and

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America, and we're forgetting that those
are the two largest economies.

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So whatever happens there, it's not going
to be pretty.

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So they are number one and number two
trading partners.

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So from a South African perspective, the
second order of things are going to come

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and hurt us.

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But the second order of things are going
to hurt most economies because we all

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trade with those two big economies.

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And it's going to be messy.

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It's going to be painful.

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So volatility is going to be up and these
things don't blow over in a couple of days

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or weeks.

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They normally take a little bit longer.

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Yeah, they do.

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I mean, everyone was jumping up and down
with the glee after the 90 day pause was

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announced by President Trump.

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But I just don't see it being the end of
it.

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You know, you feel something else is going
to happen.

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But anyway, let's hope it doesn't and
people get around the table and sanity

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prevails, even the Chinese.

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Are you tempted to sit on the fence?

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I asked one of your colleagues the same
question in her.

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review of the quarter.

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And she said, no, I'm not a fence-sitter,
but you must be tempted to sit down and

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say, phew, goodness me,

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isn't it best just to let the dust settle
and then navigate the risks that's

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emerged, the risk premiums,

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especially in equities and credit?

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If the first party doesn't, you know,
shoot with 15 barrels on day one,

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I'm not surprised that there have been
some people that have been calmer and some

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other countries that have been less calm.

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I think that, you know, you can argue that
China has seen a vulnerability in

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America's reaction and they've taken
advantage of it.

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And we do know that they play the longer
game in strategy and they've...

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But I would say that they've read that
Trump has slightly overplayed his hand and

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they want to take advantage of it.

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As I mentioned earlier, unfortunately, the
rest of us are caught in the middle of it.

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And there's not much we can do to sway
either of those forces.

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So I think we've got to be nimble.

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I think we've got to recognize that
volatility is the name of the game.

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It's very unpredictable.

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This is not like a normal crisis where you
can sort of analyze the reaction function

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of leaders and central bankers,

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because this is not a macro crisis.

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This is a purely a man-made crisis.

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And as we saw recently, he can change his
mind

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24, 48 hours after he made the original
decision.

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So it's crazy times and portfolios need to
reflect that risk.

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premium in their construction.

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Yeah, when someone says man-made crisis,
you think of man as an entity, as a whole,

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as humankind in general.

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This really is a man-made crisis.

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One man.

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On top of all that, of course, we've got
South Africa.

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And last time we had a chat on a podcast,
Malcolm, we spoke about GNU.

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You were pretty enthusiastic about it, but
cracks have appeared since then, and the

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cracks appear to be widening.

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What is the current political landscape?

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Give us it in a nutshell if you would.

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Yeah, in a small nutshell, unfortunately,
the adults left the room, the side as

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well.

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We were surprised by that.

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We thought common sense.

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We always thought it was a bit of an
uneasy marriage.

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It was a marriage of convenience.

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But they would sort of stick it out.

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There would be noises.

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I personally think there was a little bit
of overplay from both players, very

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similar to what we've seen in the trade
war.

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and personality sort of clashed as opposed
to policy.

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Where we are now is there has been a
recognition of that from both parties,

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and the latest statements have been a lot
calmer, a lot less personal,

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and people are once again looking at the
issues facing the country.

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So I think we went from about a week ago
we were completely on the brink and I

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would

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have given it quite a small chance of
surviving.

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The current negotiations are back on.

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I think there's damage of relationships,
but

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I think it's safe to say that neither
party can afford to be the aggressor.

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The ANC can't really afford.

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I think they'll be punished if they kick
out the DA because a large proportion of

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their voter base

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want the coalition in there.

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And similarly with the DA, if they have a
hissy fit and walk out.

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They become irrelevant for four years.

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Yeah, they've got six ministries in the
news, they can make a difference, they can

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show.

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And politics is all about being in the
news for the right reason.

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So almost by necessity, both parties are
back at the table.

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It's not going to be an easy journey to
walk it back because, to be quite honest,

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I think both parties need to apologize to
each other.

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We know that that is quite difficult for
certain politicians.

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So it'll be closely watched.

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I wouldn't throw it out as it's all over.

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I still think better than even probability
that they managed to rekindle the marriage

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as such.

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Okay.

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I was going to ask you about opportunities
and risks arising from what you've just

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described in

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South Africa, but I think we'll put that
into the main body of the last section of

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this podcast, and that's fun positioning.

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Please tell us how the fund is positioned
and how it's managing current market risks

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and volatility.

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And have you not sat on the fence and have
you already started tweaking here and

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there,

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whether it be with instruments or
duration, for example?

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Yes.

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So we actually acted quite quickly when we
realized that the relationship and the G&U

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were falling apart.

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And we actually cut quite a bit of
duration, South African duration.

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So what we did first off.

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is cut South African duration.

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When the tariff fall hit, we actually
added international duration.

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some US treasuries, some German bunds and
UK gilts.

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Those were behaving because those were
initially priced in, slowed down at

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potential recession.

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So international bonds were rallying while
South Africa was selling off.

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So that sort of saved us a little bit in
the portfolio.

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Subsequent to that, when Trump doubled
down, Obviously,

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we recognize that it's now become a fiscal
issue in the U.S., so we actually got rid

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of U.S. duration.

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So we've been quite active in managing the
different risks as the market is jumping

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around.

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And you need to in these markets because
the market is jumping around day to day

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and week to week.

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So your more tactical nature has become
more important.

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What we've also done is we've added quite
a bit more FX into the portfolio.

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So we've bought some euros.

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We bought a little bit of yen and we
bought some dollars into the portfolio as

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a buffer against South African risk

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and also just some sort of protection for
the portfolio.

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The duration, we remain cautious.

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We've still got some.

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We've got just over a year duration in
South Africa.

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We've trimmed back a little bit of the
listed property.

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That's had a very good bounce to the
reversal of Trump's tariffs.

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So we've used that bounce to reduce.

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reduce that risk.

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We just felt that the volatility of listed
property right now is a little bit higher

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than the bond market.

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So we're trying to reduce the volatility
of the portfolio.

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So still trying to maximize income.

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We have got some irons in the fire, but
it's a little bit more mixed and a little

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bit more conservative right now.

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Is it fair for me to say, or is my
analysis after reading various fact sheets

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on your fund.

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Is it...

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The case that you are sort of leaning
towards shorter dated bonds at the moment.

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Absolutely.

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So that has become, I would say,

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probably our highest conviction position
is that central bankers are getting

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nervous.

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And I think they're more nervous about the
lack of growth and the slowdown.

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And as you mentioned right in the
beginning, the possibility of recession,

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as opposed to the sort of worry about the
inflation effect.

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A month ago, inflation was the core topic
that they spoke about.

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Now it's the slowdown in the economy.

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So it's not inconceivable that the Fed
cuts three to four times this year,

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whereas a month or two months ago, maybe
it was one or two cuts.

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And if they start doing that, ECB starts
cutting a bit more aggressively,

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it definitely opens up the opportunity for
the Saab to cut.

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Maybe even as much as two times this year,
where once again, two months ago,

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there was one rate cut priced at the end
of the year.

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So that's now been brought forward to July
for the first cut,

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and there's another cut priced by the end
of the year.

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So the fact that the central banks are
almost in unison starting to get worried

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about the

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slowdown of the economies around the
world, we think you want to be.

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in bonds that are anchored to the short
end and to monetary policy, as opposed to,

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you know,

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the longer term that is more worried about
the lack of growth and the lack of

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revenues for these countries and these
fiscuses.

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You've made several references to foreign
exchange FX exposure.

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It's obviously terribly, terribly
important, especially when the RAND is

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involved,

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and especially then when you throw in the
Trump factor for the dollar.

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as a whole, as an index, but it's also
influenced you, I think, when reallocating

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from local property stocks,

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which you said hadn't had a good quarter
either, to global REITs.

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Is that something that's going to
continue, do you think?

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And do you think it will be helpful?

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Yes, so we've switched about half of our
exposure into those UK REITs.

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And the thinking behind that is, number
one, they give you a little bit of a round

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edge.

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So...

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So you've got an extra buffer in the
portfolio on the currency side.

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Secondly, those REITs have cleaned up
their balance sheets, they've reduced

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their debt,

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and they had a bit of a Torah time.

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So their valuations are also attractive.

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So we feel on a relative basis they're a
little bit more attractive than some of

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the South African names at the

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moment.

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Okay, the final question.

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as a frustrated currency analyst and
trader, Malcolm, what do you think of the

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RAND?

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And you can choose whichever instrument
against the RAND that you like.

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I know the euro has been incredibly strong
against the RAND, but just give us a

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summary of that RAND potential this year.

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So the RAND, it's a very interesting
currency at the moment.

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Its terms of trade, you can argue,

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are quite attractive because gold has had
a reasonable year and oil

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is at a multi-multi-year low.

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And as you know, oil is our biggest
import.

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So as long as our exports are exceeding
our imports, one would think that the

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Rand...

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should be well supported.

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But if you look at the political risk
currently in South Africa and the global

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world,

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and the fact that we're not the favorite
country of the Americans at the moment,

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that you've got to assume that we will be
one of the last countries to get a deal

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from them.

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You've got to be a little bit cautious.

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I would say in the near term, which is
probably two to three months, you've got

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to be a little bit cautious about the
rent.

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If we can get a house in order.

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on a valuation perspective, the RAND then
starts looking quite attractive.

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So cautious now, you want a couple of
euros and yens and British pounds and even

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some dollars in your portfolio.

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And then, you know, as things calm down,

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happily we'll start shifting those back
into RANDs in a couple of months' time.

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That's an encouraging way to end.

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Thank you very much, Malcolm.

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Malcolm Charles is Portfolio Manager for
the 91 Diversified Income Fund.

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The views and opinions expressed in these
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various contributors and do not reflect
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beings these views are always subject to

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