You're listening to Strictly Business Podcast with Lindsay Williams.
Welcome, and today we are in conversation with Malcolm Charles, Portfolio Manager
for the 91 Diversified Income Fund.
We have to start with performance as we always do, Malcolm.
How would you describe the key factors that have contributed to the fund's
performance so far this year?
And indeed, what is the fund's performance?
Yeah, to be quite honest, it's been a tough quarter.
It's one of those...
sort of periods where the relationship sort of broke down.
So bonds have not had a great time.
South African listed property hasn't had a great time.
It's actually had a terrible quarter.
And what normally is the saving grace and the protector of the portfolio is the FX
portion.
In other words, the dollars and euros in your portfolio that sort of counteract the
South African risk.
And what's happened...
For most of the first quarters, the rand has rallied as well.
So the big levers in the fund have all been a little bit on the wrong side of it.
And the saving grace was the income portion.
The reasonably high income has managed to give a cash-like,
but uninspiring to what we would have liked to have done.
Yeah, so you haven't had quite the...
perfect storm because of the income element that you just described.
But on the other hand, it hasn't been great.
Well, let's hope it gets better.
And do you think it is going to get better?
How do you think that the current market dynamics, and it is pretty dynamic,
how do you anticipate these dynamics influencing the fund in the coming months?
Yeah,
so it's difficult to say when the mood is exactly going to
turn.
But at least the relationship between the RAND and the markets have restored
themselves.
So in the very last couple of weeks, the FX portion of the portfolio has done very
well for the fund.
It's more than protected.
It's actually added a little bit of return to the fund.
Bonds, obviously, having sold off, are showing a lot more value at these sort of
levels.
And even listed properties seem to have stabilized a little bit in recent days.
So I would say a combination of valuations and better relationships between the asset
classes
are bearing a little bit better for the fund than the first couple of months.
OK, what about recent developments?
We have to talk about it.
And it's a very, very difficult question indeed, if not an interesting one.
I mean, the recent changes in U.S.
trade policy.
notably tariffs and notably on an almost daily basis.
What sort of impact do you think they will have on global growth, first of all?
Because some people are talking about a slowdown.
Some people, the real doomsters, are talking about a recession.
And we may already be in recession in the United States, for example.
No, it's been an incredible own goal from the Trump administration.
I think that's the consensus either way.
You have...
American exceptionalism the whole of last year, you had a much more robust economy,
things were going along very well,
and then this crazy tariff calculation and the fact that it went
to every single country in the world, it just killed confidence.
So the recession, slowdown, we'll have that debate,
and as you said, there are two different camps.
both are are and were unnecessary to have inflicted on the global economy.
I think the fact that the trade war continues to escalate between China and
America,
so we can look at the tariffs per se around the world, and that is negative,
and that is broken trust,
and that will kill confidence, and all of that leads to a slowdown and inevitably a
recession.
I think what people aren't really talking about is the trade war between China and
America, and we're forgetting that those are the two largest economies.
So whatever happens there, it's not going to be pretty.
So they are number one and number two trading partners.
So from a South African perspective, the second order of things are going to come
and hurt us.
But the second order of things are going to hurt most economies because we all
trade with those two big economies.
And it's going to be messy.
It's going to be painful.
So volatility is going to be up and these things don't blow over in a couple of days
or weeks.
They normally take a little bit longer.
Yeah, they do.
I mean, everyone was jumping up and down with the glee after the 90 day pause was
announced by President Trump.
But I just don't see it being the end of it.
You know, you feel something else is going to happen.
But anyway, let's hope it doesn't and people get around the table and sanity
prevails, even the Chinese.
Are you tempted to sit on the fence?
I asked one of your colleagues the same question in her.
review of the quarter.
And she said, no, I'm not a fence-sitter, but you must be tempted to sit down and
say, phew, goodness me,
isn't it best just to let the dust settle and then navigate the risks that's
emerged, the risk premiums,
especially in equities and credit?
If the first party doesn't, you know, shoot with 15 barrels on day one,
I'm not surprised that there have been some people that have been calmer and some
other countries that have been less calm.
I think that, you know, you can argue that China has seen a vulnerability in
America's reaction and they've taken advantage of it.
And we do know that they play the longer game in strategy and they've...
But I would say that they've read that Trump has slightly overplayed his hand and
they want to take advantage of it.
As I mentioned earlier, unfortunately, the rest of us are caught in the middle of it.
And there's not much we can do to sway either of those forces.
So I think we've got to be nimble.
I think we've got to recognize that volatility is the name of the game.
It's very unpredictable.
This is not like a normal crisis where you can sort of analyze the reaction function
of leaders and central bankers,
because this is not a macro crisis.
This is a purely a man-made crisis.
And as we saw recently, he can change his mind
24, 48 hours after he made the original decision.
So it's crazy times and portfolios need to reflect that risk.
premium in their construction.
Yeah, when someone says man-made crisis, you think of man as an entity, as a whole,
as humankind in general.
This really is a man-made crisis.
One man.
On top of all that, of course, we've got South Africa.
And last time we had a chat on a podcast, Malcolm, we spoke about GNU.
You were pretty enthusiastic about it, but cracks have appeared since then, and the
cracks appear to be widening.
What is the current political landscape?
Give us it in a nutshell if you would.
Yeah, in a small nutshell, unfortunately, the adults left the room, the side as
well.
We were surprised by that.
We thought common sense.
We always thought it was a bit of an uneasy marriage.
It was a marriage of convenience.
But they would sort of stick it out.
There would be noises.
I personally think there was a little bit of overplay from both players, very
similar to what we've seen in the trade war.
and personality sort of clashed as opposed to policy.
Where we are now is there has been a recognition of that from both parties,
and the latest statements have been a lot calmer, a lot less personal,
and people are once again looking at the issues facing the country.
So I think we went from about a week ago we were completely on the brink and I
would
have given it quite a small chance of surviving.
The current negotiations are back on.
I think there's damage of relationships, but
I think it's safe to say that neither party can afford to be the aggressor.
The ANC can't really afford.
I think they'll be punished if they kick out the DA because a large proportion of
their voter base
want the coalition in there.
And similarly with the DA, if they have a hissy fit and walk out.
They become irrelevant for four years.
Yeah, they've got six ministries in the news, they can make a difference, they can
show.
And politics is all about being in the news for the right reason.
So almost by necessity, both parties are back at the table.
It's not going to be an easy journey to walk it back because, to be quite honest,
I think both parties need to apologize to each other.
We know that that is quite difficult for certain politicians.
So it'll be closely watched.
I wouldn't throw it out as it's all over.
I still think better than even probability that they managed to rekindle the marriage
as such.
Okay.
I was going to ask you about opportunities and risks arising from what you've just
described in
South Africa, but I think we'll put that into the main body of the last section of
this podcast, and that's fun positioning.
Please tell us how the fund is positioned and how it's managing current market risks
and volatility.
And have you not sat on the fence and have you already started tweaking here and
there,
whether it be with instruments or duration, for example?
Yes.
So we actually acted quite quickly when we realized that the relationship and the G&U
were falling apart.
And we actually cut quite a bit of duration, South African duration.
So what we did first off.
is cut South African duration.
When the tariff fall hit, we actually added international duration.
some US treasuries, some German bunds and UK gilts.
Those were behaving because those were initially priced in, slowed down at
potential recession.
So international bonds were rallying while South Africa was selling off.
So that sort of saved us a little bit in the portfolio.
Subsequent to that, when Trump doubled down, Obviously,
we recognize that it's now become a fiscal issue in the U.S., so we actually got rid
of U.S. duration.
So we've been quite active in managing the different risks as the market is jumping
around.
And you need to in these markets because the market is jumping around day to day
and week to week.
So your more tactical nature has become more important.
What we've also done is we've added quite a bit more FX into the portfolio.
So we've bought some euros.
We bought a little bit of yen and we bought some dollars into the portfolio as
a buffer against South African risk
and also just some sort of protection for the portfolio.
The duration, we remain cautious.
We've still got some.
We've got just over a year duration in South Africa.
We've trimmed back a little bit of the listed property.
That's had a very good bounce to the reversal of Trump's tariffs.
So we've used that bounce to reduce.
reduce that risk.
We just felt that the volatility of listed property right now is a little bit higher
than the bond market.
So we're trying to reduce the volatility of the portfolio.
So still trying to maximize income.
We have got some irons in the fire, but it's a little bit more mixed and a little
bit more conservative right now.
Is it fair for me to say, or is my analysis after reading various fact sheets
on your fund.
Is it...
The case that you are sort of leaning towards shorter dated bonds at the moment.
Absolutely.
So that has become, I would say,
probably our highest conviction position is that central bankers are getting
nervous.
And I think they're more nervous about the lack of growth and the slowdown.
And as you mentioned right in the beginning, the possibility of recession,
as opposed to the sort of worry about the inflation effect.
A month ago, inflation was the core topic that they spoke about.
Now it's the slowdown in the economy.
So it's not inconceivable that the Fed cuts three to four times this year,
whereas a month or two months ago, maybe it was one or two cuts.
And if they start doing that, ECB starts cutting a bit more aggressively,
it definitely opens up the opportunity for the Saab to cut.
Maybe even as much as two times this year, where once again, two months ago,
there was one rate cut priced at the end of the year.
So that's now been brought forward to July for the first cut,
and there's another cut priced by the end of the year.
So the fact that the central banks are almost in unison starting to get worried
about the
slowdown of the economies around the world, we think you want to be.
in bonds that are anchored to the short end and to monetary policy, as opposed to,
you know,
the longer term that is more worried about the lack of growth and the lack of
revenues for these countries and these fiscuses.
You've made several references to foreign exchange FX exposure.
It's obviously terribly, terribly important, especially when the RAND is
involved,
and especially then when you throw in the Trump factor for the dollar.
as a whole, as an index, but it's also influenced you, I think, when reallocating
from local property stocks,
which you said hadn't had a good quarter either, to global REITs.
Is that something that's going to continue, do you think?
And do you think it will be helpful?
Yes, so we've switched about half of our exposure into those UK REITs.
And the thinking behind that is, number one, they give you a little bit of a round
edge.
So...
So you've got an extra buffer in the portfolio on the currency side.
Secondly, those REITs have cleaned up their balance sheets, they've reduced
their debt,
and they had a bit of a Torah time.
So their valuations are also attractive.
So we feel on a relative basis they're a little bit more attractive than some of
the South African names at the
moment.
Okay, the final question.
as a frustrated currency analyst and trader, Malcolm, what do you think of the
RAND?
And you can choose whichever instrument against the RAND that you like.
I know the euro has been incredibly strong against the RAND, but just give us a
summary of that RAND potential this year.
So the RAND, it's a very interesting currency at the moment.
Its terms of trade, you can argue,
are quite attractive because gold has had a reasonable year and oil
is at a multi-multi-year low.
And as you know, oil is our biggest import.
So as long as our exports are exceeding our imports, one would think that the
Rand...
should be well supported.
But if you look at the political risk currently in South Africa and the global
world,
and the fact that we're not the favorite country of the Americans at the moment,
that you've got to assume that we will be one of the last countries to get a deal
from them.
You've got to be a little bit cautious.
I would say in the near term, which is probably two to three months, you've got
to be a little bit cautious about the rent.
If we can get a house in order.
on a valuation perspective, the RAND then starts looking quite attractive.
So cautious now, you want a couple of euros and yens and British pounds and even
some dollars in your portfolio.
And then, you know, as things calm down,
happily we'll start shifting those back into RANDs in a couple of months' time.
That's an encouraging way to end.
Thank you very much, Malcolm.
Malcolm Charles is Portfolio Manager for the 91 Diversified Income Fund.
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