The Marriott Income Fund has as its primary objective to maximise income yield as well as achieve capital stability. To achieve this objective, the securities normally to be included in the portfolio will consist of fixed income securities, high yielding securities, non-equity securities and liquid assets. Nothing precludes the Manager from retaining cash in the portfolio or placing cash on deposits. Call rates provide the fund with a benchmark. Although the mandate does not prescribe it, the portfolio is managed in conformity with prudential investment guidelines.

2019 was a good year for fixed income investor globally. According to data from CBRates (a central-bank tracking service), 56 central banks cut rates 129 times in 2019. Monetary policy was loosened in major economies such as the U.S. and the Eurozone, as well as the biggest emerging markets, such as China, India, Russia and Brazil.

This monetary easing, which was the opposite to what economists anticipated at the start of 2019, pushed interest rate expectations significantly lower — a shift that prompted a positive re-pricing of the global bond market. Twenty years ago, well over half of the global bond market boasted yields in excess of 5%. Today, that proportion has reduced to 3% - the lowest share on record (according to ICE Data Indices). The current yield of the SA government 10 year bond is 9%.

The Income Fund has an approximate 19% exposure to fixed rate debt instruments yielding approximately 9.0% which served investors well in 2019. The average term to maturity of these instruments is approximately 3.3 years .. deliberately on the shorter side to keep the modi..ed duration (interest rate price sensitivity) of the fund relatively low as we believe a Moody..s downgrade is highly likely to occur later this year. The credit rating downgrade will see SA bonds expelled from major investment grade bond indices which will precipitate significant forced selling in the bond market .. a great opportunity at which to extend the duration of the fund by securing attractive interest rates for longer.

With regards to the interest rate outlook, our view is that the Reserve Bank will probably keep interest rates unchanged in 2020 despite inflation currently running below 4%. Should a credit rating downgrade materialise, as we expect, the risk of meaningful currency depreciation would be negative for the inflation outlook – a risk that the Monetary Policy Committee is very mindful of. The fund has an approximate 50% exposure to instruments where the level of income produced (yield) is impacted by changes to the repo rate. Currently the weighted average yield of these instruments is 8.4%.

In summary, the Income Fund is well positioned for a potential Moody..s downgrade given its low modi..ed duration of 0.6% and reasonably high short dated cash balance to take advantage of higher yields that may present themselves. Given the portfolio..s weighted gross yield above 8.3%, we expect the fund to deliver returns between 7 - 8% p.a. over the next 24 months.