Commentary for the quarter ended 31 December 2024
Performance Review
Quarterly Performance: In the fourth quarter of 2024, the Northstar Income Fund achieved a 3-month return of 1.57%, surpassing its peer group’s average return of 1.53%.
The primary drivers of this performance were:
Inflation-Linked Bonds: A 54% allocation to inflation-linked bonds contributed 54 basis points (bps), with significant returns from I2025, FRBI25, and R210 bonds.
Global Assets: Through a 5% holding in the Northstar Global Income Fund, which has a 71% exposure to US Treasuries (2-year average maturity) and 25% to high dividend stocks yielding 4.0%, added 38 bps.
Floating Rate Notes, fixed bonds and Gold: Floating rate notes with a 16% weighting, fixed bonds with a 25% weighting, and the Newgold ETF with a 3% weighting, contributed 35bps, 24 bps and 20 bps, respectively, rounding out the quarter’s gains.
Annual Performance: Over the full year, the fund’s return was 10.16%, in line with peers but notably outperforming inflation by 7.1% and the Cash plus benchmark (SteFI Callx110%) by 1.2%. This performance underscores the fund’s ability to deliver real returns and exceed cash-like investments.
Market Outlook and Portfolio Positioning
Economic Backdrop 2024: The year saw a gradual decline in inflation rates, stabilisation in growth, and a cautious monetary policy from the South African Reserve Bank (SARB). Despite global economic uncertainties, South Africa’s economy showed resilience, particularly in managing inflation expectations.
Economic Expectations for 2025:
Inflation: Expected to remain moderate with potential for slight increases due to global influences but still within the SARB’s target range.
Interest Rates: A shallower interest rate cutting cycle is anticipated, which supports our strategy of holding floating rate notes as they offer better returns in a stable interest rate environment.
Growth: Growth forecasts are cautiously optimistic, supported by policy reforms and infrastructure spending, which could benefit the bond markets, which is trading on attractive yields.
Inflation-Linked Bonds: With the maturity of I2025 on 31 January 2025, funds will be redeployed towards new issues at the front of the inflation-linked curve to continue providing unit holders inflation protection.
Floating Rate Notes: Enhanced focus here given the interest rate outlook, offering a buffer against rate volatility.
Fixed Bonds: With yields trading at attractive levels, a portion of the maturing I2025s will be considered for purchases of bonds in mid to long dated maturities, enhancing the yield and return expectations for the portfolio.
Global fixed income: Increase duration through the Northstar Global Income Fund with longer dated maturities offering above average real returns.
Gold and Commodities: Maintain a modest holding to hedge against currency and economic shocks.
Fund strategy and future outlook
The Northstar Income Fund has demonstrated its capability to deliver consistent returns while managing risk, with a focus on high-quality assets including government bonds and senior bank paper. The fund’s yield stands at 9.5% with an average maturity of 3.3 years and a modified duration of 2.3, providing a balance between yield and interest rate sensitivity.
As we approach 2025, our strategy remains centred on capital preservation and income generation in a potentially volatile but growth-oriented economic environment. With a gross expected return of 9.6% and an average standard deviation of 2.9%, the fund is positioned to continue offering low-risk, inflation-beating returns.