Commentary for the quarter ended 30 June 2024
Q2 2024 Performance review
The Northstar Income fund showed strong outperformance versus the STeFI x110% benchmark with a 3-month return of 3.4% versus 2.1% and a 12-month return of 10.8% versus 9.0%.
The 38% weighting to fixed bonds was the most significant contributor of 2.0%, with strong gains from the R2037, R2035, R2032, R2030, and R213. The 31% average weighting to inflation-linked bonds was the next best contributor of 0.7%, with the most substantial gains from the I2025, FRBI25, SBSI14, NI29, and I2029. In addition, floating rate notes and Gold made meaningful contributions of 0.4% and 0.25%. Conversely, the 5.5% holding in the Northstar Global Income fund and recent 1.9% exposure to the global bond aggregate detracted 20bps due to a strong recovery in the Rand and rising developed market sovereign yields. Listed property also made a small contribution to returns.
Market outlook and portfolio positioning
The recent 2024 South African elections resulted in the formation of a new government, with the ruling party retaining a majority, albeit with a reduced margin. This outcome indicates a shift in voter sentiment and a more competitive political environment. While the results provide a degree of political stability, which is positive for investor confidence, the need for the ruling party to build consensus may introduce some political uncertainty.
The new government is committed to economic reforms to boost growth, improve infrastructure, and reduce unemployment, presenting opportunities for investors, particularly in sectors like infrastructure, energy, and technology. A focus on fiscal discipline and reducing the budget deficit is expected to improve the fiscal outlook, potentially lowering borrowing costs and benefiting investments in government bonds.
With greater political certainty and positive reform signals, the Rand’s performance has improved, supported by potential rate cuts from the South African Reserve Bank (SARB) and effective inflation control measures.
However, risks such as political infighting, challenges in implementing reforms, and external factors like global economic conditions and geopolitical tensions could result in heightened volatility in the coming months.
Against this backdrop, the Northstar Income Fund has benefited dramatically from lower bond yields as pricing moved from our bear case outlook to current levels that align with fair value. The SA10y, at just above 11%, is close to our fair value target of 10.8%, however expected returns from fixed bonds in the low double digits remain attractive.
After the recent bond rally, short-dated inflation-linked bonds are pricing more attractively versus fixed bonds on a risk-adjusted basis. For this reason, we are looking to increase exposure to the front of the inflation-linked curve. Local property has also performed very well, and as a result, valuations have diminished despite the improved growth outlook. Other portfolio actions and considerations include a slight Gold reduction and tactical tilts to our global exposure.
The Northstar Income Fund remains well positioned to benefit from lower interest rates with exposure to the highest quality credit in the South African and US markets and additional exposure to global bonds.
