Truffle continues to deliver

For the second consecutive year, the Truffle SCI Income Plus Fund is recognised at the Raging Bull Awards.

The Truffle Sanlam Collective Investments Income Plus Fund was launched by boutique manager Truffle in September 2016. The fund is predominantly invested in bank issued and corporate floating rate bonds. The fund aims to achieve higher yields of income than money market portfolios, while preserving capital.

Hannes van der Westhuyzen, one of the co-founders of Truffle, has managed the fund since its inception. Palvi Kala joined him as co-manager in 2018.

Hannes answered the following questions about the fund:

What is Truffle’s investment philosophy regarding managing the Income Plus Fund?

Truffle follows a multi-strategy approach in targeting benchmarkbeating returns. We use a combination of credit and duration to generate alpha. A key focus is capital preservation, and we, therefore, avoid risky credit. We do not invest in instruments with ratings below BBB+. We potentially could earn a higher yield on a bond with a lower rating, but we will not invest in it because, on a risk-adjusted basis, capital preservation is more important than a small increase in yield. Investors in the income fund space want the assurance of receiving a steady income stream while still preserving their capital. We therefore seek to mitigate against duration risk by keeping the overall duration in the fund as low as possible without impacting the return.

To what factors do you attribute the fund’s outperformance over the past three years?

When Basel III was introduced in South Africa, we identified the new bank subordinated Tier 1 and Tier 2 bond classes very early in their evolution as a viable investable asset class. We conducted a thorough analysis of the instruments and set prudent risk parameters and then invested in these bonds from the outset. This was hugely beneficial to the fund, as well as for all Truffle’s multi-asset funds where we manage the fixed income allocation in the same manner, as the yields we achieved were significantly higher than what we perceived the risk to be. Since then, these spreads have narrowed, which resulted in gains for the fund over and above the interest coupons.

What opportunities and challenges will the fund face over the coming year, and, following from this, how will you be positioning the fund?

The biggest challenge for all income funds is to stay relevant in a risk-on environment where equities could deliver significantly higher returns during 2021 than other asset classes. During 2020 we saw short-term rate cuts of 3% and a dramatic steepening of the yield curve with long bonds still yielding north of 10.5%. We also expect equity markets to deliver returns in excess of 12% for the year.

Because of the dramatic cuts in short-term interest rates, investors that rely on their interest income to meet monthly expenses could be tempted to seek higher returns elsewhere, albeit with a high degree of capital risk and income volatility.

Despite the above, our focus in the fund is to continue to deliver respectable returns in this low interest rate environment by making use of longer dated fixed rate bonds with higher yields but without adding undue risk to the capital of the fund.

Hannes van der Westhuyzen