Against a difficult environment, Jason Borbora-Sheen, co-portfolio manager of the Diversified Income Fund at Ninety One, an Anglo-South African asset manager, discusses reasons for investing in his fund, an alternative to traditional fixed income.

With high interest rates and stubborn inflation, Jason Borbora-Sheen at London and Cape Town-based Ninety One recently highlighted why the Diversified Income Fund is good for cautious investors looking for a defensive income option due to its bond-heavy portfolio. The fund could perform well in a rate-cutting environment, and with its risk-management toolkit, prove defensive in more volatile markets.

Borbora-Sheen emphasised that the last decade has been dominated by equities. Despite the impact of high interest rates and inflation on bonds over the last 3 years, investors shouldn’t entirely avoid fixed income. However, they should consider alternatives that they can own alongside traditional assets to provide a smoother journey.

Recently inflation has fallen, and rates have been cut leaving an attractive universe of high-quality government opportunities outside of the UK. These can offer a compelling diversification for a traditional portfolio and a clearer route to returns than some developed regions with concerning debt issuance profiles.

Borbora-Sheen believes that Ninety One’s Diversified Income Fund, which invests primarily in fixed-income, but uses tools such as hedging to mitigate risks, makes a good addition for cautious investors seeking a defensive income option to supplement their retirement income.  

The fund aims to provide income with the opportunity for capital growth, to increase the value of an investment over at least five years. It also aims to limit volatility to lower than 50 per cent of that of shares of UK companies, measured using the FTSE All Share Index. Through time its performance is driven by its yield, which currently stands at c5.5 per cent and provides a basis on which to build returns in good years or a defence against losses in bad years.

The fund’s performance, which can be compared to a return of 4 per cent each year in sterling, has outperformed that in the last two years. Borbora-Sheen believes it is a reasonable reference point for measuring the fund’s returns based on current market conditions and the principal asset types available for investment. “Within a traditional asset allocation, the fund would have improved returns, without increasing risk. This is what investors should look for from an alternative,” he told this news service in an interview.

He said that many clients have been sitting on cash recently, but they can’t do that in the long term and face the risk of rates being lower when they come to reinvest. “It’s a good time to re-invest now,” he added. Borbora-Sheen has some investments in gilts but prefers bonds outside the UK, notably New Zealand hedged back to sterling, which has outperformed gilts. He also invests in US treasuries and some emerging market bonds, hedged back to sterling.

Top non-fixed-income holdings in the fund focus on infrastructure investments, notably Luxembourg-headquartered BBGI Global Infrastructure as well as International Public Partnership which invests in public or social infrastructure assets in the UK, Australia, New Zealand, Europe and North America. Another top holding is the UK’s HICL Infrastructure. Others include US multinational Johnson & Johnson, Swiss pharmaceutical multinational Novartis, Swiss food and drinks company Nestle and Spanish energy multinational Iberdrola.