Zisanda Gila, Portfolio manager at Momentum Investments discusses their fixed income offerings

_{By: Zisanda Gila, Portfolio manager at Momentum Investments}

1. What is a fixed income investment?
   Fixed income investments refer to types of securities which pay investors fixed interest payments on their capital investment, based on a set interest rate until maturity of the underlying securities. These securities are typically bonds (both government and corporate), Treasury Bills, bank issued money market instruments and asset-backed securities.

2. What is the aim of fixed income investments?
   Fixed income investments aim to generate a steady stream of income or return, while also providing steady capital growth and capital protection over time.

3. What is the role of fixed income investments in a client’s portfolio?
   Most investors are familiar with the concept of diversification across the different asset classes, and fixed income investments traditionally fulfil three important roles within a client investment portfolio:

• Income stream from the regular coupon payments received on set dates over the life of the investment, which helps investors plan their finances and the liquidity requirements.
  
• Capital protection and capital repayment when the security reaches maturity. Fixed income securities generally experience lower price volatility compared to equities, which makes them effective capital preservation tools, though these also fluctuate from time to time in reaction to interest rates changes and economic cycles.
  
• Diversified returns. Each instrument provides different returns based on various factors such as the yield, type of bond, duration, issuer credit quality and instrument ranking in the company structure. Diversification, in-depth analysis into each investment, and the right balance of asset allocation enable investors to earn these risk-adjusted returns from diversified sources.

4. What is the risk profile for fixed income investments?
   The fixed income universe provides a diversified array of investments with different risk-return profiles.

Generally, fixed income investments – especially bonds issued by government or state-owned entities that carry government guarantee – are considered to be more conservative with lower volatility and risk compared to equities.

Corporate bonds carry the risk of default (amongst other risks), which means that the issuer may be unable to meet its income and/or principal payment obligations. Investors need to be aware of the variety of risks associated with fixed income investments.

It therefore becomes pivotal that in our investment process we focus on the risk and return trade-offs, especially when moving down the credit curve for investment opportunities. When investing in these securities, we pursue rewardable risks through market cycles and actively manage portfolios to limit downside risks and deliver on stated objectives.

5. Please tell us about the philosophy and process of a fixed income investment.

Philosophy
The Momentum Investments Fixed Income philosophy is risk and valuation based. We view interest rates as an opportunity set on a relative and an absolute basis. Our focus is on achieving superior risk-adjusted returns through interest rate cycles. We believe investing is personal, and portfolio construction is central to what we do, as we need to meet our client objectives over appropriate investment horizons. We believe diversification of strategies leads to more consistent returns over time.

Investment Process

Our goal is to keep our clients invested and earn real yields through market cycles and deliver good investment returns that meet clients’ objectives. The key aspects of our investment process involve identifying investment opportunities, investment research and portfolio management. These aspects, combined with the major drivers, namely the investment objective, risk appetite, return drivers and constraints, contribute to our process of constructing a portfolio. In our investment process, we diversify across investment types and various yield curves to earn better returns. These types of investments include instruments issued by banks, corporates, government, and government guaranteed.

To achieve and maintain efficient portfolio construction over time, we also invest in derivatives and a mix of floating and fixed rate notes to manage the interest rate risk. Our fixed income funds aim to provide steady income at the lowest risk possible and to deliver superior returns on a risk adjusted basis across the various strategies. The investment horizon ranges from short to long term and we align that with the interest rate risk the fund can take. We use the short end of the money market curve for liquidity, mainly bank issued notes, and the longer end of the curve for excess alpha.