Prescient was one of the first of the entrepreneurial asset managers to treat interest-bearing as a core product, not as an add-on run by part timers. Interest-bearing still accounts for two-thirds of Prescient's assets under management.
Chief investment strategist Guy Toms says that there are numerous opportunities to add value in interest-bearing, through the Cash QuantPlus and Bond QuantPlus processes - and most of all when there is the opportunity to work across the interest-bearing spectrum.
Chief investment officer Eldria Fraser says that Prescient has been a proponent of broader mandates and "we have been talking to clients to broaden bond mandates. In SA the market became expensive and keeping a narrow duration tolerance has forced managers to lose money as bond yields moved up.
"Also, as credit bonds have not done that well credit fears have grown globally. Now is the time to extend your credit limits and allow good managers to pick good credit where yields have moved out," she says.
Prescient offers a range of bond portfolios, matched to clients' risk profiles. The Bond Quant Fund is allowed a 0,5-year variation around the duration of the all bond index while Bond QuantPlus has a two-year variation. And there is also a Flexible Bond Fund with no duration limit, which has been fully in cash, making it a top performer in the sector. It has had a 3,1% alpha against its benchmark since it started in April 2005. BondQuant has 0,6% alpha, Bond QuantPlus 1,7%.
Toms says in interest-bearing portfolios the process remains purely quantitatively based, but it is not mechanistic. The house takes its own view on the creditworthiness of the local banks, corporates and international banks based on a predetermined list of ratios. The methodology is also used for the US$100m Global Income Fund.
"We know now we could never have relied on rating agencies, which did not downgrade credit bonds in time," he says.
There is no forecasting in the interest-bearing process, but a range of fair value models using different interest rate and inflation scenarios is used. Kevin Dewar, Fraser and Toms play a key role in the valuation and strategy process.
Prescient's asset allocation skills in the sector come through the Prescient Flexible Bond Fund (available to institutions) and the Prescient Income Provider Fund for the institutional market. The Income Provider Fund is available to the retail market through the Nedgroup Flexible Income Fund. In the year to September it was the third-best performer of all SA's domestic unit trusts with a 12,4% return.
Dewar says that there is a strong focus on the benchmark and it will not invest aggressively in property or even bonds when there are doubts about the value offered in these asset classes.
As a good alternative to traditional money market unit trusts, which have an average duration of 90 days, Prescient's flagship cash product is Cash QuantPlus. This portfolio, managed by Farzana Bayat, may have a duration of up to nine months. Bayat says it actively uses swaps to change the weightings between fixed and floating notes on a dynamic basis.
There is also a Credit QuantPlus Fund, which follows the same duration strategy as Cash QuantPlus. But it has been extended to allow more credit and this has provided 0,9% alpha. A specialist inflation-linked bond fund has given 0,4% of excess return.
Consultants also hire Prescient for cash flow matching as it has long experience of matching real or nominal cash flow needs.