Seeking to limit downside in times of market turbulence

The Investec Diversified Income Fund is a defensive return solution which also aims to protect investors from the worst market falls.

Once again, during the latest period of market turbulence, the Fund has delivered on its aims for investors, as it has done since it was launched in September 2012.

What the fund offers

  1. Defensive return fund: Aiming for attractive income with capital growth over the long term
  2. Attractive, sustainable yield: Targets 4-6% p.a. distributed monthly*
  3. 'Bond-like' volatility: Targets less than half the volatility of UK equities

How we do it

  1. Resilient portfolio built from the bottom up
  2. Structurally diversified and actively managed
  3. Focus on limiting downside risks

*These internal parameters are subject to change not necessarily with prior notification to shareholders. UK Equities defined as the FTSE All Share Index.

Ahead of the recent market sell-off, we took the following action:

  • We sold 15% of equity futures whilst retaining market upside participation by buying cheap call options.
  • Underlying equity exposure had a lower beta (of 92%) vs world equities providing outperformance versus the MSCI ACWI.
  • We cut Bond duration to c1.2 years reflecting concerns around rising inflation expectations.
  • High yield bond exposure currently represents 8.5% of the Fund, the lowest in the strategy's history, with only 0.3% in the lowest quality issues.
  • We built a 7.5% Yen position which historically has strong defensive attributes.

Figure 1: Focus on limiting downside risks – Guarding against systemic and event-based risks

 Focus on limiting downside risks – Guarding against systemic and event-based risks

To navigate a less straightforward environment requires a more thoughtful approach, and the Investec Diversified Income Fund has been able to navigate these recent and more challenging conditions effectively.

The list of competitors is frequently reviewed and is based on our Multi-Asset team's analysis of the competitor landscape. The defensive peer group average is based on all multi-asset funds within the IA Targeted Absolute Return sector. The income peer group average is based on all funds from within the IA mixed Investment 0-35, 20-60, 40-85 shares and specialist sectors which include 'income' and/or 'distribution' in their fund names and are over £100m in size.

2017: 4.82, 13.10, 7.40, 2.73. 2016: 5.92, 16.75, 10.05, 0.31. 2015: 1.97, 0.98, 2.30, 3.61. 2014: 5.32, 1.18, 5.97, 5.25. 2013: 6.19, 20.81, 11.26, 7.15.

Calendar year % returns for the Fund, Index, Income Peer Average and Defensive Peer Average, respectively.

Source: Morningstar, 5 years ending December 2017 as at 22.02.18. Performance is net of fees (I Acc Share class, NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in GBP. Fund launch date 03.09.12

Performance through times of volatility

The performance of Investec Diversified Income Fund is shown below at times of high volatility of the FTSE All-Share Index. Also shown is the performance of income and defensive fund peer groups.

During the VIX spike period at the beginning of February 2018, the Investec Diversified Income Fund returned -1.0% when the FTSE All Share Index declined -6.2% over the same time period; the Income and Defensive peer groups returned -3.2% and -2.1% respectively. This demonstrates the more defensive nature of the Investec Diversified Income Fund.

This communication is provided for general information only. It is not an invitation to make an investment nor does it constitute an offer for sale. The full documentation that should be considered before making an investment, including the Prospectus and Key Investor Information Documents, which set out the fund specific risks, is available from Investec Asset Management.

General risks

The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. Investment objectives and performance targets may not necessarily be achieved, losses may be made.

Specific risks

Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Derivative & Counterparty: The use of derivatives may increase overall risk by magnifying the effect of both gains and losses. A counterparty to a derivative transaction may fail to meet its obligations thereby leading to financial loss. Developing market: These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Interest rate: The value of fixed income investments (e.g. bonds) tends to decrease when interest rates and/or inflation rises. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. bankruptcy), the owners of their equity rank last in terms of any financial payment from that company. Government securities exposure: The portfolio may invest more than 35% of its assets in government securities issued or guaranteed by a permitted single state.