October 2023


The Good: Volatility Is Not Risk

The US Treasury bond is often a proxy for the risk-free rate used in financial models, but can any investment genuinely be risk-free? In terms of one receiving their invested capital at maturity of the bond, the risk of default is minimal, as the capital is guaranteed by the American government, who have yet to default on their debt obligations. If the investor were to sell the bond in the open market prior to maturity, that is where volatility appears. At High Street, we make the distinction between risk and volatility. The risk that the US government defaults on their bonds is minimal, but massive price fluctuations in these assets can occur. This volatility has been prevalent in recent years, with the fastest US rate hiking cycle in history. This induced the worst bear market of all time in US Treasury bonds, scarring investors who would have experienced drawdowns of 24.7% on what is considered a low-risk asset.


Source: Bank of America

The record-breaking sell-off began at a time when the US 10-year treasury rate was 0.5% on the 4th of August in 2020, while the average rate over the past 20 years was 2.9%. Due to the Covid-19 stimulus package, inflation spiked in the US, causing the unparalleled interest rate hiking by the Fed. With the 10-year rate currently at 4.8% and inflation peaking, we believe rates will regress back to their long-term average in due course.

At High Street, we had zero exposure to bonds in the Global Balanced Fund prior to mid-2022, due to the low yield and elevated volatility potentially causing capital loss. As rates started to rise, the opportunity presented itself to the team to switch more of the portfolio into bonds. We have actively been building our bond weighting in the Fund, in addition to extending our duration. Our current bond exposure is 27% of the total portfolio with a USD-denominated average yield of 5.7% and a duration of 4 years. We believe this weighting is justified, due to the attractive yield, as well as the potential for capital appreciation in the event where interest rates come down. Due to the volatility, we have been able to demonstrate considered opportunism to buy into lower risk assets at attractive prices.

The Bad: Be Careful Who You “Trust”

Amid recently reported financial fraud cases, it’s imperative to remind our High Street community about the potential financial risks they may encounter, particularly when considering investments through trust structures.



Source: Stewartgroup

Investing through a trust carries a number of risks that individuals should carefully consider. To begin, trust structures can be complex, and without a deep understanding of the legal and financial implications, investors may expose themselves to unforeseen tax liabilities or legal obligations. These individual trust entities do not undergo the same level of regulatory scrutiny as their FSCA-regulated counterparts, and there may be fewer legal protections for beneficiaries. Furthermore, the management of trust assets may not adhere to an agreed-upon mandate. This lack of control can lead to investment choices that do not align with the beneficiaries’ goals or risk tolerance. Trusts often have limited reporting requirements, which can result in beneficiaries having limited visibility into the trust’s financial activities.

FSCA-regulated funds benefit from oversight and supervision by a government regulatory body, assuring that investment managers and fund providers adhere to strict rules and regulations aimed at safeguarding the interests of investors. This regulatory framework extends to fee and performance disclosure, providing investors with essential transparency. Furthermore, FSCA-regulated funds operate within prescribed mandates, ensuring that investment activities remain within defined boundaries. In addition to these advantages, most regulated funds offer a degree of liquidity, enabling investors to buy or sell their shares regularly. This liquidity provides a valuable layer of flexibility.

One of the key distinctions between trusts and FSCA-regulated funds, such as ours, lies in asset ownership. In a trust, assets are owned by the trust entity, placing control in the hands of trustees, granting beneficiaries beneficial interests but not direct ownership of the underlying assets. On the other hand, investors in our funds maintain legal ownership of the assets that we manage on their behalf. Trusted custodians oversee the assets, ensuring their security while handling settlements and transactions, all under the explicit authorization of the investor.

At High Street, we take pride in our commitment to transparency, regulatory compliance, and investor protection, providing a trusted and secure platform for those seeking to achieve their financial goals.



& Unique Opportunities

One of the real advantages of being a boutique asset manager is the ability to capitalise on investment strategies that other firms are forced to pass on because of their size. Sometimes this presents itself in the structure of our investment mandates, like our unique local balanced fund which is 95% Rand-hedged but still compliant with Regulation 28 of the Pension Funds Act. In other situations, High Street clients are able to benefit from our nimble approach to stock selection across our funds.

One such example was during the height of the Covid-19 pandemic in 2020, when luxury goods conglomerate Richemont announced that they were going to halve their annual dividend as a precautionary measure to preserve cash. Hoping to alleviate the inevitable backlash and simultaneously support the share price, management decided to enact a “shareholder loyalty scheme”, where warrants would be distributed to shareholders in lieu of a dividend payment. A warrant, which is essentially a call option issued by a company rather than by a secondary market maker, gives the holder the right to purchase an asset at a specific price and time. In Richemont’s case, sixty-seven warrants could be exercised to buy one share for 67 Swiss francs (CHF) in three years’ time. Warrants were issued in both CHF and ZAR to reflect Richemont’s dual-listed structure in Switzerland and South Africa.

Source: Corporate Finance Institute

Warrants have value when their exercise price is lower than the company’s share price, and High Street was able to take advantage of this limited opportunity offered by Richemont in two distinct ways. Firstly, we identified that the warrants listed on the JSE were trading at a significant discount to their counterparts on the SIX Swiss Exchange. Because these two types of warrants were identical, we were able to “funge” (exchange) the cheaper South African warrants for their more valuable Swiss counterparts and take advantage of a risk-free arbitrage. Secondly, because the warrants were trading far below their fair value, we were able to essentially buy Richemont shares at a significant discount. The Richemont warrants are just one of a number of investment opportunities that larger asset managers are unable to participate in due to their size. High Street’s nimble approach and agile fund management strategies are how we continue to differentiate ourselves and drive long-term value for our investors.

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