Fairtree FR Income Plus Fund Q2 2026 commentary

Key Q2 macro environment themes

The second quarter was characterised by a broad improvement in global market sentiment as the sharp risk-off environment seen in March reversed. Geopolitical tensions eased, while Brent crude oil retraced from its first-quarter highs. Locally, the South African rand strengthened over the quarter, supported by domestic policy progress and broad US dollar weakness. The South African Reserve Bank (SARB) raised the repo rate by 25 basis points in May 2026 to address persistent inflation driven by earlier producer and fuel price shocks. The outlook for short rates into the third quarter might outline another 25-basis point move at the July meeting. We have pencilled in such an outcome, and such a move should not lead to any adverse effects on the portfolio. The overall yield however should jump by a commensurate amount. Despite calmer bond markets, local equities struggled, with the JSE All Share Index declining by 2.2% over the quarter, largely due to the Resources Index falling 19.8%.

Anchored strategy capitalising on volatility dispersion

The second quarter of 2026 put the multi-asset income landscape through a severe test of asset class performance divergence. While local South African bond and interest rate markets staged a massive relief rally, equity markets faced strong downward headwinds. In this bifurcated environment, the Fairtree FR Income Plus Fund (Class A) (“the Fund”) performed optimally, capturing significant upward yield while completely insulating investors from equity drawdowns. Year-to-date (YTD), the strategy has strongly validated its defensive mandate, keeping capital firmly in positive territory (+3.64%) while traditional equity benchmarks remain deeply negative (-3.87%). Figure 1 below shows the comparative performance of the Fund relative to other well-known asset classes and indices.

Figure 1: Q2 2026 performance comparison

Source: Bloomberg, Fairtree, 30 June 2026

The Fund delivered an exceptional quarterly return of 3.25% for Q2 2026, easily outpacing cash and its cash-plus 2% target hurdle. It did, however, lag the surging bond index, which produced a 7.94% quarter, largely making up for the losses sustained during the first quarter of the calendar year. In a more positive light, the Fund was completely decoupled from the declining local equity market which bore the brunt of struggling global PGM markets. This very facet is essentially what the Fund is designed to achieve via its mandate of steady non-correlated returns, which provides protection against severe market downturns.

As we have consistently stated, the Fund is not risk-free but rather assumes a low risk and high yield, which should produce superior Sharpe ratios over time. Obviously, this does not mean that other classes will underperform the Fund over the fullness of time, but rather that the Fund should produce low volatility of returns over the short and long runs. We feel that the Fund is indeed staying true to this mandate and, is largely insulated against severe drawdowns that are associated with a global risk-off environment. Given the extensive diversification of the assets that make up the Fund, the performance numbers are less affected by the severe fluctuations in the Resources complex or indeed changes in local interest rates.   

Table 1: Cumulative performance comparison

Source: Bloomberg, Fairtree, 30 June 2026

The core engine of the Fund aims to completely eliminate performance “lumpiness.” This discrete historical breakdown highlights that while bonds (ALBI) and equities (TOP40TR) suffer deep periodic contractions (such as six to seven years ago), the Fairtree strategy has never recorded a negative year.

When looking at Table 2 it also becomes apparent that the volatility of annual returns is significantly lower than the other asset classes and, with the exception of the fallout due to the COVID pandemic and the bear market in 2022, the Fund has consistently beaten its target.

The managers feel that the level of risk-taking in the Fund is one which balances the difficult targeted return with the risk appetite of the investors that make up the Fund client base. The Fund remains on track for producing the required STeFI Composite + 2% on an after all fees basis for calendar 2026, in spite of the increased global volatility due to the current political instability due to the ongoing conflict in the Middle East.      

Table 2:  Discrete one-year returns (10-year history) to 30 June 2026

Source: Bloomberg, Fairtree, 30 June 2026.

On an annualised basis, the Fund behaves with low volatility and thus increased predictability. Over long-term compounding horizons (five to 10 years), the strategy locks into a stable band of 8.86% to 9.46% per annum.

Table 3: Annualised performance data

Source:  Bloomberg, Fairtree 30 June 2026, Fairtree

Navigating the Q2 dynamics – some highlights

• Tactical capital recycling: The wider credit spreads captured during the March market turbulence paid off handsomely in Q2. Floating-rate instruments locked in at those wider margins reset positively, pushing the quarterly return to 3.25%.
• Duration insulation vs. bond rally: The Fund’s deliberately low modified duration meant it did not capture the full velocity of the ALBI’s massive 7.94% Q2 rally. However, this same attribute protects capital from the sharp losses that bonds suffer when interest rates spike.
• Asymmetrical protection: By completely avoiding equity market volatility, the Fund saved investors from the -3.25% drawdown experienced by the TOP40TR over the quarter.
• The Fund currently has a spread of around 2.22% which is perilously close to our target of 2% on an after fees basis. The managers will look to up the risk of the Fund into any downturn in order to ensure that our target is attained for 2026. The current annualised yield of 9.54% should produce an annual return of between 8.75% to 9.00% during 2026.
• Given our expectation of another 0.25% repo rate increase at the next meeting of the Monetary Policy Committee, this number may be skewed slightly higher (around 0.125%).
• Credit defaults remain subdued, with only two global credit events triggering during Q2. The Fund remains largely unaffected by these incidents.