Yet when we tell peers in locally or in global markets that we run a systematic credit within South Africa, the response is often a raised eyebrow. The local debt capital market, the argument goes, is too small, too concentrated, and too illiquid for quantitative approaches to work. Issuance is dominated by a handful of banks, SOEs and listed corporates. Secondary trading is thin. Pension funds and life insurers buy and hold. There is no real high-yield market to speak of. How, exactly, do you run a rules-based credit process in a market where a single bond can take weeks to source at a fair level?

It is a fair challenge, and one that deserves a more honest answer than the industry usually offers.

The critique has merit

Let us start by conceding the obvious. Classical systematic credit strategies, the kind that work in US investment grade or European high-yield, depend on conditions that South Africa does not fully replicate. They assume a deep universe of issuers across the credit-quality spectrum, daily or near-daily price discovery, low transaction costs, and the ability to rebalance into and out of names without moving the market against you.

In South Africa, none of those assumptions hold cleanly. The JSE-listed corporate bond universe is dominated by financials. Outside of the top tier of issuers, bid-offer spreads can be punitive. A factor tilt that requires turning over 30% of a portfolio annually is, in practice, a strategy that hands a meaningful share of expected alpha to market makers. And the structural buy-and-hold demand from life insurers and income-fund mandates, once placed, often disappear from circulation entirely.

A purist would conclude from this that systematic credit investing in SA is unworkable. We disagree, and the reason matters.

What systematic actually means

Much of the confusion stems from conflating "systematic" with "high-turnover quant". The two are different things. Systematic investing, as we practise it, is fundamentally about replacing discretionary, emotion-driven decisions with a rules-based, evidence-led process. It is about consistency, repeatability, and the disciplined application of frameworks that have been tested across cycles. It is not necessarily about trading bonds every week.

This distinction is decisive in a market like South Africa's. The systematic edge in SA credit does not come from rapid factor rotation. It comes from imposing rigour at the points in the investment process where human bias and market frictions are most costly: issuer selection, risk pricing, position sizing, and portfolio construction.

Consider how we manage credit risk in the Prescient Income Plus Fund.

Each issuer is run through an in-house, dynamic probability-of-default model. Portfolio-level risk is then monitored through expected loss, loss given default, and credit value-at-risk metrics.

None of these inputs requires us to trade a bond on any given day. What they do is ensure that every credit we hold has been priced against a consistent, transparent yardstick, and that the portfolio's aggregate risk is always known, always measured, and always within tolerance.

That is systematic investing in an illiquid market. The signals are generated by data and rules.

The expression of those signals is deliberately patient.

The hybrid case

This points to what we believe is the right framework for SA credit: systematic signal generation paired with discretionary, opportunistic execution. The signals tell us what we want to own, at what spread, in what size, and with what aggregate risk profile. Execution recognises the reality that getting there in a thin market takes time, and that paying away the premium in a rushed trade destroys the very edge the signal identified.

This is not a fudge. It is an acknowledgement that the medium constrains the method.

In US credit, signal and execution can happen almost simultaneously. In SA, they are separated by days or weeks of patient sourcing in primary issuance, reverse enquiries, and selective secondary trades. The systematic framework still drives the decisions. It just operates on a different clock.

There is also a second dimension where systematic approaches earn their keep, and that is in the macro overlay. The South African government bond curve is deep, liquid, and traded actively, which makes rules-based positioning around duration, the shape of the curve, and carry-and-roll dynamics entirely feasible.

But the more important application of the macro overlay, in our view, sits upstream of rates positioning. It feeds into how we read the credit cycle itself. This is the purpose of the Prescient Credit Cycle Indicator (PCCI), a proprietary tool built on the Stock and Watson Dynamic Factor Model framework. The PCCI distils a set of South African macroeconomic variables into a single, statistically grounded reading of where issuer default probabilities are heading. It tells us, in effect, whether the macro backdrop is tightening or loosening the screws on corporate borrowers, and by how much. A rising PCCI signals a weakening credit environment and prompts us to dial back risk, shorten credit spread duration, and lean into higher-quality issuers. A declining PCCI gives us the licence to add risk and extend into spread.

The point is that we are not guessing where we are in the cycle. We have a measured, repeatable view of it, updated as the data evolves, and that view drives portfolio positioning before stress shows up in spreads.

In a market where you cannot easily trade your way out of a deteriorating credit position, knowing the direction of travel ahead of the market is the difference between protecting capital and chasing it.

The honest conclusion

The illiquidity problem in SA credit is real, and any manager who claims otherwise is selling something. But it is a problem about implementation, and not about philosophy.

The case for systematic investing, that rules beat emotion, that evidence beats anecdote, that consistency compounds, does not weaken in a small market. If anything, it strengthens.

In a market where a single bad credit can wipe out a year of carry, and where you cannot trade your way out of a mistake, the discipline of a systematic framework is no luxury. It is a necessity.

The question is not whether systematic investing can work in South African credit. It is whether you have built the right hybrid: rigorous enough to capture the discipline, flexible enough to respect the market.

Disclaimer

Prescient Investment Management (Pty) Ltd is an authorised Financial Services Provider (FSP 612).

Collective Investment Schemes in Securities (CIS) should be considered medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. There are no guarantees. Please note that there are risks involved in buying or selling any financial product. Prescient Management Company (RF) (Pty) Ltd is approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information please go to www.prescient.co.za