Johannesburg - Retail investor participation in the South African bond market is on the up as institutions roll out new products.
Rand Merchant Bank (RMB) has announced the launch of the Bips Inflation-X product which is to be listed as an exchange-traded fund (ETF). The ETF will list on the JSE on May 19 and will track a basket of government-backed inflation-linked bonds, providing investors with a real return of inflation plus about 2.3%.
"In the current economic climate, very few asset classes can offer investors guaranteed cash flow, capital preservation and a natural hedge against inflation," said Leonard Jordaan, co-head of ETFs at RMB.
Products that offer a guaranteed return over inflation are highly topical now, as investors try to assess the inflationary impact of various bailout packages across the world. With excess liquidity being put into the system with through "unnatural" bailouts, inflation could spike sharply in coming years, economists say.
ETFs have become an increasingly popular asset class in South Africa, as they offer lower fees than actively managed unit trusts investing in the same market space. Management fees on the Bips product start at 0.39% per annum, with an average managed fixed income fund and annual fee of between 0.85% and 1% per year.
Jordaan said there has been much interest in the product from the stockbroking community and medium-sized institutional investors, whose clients are sitting on a lot of cash and remain wary of equity markets.
Direct participation in the government and corporate debt markets in South Africa has traditionally been the domain of institutional investors, with retailers often having no access to this critical asset class.
So far, the easiest access point for retail investors was through the National Treasury-issued, inflation-linked and retail savings bonds which can be purchased from the Post Office or Pick n Pay. These are known as the RSA Retail Savings Bond and require a minimum investment of R1 000.
A local asset manager agreed that inflation-linked bond products were a "good" asset class and felt the RSA Retail Savings Bond product offered a more attractive interest yield for investors than other retail products in the market at the moment.
In 2008, Investec launched its Z-Shares GOVI (ZGOVI) instrument which is an ETF focused on a basket of government bonds including the R153. The product differs from the RMB offering in not being limited to inflation-linked products in its basket.
Retail investors in spotlight
Michael Keeves from Investec Capital Markets said there was much interest interest in the ZGOVI instrument in December, January and February: "It was primarily from institutional investors, but some retail investors have also been participating; there is trade every day."
Corporate bonds, however, are more difficult for retail investors to participate in.
Keeves said that the South African corporate debt market - where businesses sell their debt to investors in return for fixed income yield - garnered interest as companies look to reorganise debt on their balance sheets.
For instance, local banking group Absa has both a South African- and European-listed corporate bond.
Keeves said he doubted if any retail products allowing investors to participate in the sector were on the horizon because there is no real corporate bond index the ETF would track.
Jordaan agreed, saying that there would be insufficient liquidity in these instruments.
Garth Greubel, CEO of the Bond Exchange of South Africa (Besa), told Fin24.com that the size of trades in the bond market are too big for ordinary retail investors. However, he said: "I also think there is a growing market for the retail investor."
In most instances, retail investors who want to participate directly in the corporate bond market would require more than R250 000 simply to enter the market.
A trader at a local brokerage, who had read the announcement on the Bips Inflation-X product, said he was "very interested", adding that timing one's entrance would be important in terms of the longer=term outlook for inflation.
* Ashton holds shares in the Z-Shares GOVI ETF.
- Fin24.com
For more information on inflation-linked bonds, visit Market Monkey's blog.