Where you should invest is a ‘no-brainer’

Chat to the average South African high-net-worth and/or retiree investor these days and you’re likely to find him or her pretty skittish about their investments. 

The reasons are well-documented.

They’re nervous about domestic and international equities, property and even fixed-interest instruments.

No need, however, to be overly despondent. 

An excellent opportunity for many is provided by Philip Bradford’s Sasfin BCI Flexible Income Fund, which returned an average 12.06% a year for the past three years, compared with 7.94% of its 59 peers over the same period.

In December it won the Raging Bull Award for the best South African interest-bearing fund on straight performance over three years and was rated the best South African multi-asset income fund on straight performance over the same period.

Compare this to the top-five SA general equity funds, which returned an annualised average of 8% to 9% over five years to December 2018 (negative in real terms). 

Several funds in this category dished up negative returns in nominal terms over the same period.

The Sasfin Flexible Fund was launched in July 2015 and currently has R1.15bn under management.

It’s focused on providing investors with a high level of income, while preserving capital. 

It does this by investing in high-yielding asset classes, such as different types of bonds (government, corporate and inflation-linked), and other lower-risk income assets.

It’s suitable for the conservative investor seeking a high-yield, lower-risk investment that provides a regular income.

Bradford, a chartered financial analyst (CFA) charterholder, and a past president of the CFA Society of SA, joined Sasfin in 2014 and is currently its chief investment officer (CIO). 

Bradford’s cutting edge over his peers is that as group CIO he is well-focused on all asset classes, and actively manages the interest rate and credit risk in his fund. Typically, it has approximately half the duration of the All Bond Index. 

And he doesn’t invest in property or equity.Other attributes are that he is backed by an experienced and agile team; the fund boasts considerable flexibility; it’s focused 100% on rand-denominated returns; and it’s one of the few teams that invests in fixed-rate bonds. 

Most of its competitors invest in floating rate bonds.

Currently, the fund is 50% invested in fixed-rate investments, 50% in floating rate investments and cash, with corporate exposure (such as investments in banks and insurance companies) comprising 65%. 

This amounts to a pretty secure portfolio.

“What you’re relying on is institutions that you’re lending money to being around in 20 years’ time”, says Bradford. 

“Therefore, we are very cautious when selecting investments for the Sasfin BCI Flexible Income Fund.  

“We also have some exposure to safe, government-guaranteed bonds, and I am confident that these will be adequately serviced for many years to come.”

Unlike 10 or 15 years ago, yields of around 11% are currently possible from some of the longer-dated bonds and are extremely attractive, he points out. 

“What’s particularly significant in the broader picture is that today bonds are giving you up to four percentage points more than in the past when interest rates were significantly higher.

“In fact, the entire global interest rate environment is a lot lower than a decade or two ago. Before the financial crisis you got 6% in the UK in cash, and in the US about 5%. However, today those same rates are between 0% and 2%. And, going forward, you’re likely to see continued lower rates in those markets,” he says.

“That makes interest rates in SA very attractive at present (especially to foreigners). We are a lot riskier than prior to the financial crisis, given the amount of debt that we have taken on, but our yields are also much higher.”

Bradford concedes that global equities, especially in the US, have done incredibly well during the past decade, but believes it highly unlikely that this will remain indefinitely.

“We are unlikely to see double-digit returns again from global equities for the next five to ten years.“Which brings us back to fixed-interest investments in SA with yields of up to 11% locally and with inflation currently at 4.5%, this is an excellent real return with a very high degree of certainty. It’s a no-brainer where you should be investing, particularly in a pension fund”.

A further sweetener, says Bradford, is that SA is “very well-placed” relative to its emerging market peers. 

“Our bond yields have largely priced in a downgrade which therefore creates an opportunity for investors. 

“In fact, it’s a crazy situation across the board analogous to a horse race, where you’re offered the same or better odds on the favourite as the outsider. 

In other words, at the moment I’m able to generate very high returns from lower-risk investments, with a high degree of certainty and much lower capital risk,” he says.

“And where investments that provide certainty of cash flows and certainty of capital are generating the kinds of returns you’d normally get out of equities, again, it’s a no-brainer where you should be investing. In fact, this is a fantastic opportunity for investors looking for high returns and/or are risk averse”. 

This article originally appeared in the 20 June edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.