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Equities are about hope, bonds are about fear. That’s a quote from Andrew Canter, head of fixed interest at Futuregrowth Asset Management.
Maybe it’s not as dramatic as it sounds: Canter was explaining why bonds are needed in a balanced investment portfolio for diversification. But it does sum up the different investment case that applies to bonds.
And bonds can prove to be vital for diversification when equity markets go into tilt. That happened in 2008. As the global credit crunch fears set in the JSE went into a tailspin, with the all-share index losing 25.7% over the year. But a mixed bag of bonds – mainly SA Government gilts – were up by 17.5%. That was a great return in a crises year and shows how important exposure to bonds can be.
Investors have lots to choose from. There are a number of government bonds, or gilts, divided into fixed rate vanilla bonds, inflation-linked bonds and variable rate bonds.
Semi-Government institutions – public utilities, such as Transnet – also issue bonds, backed by government, as do some local governments. Though not entirely risk-free, gilts are about the safest investment you can get, backed by the word of government.’
In effect the investor is lending money to government. In return, government gives its word to repay the capital amount at an agreed future date (the maturity date). In addition, government will pay an agreed interest rate or coupon on the bond.
“That’s the beauty of sitting in a government bond,” says Murray. Anderson, MD of Atlantic Asset Management. “You have government behind it.”
Then there’s the corporate bond market, which has become increasingly popular and active in SA. Large companies, including all of SA’s major banks, have issued corporate bonds.
Such bonds typically offer higher interest rates due to the perceived higher risk. But risk is still low: it’s hard to imagine a large company not honouring its bond repayments.
Ideally, bonds should be held to maturity, especially by retail investors. But once issued bonds are very actively traded in the secondary market.
South African bonds have proved very popular with investors overseas as they search for low-risk yields in emerging markets. It’s not hard to see why: developed market bonds yields are probably around 4% at the highest, against the 8% and higher yield investors can obtain in SA. And SA’s bond market is a favoured emerging market for overseas investors, well regulated by the Bond Exchange of South Africa (BESA).
At the time of writing, foreign inflows into bonds was approaching R80bn.
That’s an added incentive for local investors to buy bonds.
- Finweek
Maybe it’s not as dramatic as it sounds: Canter was explaining why bonds are needed in a balanced investment portfolio for diversification. But it does sum up the different investment case that applies to bonds.
And bonds can prove to be vital for diversification when equity markets go into tilt. That happened in 2008. As the global credit crunch fears set in the JSE went into a tailspin, with the all-share index losing 25.7% over the year. But a mixed bag of bonds – mainly SA Government gilts – were up by 17.5%. That was a great return in a crises year and shows how important exposure to bonds can be.
Investors have lots to choose from. There are a number of government bonds, or gilts, divided into fixed rate vanilla bonds, inflation-linked bonds and variable rate bonds.
Semi-Government institutions – public utilities, such as Transnet – also issue bonds, backed by government, as do some local governments. Though not entirely risk-free, gilts are about the safest investment you can get, backed by the word of government.’
In effect the investor is lending money to government. In return, government gives its word to repay the capital amount at an agreed future date (the maturity date). In addition, government will pay an agreed interest rate or coupon on the bond.
“That’s the beauty of sitting in a government bond,” says Murray. Anderson, MD of Atlantic Asset Management. “You have government behind it.”
Then there’s the corporate bond market, which has become increasingly popular and active in SA. Large companies, including all of SA’s major banks, have issued corporate bonds.
Such bonds typically offer higher interest rates due to the perceived higher risk. But risk is still low: it’s hard to imagine a large company not honouring its bond repayments.
Ideally, bonds should be held to maturity, especially by retail investors. But once issued bonds are very actively traded in the secondary market.
South African bonds have proved very popular with investors overseas as they search for low-risk yields in emerging markets. It’s not hard to see why: developed market bonds yields are probably around 4% at the highest, against the 8% and higher yield investors can obtain in SA. And SA’s bond market is a favoured emerging market for overseas investors, well regulated by the Bond Exchange of South Africa (BESA).
At the time of writing, foreign inflows into bonds was approaching R80bn.
That’s an added incentive for local investors to buy bonds.
- Finweek
