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How to invest

Dec 14 2010 09:14
Apart from RSA Retail Growth Bonds, buying bonds directly is expensive. The preferable route for an investor is probably a unit trust fund or an exchange-traded fund (ETF).

There are a number of funds available and it’s important for the investor to decide exactly what type of bond exposure is best for his portfolio.

There are around 20 pure bond unit trust funds run by all SA’s major asset managers and some of the smaller boutiques. But investors need to have a look at what’s inside the fund.

Depending on the outlook of the manager, some funds will be more skewed towards gilts, others to corporate bonds and some will also include offshore bonds.

Murray Anderson, MD of Atlantic Asset Management, says it’s probably best for the more complex bond decisions to be made by a professional investment manager. He says while much will depend on the investor, the bond investment decisions need someone up to speed with the bond market and aware of possible changes. “It brings in credit and risk analysis – and that’s best done by a professional manager in a flexible, fixed-income fund.”

Though active management of bonds may not be what the investor is looking for there are also a number of unit trust funds that will track the bond index. And they’re available at lower cost.

The various other fixed-interest unit trust categories include bonds and other instruments, such as money market funds. From a risk perspective, the potential risk will be lower in those funds, though risk isn’t really an issue in bond or fixed-income unit trust funds.

Once again, it’s important for the investor to take a closer look at what’s inside the fund. If bonds are what the investor wants, determine just how much of the portfolio is allocated to bonds and what type of bonds. That information is available on most asset managers’ websites or the latest fund fact sheets.

An even cheaper option is ETFs. There are a number of products here that will track a broad or composite bond index. Some are quite specific, such as Bips Government Inflation-Linked Fund, which only buys inflation-linked gilts.

An investor looking for increased exposure to bonds through unit trust funds or ETFs would do well to invest in more than one product. That will add to diversification and lower management risk. Like all asset managers, bond fund managers also go through periods when they’re off form.

The investor can compile a portfolio featuring exactly the exposure to bonds that’s required, combing pure bond funds, tracker funds and fixed-interest funds.

The investor needs to be aware the composition of many of those funds – even tracker funds – will change over time. So it’s important to note the changes and make sure it’s still in line with the original investment portfolio.
 

 - Finweek

bonds  |  investing  |  etfs
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