BUY, HOLD, SELL

While it’s good investment practice to build a portfolio that comprises a mix of stocks and bonds, it’s as important to rebalance it periodically

ASHBURTON INFLATION ETF

Share price: R20.62 JSE code: ASHINF

BUY CLASSIC INVESTMENT advice is to build a portfolio of mixed stocks and bonds. Investors should pick a ratio, say 30% bonds and 70% stocks, and then rebalance their portfolios once a year or so. This way, if stocks have had a strong run, the investor banks some winnings by selling stocks and buying bonds, and vice versa.

This automates the discipline of buying low and selling high, as Benjamin Graham argued in The Intelligent Investor.

Until the arrival of exchange traded funds (ETFs), this was not practical for SA retail investors because the local bond market is only accessible to institutions. Things have improved thanks to three ETFs offered by Absa: Ashburton Inflation, which tracks the government inflation-linked bonds index; NewFunds Govi, which tracks the SA government bond total return index; and NewFunds ILBI, which offers a basket of government inflation-linked bonds selected by Absa’s indexing system.

My bias is towards the Ashburton product because it pays cash every quarter, whereas the other two buy additional bonds with the interest they collect.

To cut a long story short, a falling interest rate environment makes bonds more attractive because their face value rises as interest rates drop. And we are hopefully heading towards lower interest rates as inflation drops.

CORESHARES DIVTRAX

Share price: R27.70 JSE code: DIVTRX

HOLD LEAVING THE STOCK portion of your portfolio unchanged while buying bonds assumes you’ve not been following Graham’s balanced portfolio theory.

The JSE’s all share index has been stagnant for the past three years, gaining just 2.8% in 2016 and falling 0.8% in 2015, excluding dividends. That the average value of shares has fallen for the past few years means people following a balanced strategy would probably be moving some of the interest earned from bonds into stocks.

Incidentally, two ready mixed balanced portfolios are available as ETFs in Absa’s NewFunds range: Mapps Growth and Mapps Protect. The Growth ETF is 75% equities and 25% bonds; Protect is 40% equities and 60% bonds. Their performance illustrates the risk-reward trade-off of keeping the bond portion of a portfolio high or low. Over the past three years of stagnant share prices, the conservative Protect portfolio has beaten the more risky Growth portfolio, averaging 4.35% annual growth against 3.79%. But over 10 years Growth achieved 10.52% against Protect’s 8.65%.

There is a bewildering selection of ETFs offering stock portfolios. I prefer share portfolios that pay high dividends, narrowing the choice to CoreShares DivTrax or Satrix Divi Plus. As I have more faith in historical performance than analysts’ forecasts, my bias is towards CoreShares DivTrax.

CORESHARES PROPTRAX SAPY

Share price: R66.00 JSE code: PTXSPY

SELL NEARLY ALL THE JSE’S recent new listings are property companies. This has prompted the JSE to split the sector into real estate investment trusts (Reits), divided into boards for development companies, diversified Reits, industrial and office Reits, residential Reits, and retail Reits. To complicate things further, many of these focus on different geographic regions.

The popularity of property stocks is not hard to understand, considering the record of the JSE’s SA property index (Sapy), traditionally offered to retail investors via the CoreShares PropTrax ETF.

As property listings have grown, so have the number of ETFs tracking them. These include competing products from Satrix and Stanlib, along with CoreShares, offering an equally weighted property ETF.

The original PropTrax ETF has been among the JSE’s best performers, with the Sapy index gaining 27% in 2012 (excluding dividends), 20% in 2010 and 19% in 2014.

Listed property is a kind of hybrid between equities and bonds. Shareholders do not pay 15% dividend withholding tax. Instead their payouts are treated as interest, and taxed as income over a certain threshold (determined by age). To avoid the nightmare of shifting tax regulations, it’s best to keep as much of one’s investment as possible in a tax-free savings account.