BEG TO DIFFER

Not ev­ery­one thinks off­shore bonds are ad­vis­able now, writes Jo­hann Barnard

Financial Mail - Investors Monthly - - Contents -

Not ev­ery­one thinks off­shore bonds are ad­vis­able now

Avery dif­fer­ent take on global di­ver­si­fi­ca­tion is be­ing of­fered by Ash­bur­ton In­vest­ments. The in­vest­ment man­ager listed its World Gov­ern­ment Bond ETF this year to of­fer cheaper di­rect ac­cess to the in­ter­na­tional bond mar­ket.

Bonds are pop­u­lar for be­ing a lower-risk as­set that helps in­vestors add a more de­fen­sive flavour to their port­fo­lio. And what could be more de­pend­able than bonds is­sued by grow­ing, de­vel­oped econ­omy gov­ern­ments?

That de­pend­abil­ity, how­ever, comes at a price: yields far lower than SA in­fla­tion. This means that in­vestors are at the mercy of the rand, which would have to con­tinue weak­en­ing against global cur­ren­cies if in­vestors in this fund are to come out even. And, gen­er­ally speak­ing, that should be the case. Ex­cept that the rand is no­to­ri­ously un­sta­ble. And even the dol­lar has been do­ing a bit of a yo-yo im­per­son­ation this year. It has been strength­en­ing, though, which sup­ports the con­vic­tion of Ash­bur­ton’s Niko­lay Mlade­nov that it’s a sound di­ver­si­fi­ca­tion tool.

“In the six months that this fund has been in ex­is­tence, it has al­ready gone up al­most 13%. Most of those re­turns are not be­cause bond mar­kets in­ter­na­tion­ally have ral­lied but are due mainly to rand weak­ness,” he says. “Ob­vi­ously the op­po­site can be ob­served in pe­ri­ods of a strength­en­ing rand. But at the mo­ment it’s good to have ex­po­sure to some­thing with an off­shore fo­cus.”

Mlade­nov says the ETF was de­vel­oped when re­search showed that lo­cal in­vestors had no low-cost ac­cess to the in­ter­na­tional bond mar­ket. The fund tracks the FTSE world gov­ern­ment bond in­dex, which of­fers ex­po­sure to in­vest­ment­grade bonds is­sued by de­vel­oped and emerg­ing mar­ket gov­ern­ments. US and euro bonds each make up about a third of the fund. About 20% is in Ja­panese bonds and the re­main­der in se­lected mar­kets.

But not ev­ery­one is con­vinced that low-yield­ing gov­ern­ment bonds in world mar­kets are ap­pro­pri­ate for SA in­vestors look­ing to pro­tect them­selves from down­side risk. Bruce Ack­er­man, co­man­ager of Sas­fin’s Global Equity Fund, is one who is op­posed to the idea.

This is not only be­cause of the huge gap be­tween global bond yields and lo­cal in­fla­tion — rel­e­vant only if you in­tend to use that cap­i­tal in SA — but also be­cause of global fis­cal pol­icy. Ack­er­man says the less­en­ing of the quan­ti­ta­tive eas­ing (QE) that many cen­tral banks main­tained over past years might not have the de­sired long-term ben­e­fits for bond­hold­ers. “Cen­tral banks have two means of nor­mal­is­ing the mon­e­tary en­vi­ron­ment. One is to have a real in­ter­est rate nearer to zero rather than nega­tive rates, and the sec­ond is to shrink the cen­tral bank bal­ance sheet be­cause they’ve been buy­ing in vast amounts of bonds via QE.”

By rais­ing rates, he says, cen­tral banks are try­ing to cre­ate some space in case they have to cut rates again should the global econ­omy stall.

“They will there­fore be damp­en­ing growth in ad­vance of any in­fla­tion­ary prob­lems be­cause they want to make sure dra­co­nian ac­tion isn’t re­quired,” Ack­er­man says.

This means in­ter­est rates won’t have to be hiked, pos­si­bly putting down­ward pres­sure on bond prices. That in turn could lead to higher yields.

This is of in­ter­est not only to bond­hold­ers, but also for equity in­vestors, be­cause of the in­verse cor­re­la­tion be­tween the as­set classes — gen­er­ally when bond yields rise equity prices come un­der pres­sure.

“So you have to watch out for bond yields. How­ever, with the US yield at around 3% it’s not a cur­rent risk. Should it go to 4% or 5% due to in­fla­tion­ary con­cerns it cer­tainly would be,” Ack­er­man says. “It’s more likely to take place than for bond yields to go back to 1.5%, be­cause of strong eco­nomic growth. But it would seem that the cen­tral banks are go­ing to en­sure that it doesn’t hap­pen.”

These are ob­vi­ously fac­tors that Mlade­nov also is aware of, but not ones that throw him off his con­vic­tion that global gov­ern­ment bonds have a role to play in a di­ver­si­fied port­fo­lio.

“We’ve seen in­creased de­mand from dis­cre­tionary fund man­agers and in­de­pen­dent fi­nan­cial ad­vis­ers for low­cost pas­sive build­ing blocks. The main aim is to pre­serve cap­i­tal and have less ex­po­sure to risk.” As he points out, it’s al­ways good to have ex­po­sure to bonds of some kind as part of a di­ver­si­fied strat­egy.

This new op­tion is cer­tainly in­ter­est­ing, though it’s far from an out­right home run given the global un­cer­tainty — some­thing that could turn rapidly nega­tive if the trade wars bite.

The ETF was de­vel­oped when re­search showed lo­cal in­vestors had no low-cost ac­cess to the in­ter­na­tional bond mar­ket

Pic­ture: 123RF — EVGENII NAUMOV

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