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