Bonds telling a good story

Finweek English Edition - - Private Buy -

SOME READ­ERS HAVE been ask­ing what unit trust funds are best in the cur­rent tur­bu­lent mar­ket. Of course, much de­pends on the in­vestor’s risk pro­file and time hori­zon, but the short an­swer is avoid spe­cial­ity unit trusts for now (un­less the in­vestor has a spe­cific, well-in­formed view on a sec­tor) and look at the gen­eral eq­uity funds or as­set al­lo­ca­tion funds – ba­si­cally bal­anced funds, where the man­ager makes the as­set choice.

But there’s a fur­ther al­ter­na­tive: bond unit trust funds. Bonds aren’t my area of ex­per­tise but yields sug­gest, I’m told, that bonds seem to be in­di­cat­ing that inflation is at or past its worst.

The prob­lem with in­vest­ing di­rectly in bonds is that you need ex­pert knowl­edge, as in what bond and do you go longer or shorter du­ra­tion. And bonds cost a large amount.

Bond unit trusts should have an ex­pert run­ning the fund, are more af­ford­able and money can be phased in via monthly debit or­ders.

As­set al­lo­ca­tion unit trusts are prob­a­bly cur­rently rel­a­tively high in cash, with a lower than av­er­age eq­ui­ties ex­po­sure. That’s good: it pro­vides some pro­tec­tion should the mar­ket get worse (gasp, and it could) and pro­vides liq­uid­ity for the fund man­ager to pounce on un­der­val­ued op­por­tu­ni­ties as those emerge without hav­ing to sell other as­set classes in the fund.

Money mar­ket funds re­main an at­trac­tion but not one I’d go along with. The best thing is that a money mar­ket unit trust should be safer than cash in the bank. It’s un­likely, but one South African bank could col­lapse. A money mar­ket fund will be ex­posed to all the banks.

Sec­tor calls are more dif­fi­cult and in the in­ter­ests of pru­dence should prob­a­bly be avoided. But be­ing the eq­ui­ties bull I am, my unit trust money would still go into a fi­nan­cials fund. What bet­ter time to buy than when ev­ery­thing looks so bleak?

But that’s just me. Bet­ter to tread cau­tiously with the sec­tor funds.

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