Right time to buy fixed-rate bonds
JSE: PAST FIVE YEARS HAVE BEEN DISAPPOINTING
Bonds may seem boring but sometimes it pays to back the tortoise. Moneyweb
Equities always seem more exciting, with every listed company’s prospects being scrutinised, analysed and debated by hundreds of investors for hours every time something changes. Bonds seem boring in comparison.
Not necessarily, says Sasfin BCI Flexible Income Fund portfolio manager Phil Bradford.
He maintains that the past five years have been disappointing for investors on the JSE and the longheld belief that equities outperform all other assets classes has been tested severely.
“The JSE All Share Index, like the fabled hare, has been soundly beaten by the tortoise-like cash and bonds,” says Bradford.
“Slow and steady is a good approach, but few people would bet money on the tortoise against the hare. But in investing, getting to the finish line is far more important than getting there as fast as possible.”
Bradford, who this year won both Morningstar and Raging Bulls awards in the flexible income category, says his analysis shows that bonds and cash have been an excellent choice for investors, especially if one considers volatility and risk.
“Everyone wants high investment returns, but many investors don’t want to take risks – or cannot afford to,” says Bradford, adding that many people are looking for a decent return without taking extra risk in uncertain times.
‘Solid choice’
He says this is one of the reasons bonds are a solid choice at current rates.
“A bond’s income and capital are guaranteed by the issuer, like a bank or government, which provides certainty in an uncertain world. For once, bonds are cheap, offering high yields at just the right time.”
According to Sasfin’s analysis, the yield on local 10-year bonds is currently more than double the yield on cash, while longer-dated bonds are providing a further 2% interest.
With expectations that inflation will fall to close to 3%, investors who buy bonds at current levels will be locking in returns of 8% above inflation.
“These are the type of returns normally only possible from equities,” says Bradford.
While most investments have taken a hammering this year, Bradford was sitting on more cash than usual in the fund in anticipation of an increase in risk and volatility due to the expected downgrade of SA’s bonds by rating agencies.
It worked, because he also ducked the havoc of the Covid-19-inspired malaise in the markets.
Sell or hold?
He pushes the case for investing in bonds, saying many investors in shares are asking if it is time to sell or hold on for further recovery.
This is a textbook case of behavioural error known as “anchoring”, where investors hold on to current investments hoping to get back to where they were before.
“This is causing investors to ignore other good, lower-risk opportunities,” says Bradford.
“With cash yields at record lows, the answer lies with SA bonds. They are cheaper than other emerging markets and provide low-risk investors with the opportunity to lock in high returns.
“Equities are likely to recover over the next few years, but the outlook is uncertain,” he adds.
“Interest rates are going to fall even further and cash rates could easily fall closer to 3% by the end of the year if the economy does not recover.
“This is the right time to buy fixed-rate bonds at high yields, locking in rates above 11% for our investors.”