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

Financial Mail - Investors Monthly - - Contents - Robert Laing


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.


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.


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.

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