Life in SA bonds if you know where to look
The local bond market may be risky but it still offers investors potentially better returns than offshore bonds or cash, managers of multi-asset income funds say.
Despite the risk that a ratings agency downgrade presents to the local bond market, the managers of a number of multi-asset income funds this week told an investment conference hosted by investment platform Glacier by Sanlam that they are choosing bonds with shorter terms to maturity and avoiding or investing little in government bonds - and are still finding investment opportunities.
The SIM Active Income Fund invests in corporate and government bonds, money market instruments, preference shares and listed property as well as derivatives, and has achieved an annual return of 8.48% for the past 10 years, according to Morningstar.
Melville du Plessis, fund manager of the SIM Active Income Fund, says international investors are choosing emerging-market bonds including South African bonds because they offer higher yields despite the political and policy uncertainty that would normally affect bond yields.
At the end of June, the fund had more than 86% in cash and money-market instruments, 11.6% in bonds - mostly corporate bonds - and less than 2% in listed property.
Meyer Coetzee, manager of Prescient Income Provider, says the South African bond market was among the four most expensive bond markets in emerging-market countries and investing in bonds was currently tricky.
The Prescient Income Provider, which has returned 9.38% a year for the past 10 years according to Morningstar, is currently also investing in bonds with a shorter term to maturity and has 46.6% in cash and money- market funds and 13.5% offshore.
Malcolm Charles, manager of Investec Asset Management's Diversified Income Fund, says that after the firing of finance minister Nhlanhla Nene at the end of 2015, South African bonds went on to deliver a 15% return in 2016.
Investec's Diversified Income Fund has a five-year history of delivering a return of 7.14% a year. The fund currently has 58% in longer-term debts with a floating interest rate, 10% in corporate bonds, 9.5% in foreign currencies, money-market and cash instruments, and 6% in government bonds.
Louis Antelme, fixed-income portfolio manager at Fairtree, which manages the BCI Income Plus Fund, says the fund targets the short-term fixed-interest index plus three percentage points.
The fund invests largely in floating-rate bonds and notes. It uses foreign currency that is hedged using futures and currently has less than 2% in listed property.
The fund has returned 9.55% a year over the past three years.