For the fourth time in 16 months the JSE all share index is battling to punch through dogged resistance at the 54,000 level. It is a reflection of huge uncertainty in a market which has been buffeted by currency, political and economic shocks. It could be time to heed the saying: he who runs away lives to fight another day. For most investors, the first safe haven likely to spring to mind is a money market fund.
But they are missing a trick. For a minimal rise in risk (if any) they can extract a handy yield boost from an income fund.
Henk Viljoen, head of fixed interest at Stanlib, says: "I have been advocating income funds for some time."
Viljoen co-manages Stanlib Income Fund, which has assets of R20.5bn, the largest in its sector. With its assets concentrated in domestic instruments which have yields linked to the repo rate-driven Johannesburg interbank agreed rate (Jibar), the fund is very much in the traditional income fund mould.
Instruments linked to movements in Jibar eliminate the risk of capital loss and provide a yield boost.
"Five-year bank paper is yielding 9%," says Viljoen.
Overall the fund is now delivering a yield after fees of 8.5%, some 50 basis points above net money market fund yields.
On a R100,000 investment over five years this gives the fund a total income edge of about R3,400 over a money market fund.
But Malcolm Charles, head of fixed income at Investec Asset Management, believes a traditional income fund is not the ideal solution. "You want a multi-asset income fund with a decent yield plus an element of capital appreciation." He co-manages the R2.2bn Investec Diversified Income Fund. The fund’s diversification brings with it modest exposure to domestic and offshore assets such as listed property, preference shares and units of other funds. Though the multi-asset approach will not please income fund purists who aim to avoid risk completely, Investec’s fund has lived up to its promise of enhanced returns and minimal price volatility. Investors have sacrificed some yield (it now yields about 7.8% after costs), but have more than made up for it in capital appreciation: over the five years to June 30 the fund gave an average annual return of 8.5% after costs compared with the Stanlib fund’s 6.74%.
Both funds qualify for inclusion under national treasury’s tax-free, R30,000/year investment programme.
For investors looking to maximise low-risk yield, a number of bank fixed deposits are also looking attractive.
Also to be borne in mind are the thresholds before interest becomes taxable. At a yield of 8% the maximum investment is R297,500 for those under 60 years old and R432,200 for those over 60. Among 12-month fixed deposits, Investec’s stands out at an effective 8.5% yield on a minimum R100,000 investment. In the five-year deposit space FNB stands out with a yield on offer of 9.45%. In the two- and three-year space, yields on income funds such as Stanlib’s and Investec’s are ahead of the pack. Over two years, for example, the best fixed deposit yield is 7.6% from Absa, which does not permit early access to funds.
Investors hoping to see interest yields rise further are in for a disappointment, believes Viljoen. "I feel we have seen the end of rate hikes. But they won’t come down any time soon either."
Investors can extract a handy yield boost from an income fund, without much more risk