SIMON BROWN: I chat with Nerina Visser from etfSA. I want to talk about bonds. Nerina, I appreciate your time. For me, links have always been one of two things; one, deeply boring, or two, in a 60:40 portfolio, 60% stocks, 40% bonds. Guess you have a better idea of how important they are in a diversified and of course passive portfolio, as we can do passive as well.
NERINA FISHERMAN: Indeed. You’re absolutely right. And I think the third one that I would add to this list that you mentioned is any form of retirement savings because whether you know it or not, we all have exposure to bonds, whether it’s your company pension or provident fund or your retirement annuity fund.
Yes, bonds certainly don’t spark excitement and thrills in us, but they can actually be a great not only for diversifying risk in a portfolio but, as we’ve certainly seen over the last 12-18 years. months, a very, very good source of income in a portfolio. And that happened in part because of the big drops in short-term interest rates that we saw in the first quarter of last year.
Now, bonds pay a fixed interest rate, which is quite different from the prime rate or the overdraft rate – or the short-term rate. This is the one that was cut. So, you know, long term rates or prime rate or whatever is sort of at a similar level to those fixed coupons or fixed interest rates that bonds pay are not that effective.
But now when a basket of government bonds is earning around 8.5% to 9% fixed interest a year, you can compare that, if you’re lucky, to probably 3% or 3.5%. a savings account or a monetary fund. Then suddenly you see why bonds get so much more interesting and exciting in a portfolio, way beyond that low risk, boring prospect that you described.
SIMON BROWN: So it’s part of that income. I’m old enough to sign up for vaccines, but I’m not old enough to be retired, so I’m in that kind of Goldilocks space right now. But never take a dim view of income. I may not need it [but] I can just reinvest it, in a way.
NERINA FISHERMAN: Exactly exactly. This is what we want to do. When we think in terms of the returns we get from investments, it is always about components. There is the capital growth side, which is really the price that changes, the price that can go up and down. And then there’s the income component, and the income component can come in the form of dividends, which we are all familiar with when it comes to investments in stocks or stocks. But when it comes to interest-bearing investments, that component of income comes in the form of interest. And of course, in the case of government bonds, this is a guaranteed rate. Yes, the price of the bond can always go up and down, and there can be a capital gain or loss component depending on those prices. But the most important part, the greatest part of your return that you will get from bonds is actually that interest income. And so that gives you a much more stable feedback profile.
In the case of stocks, your capital gain or loss dominates the total return you get from such an investment, while in the case of bonds most of your performance actually comes from the interest return. that you obtain.
SIMON BROWN: If we get a little technical, the primary market versus the secondary market. And if you buy an ETF with the secondary market, if you buy it on the JSE, so there is – I’m looking at the NF Govi, it’s just the one that appeared first on my list – in April / March of last year he was under pressure but the income didn’t change, just the capital value. In other words, you close your eyes and say, don’t worry, I’m here for the income. They have recovered and in fact are now about 20% ahead of what they were before the pandemic.
NERINA FISHERMAN: Exactly. You talk about the primary market and the secondary market, and that’s another interesting way to look at it when you think of it in terms of bond ETFs. Before we could buy bonds as ETFs, bonds were only easily accessible to institutional investors – your large fund managers or pension funds, etc.
Yes, we have retail savings bonds available in South Africa so there is some form of exposure that investors can get. But these are fairly fixed terms, longer terms. When you look at the face size of a single bond, a single government bond being 1 million rand, yes I’m old enough to get the vaccine too, but I’m not dropping 1 million rand on a single bond when I go out and invest. So, pack these bonds not only in an index or a diversified basket of different government bonds, but also in an ETF, where you are essentially buying only a slice, just a part of such a fund made up of all of these. different obligations, suddenly means it’s much more affordable.
If you’re talking about the new fund, the Govi ETF R76 trading roundabout per unit, or per share, that puts it within the grasp of most people to say “Well, yeah, if I can afford R100.” to invest, I can go out and buy one of those ETF shares and thus get that bond exposure, which I certainly wouldn’t have been able to access in previous years.
SIMON BROWN: It’s a different beast from income funds and money market funds – and there are nuances between them. But first, they usually have much lower rates; there’s always the issue of fees, although we’ve certainly seen fees drop in both of these cases. Income and money markets perform their function. I feel like bonds are in a different space, and typically yielding 8.5%, 9% – you probably won’t find that easily in a money or money market.
NERINA FISHERMAN: You will certainly not find an income or a monetary fund there. So what I often tell people is you have to see what you can get in terms of income funds or money market funds. Let’s be generous and say you can get 4% interest on it; if I can then get 9% interest on my government loan, there is already a 5% differential.
Yes, the MMF is unlikely to experience a capital loss. It is not quite guaranteed in capital, but this price is quite static. So it’s not going to waste any capital for me. But that does mean that I can afford to lose at least 5% of the principal amount of government bonds before my total return on the bond returns to the level I just got from my money market fund.
You mentioned what happened in March of last year at the height of the pandemic when we saw bonds take a hit – not as big as the stock market, but they certainly took quite a bit. You know, a 5% capital loss over an extended period is unheard of in the bond market.
So I’m quite comfortable with the fact that this buffer, this margin that I get in terms of rising yields, the higher interest rate that I can get fixed interest rates for these bonds Government, beyond current money market rates, is a good option for me because it is unlikely that I will lose at least 5% or more over a long period of my government bonds.
SIMON BROWN: Again, staying with the NF Govi, just because it’s the one on my screen, if I zoom out the list in March 2012, nine years ago, it goes pretty much from the bottom left top right. Yes, there is some volatility, but nothing you see in the stock market. This is the attraction. They are a bit boring but sometimes boring is nice. Boredom sometimes has its place.
NERINA FISHERMAN: Boring is actually pretty good when it comes to investing. If that’s too exciting, I think you’d be wrong. There is an element of investing and certainly, trading or speculation that can be quite exciting and so on, but for the most part of your long term investments, the way you plan to manage your wealth in the long term. long term, boring is actually fine. I prefer to get my feelings through other means and not through my investments.
SIMON BROWN: I would say to people, bungee jump, parachute jump.
We will leave it there. Nerina Visser, etfSA, I always appreciate your insight.
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