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 in the investment world. Bonds seem boring in comparison.
Not necessarily, says Phil Bradford, portfolio manager of the Sasfin BCI Flexible Income Fund. He maintains that the last five years have actually been very disappointing for investors on the JSE and the long-held 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 in real life 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,” he says.
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 the current uncertain times.
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 a uncertain world.
“For once, bonds are cheap, offering high yields at just the right time.”
According to Sasfin’s analysis, the yield on SA 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 since the start of the year – including equities, property, bonds and whatever funds hold them – 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.
He does not say so, but the image that springs to mind is of a tortoise hiding in its shell at the first sign of danger.
It worked, because he also ducked the havoc of the Covid-19-inspired malaise in the markets.
In fact, the fund reduced its exposure to the market during January 2020, and its cash holdings and liquid assets increased to their highest levels since the inception of the fund in 2015. This meant that when the impact of the pandemic ripped across economies globally and locally, the fund had already reduced its risk profile and was conservatively positioned and thus avoided most of the fallout.
It is now in a position to take advantage of the recent sell-off and invest in bonds at high yields, which “is likely to deliver consistent returns for many years to come,” says Bradford.
Sell, or hold?
He pushes the case for investing in bonds, saying that 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 the sell-off.
“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 very uncertain at the moment,” 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.”
He notes that the fund has returned above 55% cumulatively since its launch five years ago, compared with the JSE All Share, which returned 11%.