SIMON BROWN: I’m chatting with Nerina Visser from etfSA. I want to talk about bonds. Nerina, I appreciate your time. To me bonds have always been one of two things; one, deeply boring or, two, part of a 60:40 portfolio, 60% equity, 40% bonds. I suspect you’ve got a lot more insight as to how important they are in a diverse and of course passive portfolio – because we can do the passive as well.
NERINA VISSER: Indeed. You are quite right. And I think the third one I would add to that list that you mentioned is any form of retirement saving because, whether you know it or not, we all have some bond exposure, whether it’s your company pension or provident fund or your retirement annuity fund.
Yes, bonds certainly don’t instill excitement and thrills in us, but they actually can be a great not just risk diversifier in a portfolio but, as we certainly have seen over the last 12 to 18 months, a very, very good source of income in a portfolio. And this happened particularly because of the significant cuts 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. That was the one that was cut. So, you know, full-term rates or the prime rate or whatever is sort of at a similar level to these fixed coupons or fixed-interest rates that bonds pay are not that effective.
But now, when we find ourselves where a basket of government bonds pays around 8.5% to 9% of fixed interest per annum, you can compare that, if you’re lucky, to probably getting 3% or 3.5% from a savings account or a money-market fund. Then suddenly you see why bonds become a lot more interesting and exciting in a portfolio, way beyond that low-risk, boring perspective that you painted.
SIMON BROWN: So partly it is that income. I’m old enough to get registered for vaccines, but I’m not old enough to be retired, so I’m in that sort of Goldilocks space at the moment. But never give a bad eye to income. I might not need it [but] I can just reinvest it, in a sense.
NERINA VISSER: Exactly, exactly. That’s what we want to do. When we think in terms of returns that we get from investments, it always comes to 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 be either in the form of dividends, which is what we are familiar with when it comes to shares or equity investing. But when it comes to interest-bearing investments, that income component comes in the form of interest. And of course in the case of government bonds that is a guaranteed rate. Yes, the price of the bond can still go up and down, and there can be some component of capital gain or loss in terms of those prices. But the chunkiest part, the biggest part of your return that you will be getting from bonds is actually that interest income. And so it gives you a much more stable return profile.
In the case of equities, your capital appreciation or capital loss dominates the total return that you get from such an investment, whereas in the case of bonds the bulk of your performance actually comes from that interest yield that you get.
SIMON BROWN: If we get a little technical, the primary versus the secondary market. And if we’re buying an ETF with the secondary market, if we are buying it on the JSE, there is, therefore – I’m looking at the NF Govi, it’s just the one that popped up first on my list – in April/March of last year it 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’ve recovered and in fact, they are now about 20% up on where they were ahead of the pandemic.
NERINA VISSER: Exactly. You talk about the primary market and the secondary market, and that’s quite another interesting way to look at it when we think in terms of bond ETFs. Prior to our being able to buy bonds in ETF form, bonds were only readily available to institutional investors – your big fund managers or your pension funds, and so on.
Yes, we do 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 nominal size of a single bond, a single government bond being R1 million, yes, I’m also old enough to get my vaccine, but I don’t drop R1 million on a single bond when I go out and invest. So packaging these bonds into not just an index or a diversified basket of different government bonds, but also packaging them in an ETF, where you are basically buying just a slice, just a portion of such a fund made up of all these different bonds, means that suddenly it’s a lot more affordable.
If you talk about the new fund, the Govi ETF trading roundabout R76 per unit, or per share, that puts it in the reach of most people to say” “Well, yes, if I can afford R100 to invest, I can go out and buy one of these units of the ETF and in that way get that exposure to bonds, which in prior years I certainly would not have been able to get access to.”
SIMON BROWN: It’s a different beast from income funds and money-market funds – and there are nuances between those. But first, they typically have much lower rates; there’s always the fee issue, although certainly, we’ve seen fees come down in those two. Income and money markets serve their purpose. My sense is bonds are in a different space, and typically an 8.5%, 9% yield – you’re not likely to find that easily in an income or money market.
NERINA VISSER: You definitely won’t find it an income or a money-market fund. So what I often say to people is, have a look at what you can get in terms of an income fund or a money-market fund. Let’s be generous and say you can get 4% interest in terms of that; if I can then get 9% interest in terms of my government bond, there’s already a 5% differential.
Yes, the money-market fund is unlikely ever to have any capital loss. It’s not quite capital-guaranteed, but that price is fairly static. So it’s not going to lose capital for me. But it means I can afford to lose at least 5% of the capital of the government bonds before my total return for the bond gets back to the level that I’m just getting from my money-market fund.
You mentioned what happened during March last year at the height of the pandemic when we saw bonds taking a knock – not quite as big as the equity 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 feel quite comfortable that that buffer, that margin that I get in terms of the yield pickup, the higher interest rate that I can get from the fixed interest rates for these government bonds, over and above where money-market rates are at the moment, is a good option for me because it’s unlikely over a longer period of time that I’m going to lose at least 5% or more in my government bonds.
SIMON BROWN: Again, sticking with the NF Govi, just cause it’s the one on my screen, if I zoom out to listing in March of 2012, nine years ago, it pretty much goes from bottom left to top right. Yes, there’s some volatility, but nothing like you see in the equity market. That is the attraction. They are a little boring but sometimes boring is nice. Boring has a place sometimes.
NERINA VISSER: Boring is actually quite good when it comes to investing. If it’s too exciting I think you’re doing it wrong. There’s a component of investing and certainly, trading or speculation that can be quite exciting and so on, but for the bulk of your long-term investments, the way that you look at managing your wealth over the longer term, boring’s actually good. I prefer to get my thrills in other ways and not in my investments.
SIMON BROWN: I would say to folks, go bungee-jumping, go skydiving.
We’ll leave it there. Nerina Visser, etfSA, I always appreciate your insight.
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