Phillip is a multiple Raging Bull winner and has a longstanding relationship with Richard Sharp (MD of Heritage Wealth Partners), he is head of investments for Portfoliometrix and manages the Dynamic Income Fund. At present Phillip looks after anything from 25%-35% of our total AUM (assets under management) depending on market conditions. We are fortunate enough to have direct access to Phillip and he has penned this article, especially for Heritage Wealth Partners and our clients.
If you asked a group of investors to guess which asset class in South Africa had given the best return over the last seven years, most would rationally choose the stock market. After all, investors have been programmed to believe that equities outperform other asset classes, and they must buy “stocks for the long run.”
Although, as shown in the chart below, this was not a good period for the JSE. So like the fabled hare, SA stocks were soundly beaten by lowly cash and the “tortoise-like” bonds. Importantly, whilst the SA Bond index provided more than double the return of the stock market over seven years to the end of June 2022, there were other lesser-known investments that we hold in the funds we manage that gave an even better return.
All data is calculated on a monthly, ZAR basis as of 30/06/2022. Source: Financial Express, PortfolioMetrix. The Portfolio Manager Track Record is a composite of funds managed by the portfolio manager since 1 July 2015.
At first glance, Aesop’s fable, The Tortoise and the Hare seems like moralistic propaganda. We all get the point that slow and steady is a good approach, but in real life who in their right mind would bet their hard-earned money on the tortoise against the hare? However, this fable is probably best applied to investing where “getting to the finish line” is far more important than “getting there as fast as possible.” Experienced investors have invariably learned the hard way that avoiding losses and consistent returns are more important than finding the next Amazon, Tesla or Bitcoin with the hope of achieving high returns.
The challenge that many investors face is that they typically are not aware of the multitude of additional investment opportunities available to them that provide excellent returns with much less volatility than the stock market. Bonds are such an example of a misunderstood asset class that tend to provide inflation-beating returns with far greater consistency.
When buying a bond, you are essentially lending your money to a company, institution or government at an agreed rate of interest, and they guarantee to pay back your capital at maturity. The majority of bonds in SA are issued by the government, but there is an ever-increasing market of listed bonds issued by the major banks and other blue-chip companies. If an investor buys a 5-year bond issued by a major bank (e.g. Standard Bank), it is very similar to investing your money in a 5-year fixed deposit with the same bank. The major difference is that you can sell your bond anytime, so you are not locked in at all.
Certain bonds in SA are currently providing investors with a very high income (over 11%) which is very attractive compared to other riskier asset classes. The challenge is that most of the high-yielding bonds are snapped up by large institutional investors and are not easily accessible to private investors. Therefore, we manage investment funds that allow clients access to a diversified portfolio of these high-yielding bonds and the added benefit of easy access and liquidity.
So, whilst we continue to see multi-year opportunities for decent growth in the local and global stock markets, we also have a large proportion of our investors’ money invested in a range of bonds. With certain bonds at current yields of over 11%, they may just give the stock market some stiff competition again over the next seven years.
Philip Bradford is a multiple award-winning fund manager and Head of Investments at PortfolioMetrix Asset Management.