Bonds A Solid Choice Amid Uncertainty

Investors can now lock in bond yields at double the rate of cash returns.

- Leon Kok

It goes without saying that the objective of any intelligent investor is to maximize their capital by earning the highest returns that they can get over the longest period possible. The general view is that equities are preferable to bonds or cash equivalents because of their riskier nature and that they offer the highest possible returns.

And as bonds are traditionally considered safer investments than equities, the rate of return offered by them is typically lower. But some bonds (high-yield bonds) may offer exceedingly high rates of return. In the case of junk bonds, for instance, they could yield returns as high as 50% per year, the catch being that they carry extremely high risks of default.

Appropriate allocation of portfolios to these classes is currently being debated both globally and in South Africa. The contrasts between our markets and many elsewhere are considerable. Indeed, it’s not all a straight line.

The dilemma of choice in SA has been brilliantly explicated by Philip Bradford, manager of the Sasfin BCI Flexible Income Fund. He drew from Aesop’s fable, The Tortoise and the Hare’s, seemingly moralistic propaganda.

Slow and steady is a good approach, he says, but in real life, few would bet their money on the tortoise against the hare. On the other hand, the fable comes into its own where ‘getting to the finish line’ is far more important than ‘getting there as fast as possible’.