When buying a new vehicle, the consumer seeks to invest in a reliable, homogeneous and safe mode of transport. Although different brands and different body types may influence your preferences, we are always compelled to consider reliability, consistency and safety as deciding factors in our vehicle purchases, no matter who you are and what you like.
In terms of reliability, we generally aim to look for a mode of transportation that won’t give us a headache. Consistency is tied to our desire to find a vehicle that will perform reliably over a long period of time, in any given environment. Bonus points are awarded to models that are proven to overcome the potholes, dark streets, mountains, mud and craziness of South Africa.
When it comes to safety, we’re looking to buy a car that has seamlessly passed every safety test in the book. We hope that the vehicle we buy will not harm us – as a mode of transport responsible for the safe passage of those who are dearest to us. Safety ratings and warranties will underpin our decision-making to a large extent – no one wants to invest in a vehicle that could put your greatest assets at risk.
When it comes to financial investments, similar principles tend to be applied. There is certainly no guarantee of safety offered to investors in the South African financial markets, just like the fact that most vehicles are not bulletproof and can only guarantee your safety to a certain extent . But what investment advisers can do is find the investments that offer state-of-the-art airbags, with world-class braking systems and an ability to absorb shocks unparalleled in the market.
Fortunately, South Africa continues to have a thriving primary and secondary government debt market, despite our sluggish long-term growth forecasts, infrastructure issues and rising government debt. This is reflected in the country’s strong macroeconomic management and the depth of its capital markets.
An investment vehicle that local and international investors should consider for the stable generation and preservation of their wealth may well lie in the South African bond market – which has achieved returns as high as 12% over the past two years. , while outperforming those of other emerging countries. bond markets (including those of China, Indonesia, Brazil, India and Mexico).
Some would be pleasantly surprised that our bond market became a global leader last year, with a total return of 8.7% in 2021. In this sense, the South African bond market has been able to rival and outperform those of some of the world markets. most developed economies, including that of Japan.
Currently, the actual yield on 10-year US Treasuries is -4.816%. The real return represents the annual return on the bond (3.447%) less than the current US CPI inflation rate (8.263%). These figures indicate that investors are actually losing 4.816% on this investment, after adjusting for inflation.
Alternatively, the real yield on 10-year South African government bonds is 2.535% (while the annual yield is 10.335% below the CPI inflation rate of 7.8%), indicating that the South African 10-year government bond currently yields, on a real yield basis, 7.351% above that of the US Treasury.
This comparison helps to illustrate that at present, South African bonds are stable investments, probably due to the fact that the rand has remained sheltered from the most debilitating effects of a world economy in crisis. . Our bond market remains an attractive opportunity for investors and holds great promise as a reliable, safe and consistent vehicle to continue to develop the South African financial market into a globally competitive arena.
That said, when it comes to bond fund investments, transparency can be a critical “safety” factor that predetermines an investor’s interest and commitment. In this regard, investors would be well placed to choose a fund manager who openly uses a quantitative investment strategy that is verified against up-to-date empirical bond data, to hedge investments against bond price fluctuations, interest rate sensitivity and overall market volatility.
Investors should also avoid investing in funds that hide real returns through a special purpose vehicle (SPV) that is often created with a return horizon. SPVs will generally return a percentage of interest to the fund that is not realized. Once the investment horizon is over, investors often realize that they have been misguided in their returns and will either receive far less than originally intended or will have invested based on reports. questionable performance.
Transparency in terms of counterparty risk must also remain at the forefront of investor decision-making, with many recent scandals exposing large losses and thefts in crypto funds in particular. Finding a fund manager who is committed to holding client funds with a well-capitalized and respected custodian or third party can help mitigate these risks and disasters.
Most seasoned investors with a successful investment lineup will also confirm that preserving and generating wealth through low risk, consistent and reliable investments will be magnified down the line. Mathematically, this translates to thinking in terms of geometric means (where events are multiplied together) as opposed to the ubiquitous arithmetic mean (where the mean is based on a sum of numbers).
For this reason, allocating large components of a portfolio to investments that manage downside risk and provide consistent upside returns has a profound effect over a relatively short period of time. Here’s a thought experiment – if you had 20 million rand and you were offered to turn that 20 million rand into 200 million rand – for calling heads or tails in a jiffy – would you take that bet? If you are wrong, you will lose everything. What would be your judgement? The answer is that you should choose to regularly dial the 20 million rand instead!
Successful investors realize that wealth management sits around this geometric mean and the utility of money declines, making it wise to invest until you get a “good” result. high probability. Staying primarily committed to low-risk, consistent and reliable investments that offer stable upside returns with a strong focus on risk management, transparency and downside protection can offer you more in the long run than a simple blow today.
One thing is certain – the South African bond market plays a vital role in supporting the stability and development of our country’s financial market, as an emerging economy with the most attractive (comparative) risk profile for investors. bond market investments around the world – let’s start capitalizing on that.
Michael de la Hunt is the co-founder of Ion Capital Partners