Taxes not favouring bond funds at present

Evan Pickworth

BOND funds are generally not the darlings of the investment universe, and while SA yields are certainly standing out from the crowd, tax and levy increases are only serving to make them less favourable.

For those searching for healthy inflation beating returns in retirement – when tax increases are included – you’re probably not going to get it from bonds.

With electricity prices going up 26% again, new carbon taxes on cars and even water and other increases mooted above inflation of 4% and salary increase of 6%, yields of 8% before costs are not going to be enough, it is as simple as that.

I heard a leading market expert complaining this week that the interest being earned in his pension portfolio was not high enough to let him retire, which is unfortunate as he is nearing that date and equity markets are so volatile and toppish in SA.

This is forcing investors to look for safer bets that still offer decent real returns. Some are seeking out alternatives, like gold and silver coins as a retirement strategy, especially as the safe haven element is attached.

With inflation expected to average around the 5-5.5% mark this year and next, South African 10-year government yields do offer value on a real yield basis and the spread is one of the highest ever achieved, but having the bulk of a portfolio earning at that rate, especially as retirement funds naturally progress to higher fixed income weightings, it leaves many people more than a little worried.

Some yield enhancing funds have certainly done very well by beating the bond benchmark by close to 2% and income funds, which include some property yields, are looking far more attractive than the money market, as rates are only due to go up in about nine months. So the two-year space is the one to be looking at, where 8% could be earned relative to 5% in the money market – but is that even going to be enough?

A good diversification strategy will always work, but that would need equities to do a lot better than they are. It is definitely a predicament for investors to be in.

But I have always maintained a fair weighting should be given to regular bond and income funds, and the slant right now should be to a two-year plus income fund, or at least a strong yield enhancing bond fund and certainly not a global one. Then some alternative investment should be considered, but only as part of 10-15% put into resources and commodities – actually about 5% in the alternatives.

The rest will generally be in equities – but sector breakdowns are becoming more important by the day, so a tracker fund is not my preferred choice. I would carefully investigate whether funds are exposed to up and coming sectors, like consumer goods.

Of all fixed income funds in SA, the best 12-month performance is from Sanlam’s Bond Plus Fund with 9.98% – it is also the best over three years with 32.27%, which is not bad. But more than three months it has only managed 0.56%, which when annualised is not even inflation beating!


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