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Are the dark clouds filling the skies with Gold?

by | Coronavirus, Fund Updates

In the midst of the human tragedy of the Coronavirus Pandemic, most investors who have accumulated capital over time have seen their portfolios being somewhat battered.

Equity fund values have suddenly fallen – in some instances significantly – more conservative funds have seen declines and even investors who have some of their capital in income funds- usually used for their typically conservative nature of providing capital protection and an income yield – have seen the capital values of their investments in these types of funds decline recently.

In a recent article by Morningstar Investment Management South Africa’s Eugene Visagie and Victoria Reuvers, the authors have taken a look at why many of these funds saw their values fall, and yields rise and why, in the aftermath of these declines, investors in these funds should be handsomely rewarded going forward over an appropriate period.

Key points for existing income fund investors

Some of the key points which they make are:

  • Income funds typically hold a combination of cash instruments, government bonds, credit instruments like bank debt, preference shares, inflation-linked bonds and selected listed property instruments like REITS.
  • Since all of these instruments trade in the market, prices are determined by supply-and-demand dynamics.
  • When there is forced selling of these instruments, their prices can fall, but at the same time this results in their yield increasing.
  • This is what happened in March when, largely as a result of international investors disinvesting from emerging markets, income funds on average lost 3%-5% of their capital value as the yields on many of these instruments increased.
  • Existing investors in these funds will be compensated by the decline in the capital value of their investments by a higher income yield going forward. And, if they stay in these funds and the yields of these instruments reduces, the capital value of their investments will increase commensurately.
  • New investors in these funds will immediately be able to reap the higher yield of the funds and, if they stay in these funds and the yields of these instruments reduces, the capital value of their investments will increase commensurately.

What does this mean for you?

  • In an environment where interest rates are being cut and cash in the bank will likely return 4.5%-5.0%, income funds are now yielding close to 9%.
  • South African bonds are currently providing some of the highest yields in the world.
  • Investors are always looking for positive real returns from Investments and South Africa is presenting a very good investment option to international investors. It is therefore expected that foreign investors will reinvest into our bonds once there is less volatility in the market.
  • This will result in the capital value of these instruments increasing and the yield will reduce.

The authors conclude with this quote from Warren Buffett:

“Every decade or so, dark clouds will fill the economic skies and they will briefly rain gold. When downpours of that sort occur, it is imperative that we rush outdoors carrying washtubs, not teaspoons”.

We are constantly looking for opportunities for our clients to both preserve and grow their capital. At current real yields, these funds look compelling to us for appropriate investors who have a twelve-month or longer investment horizon and are looking for a better parking place for their short-term cash than under the mattress or in the bank.

Should you wish to discuss your existing portfolio, or you are wondering where – and when – you can allocate new investments, please give us a call.

To read the full article, please click here

 

The information contained in this communication is of a general nature and is not intended to address the circumstances of any particular person. You should not act upon this information without appropriate professional advice. Wealth Preservation Strategies (Pty) Ltd will not be liable for any loss or damage suffered by any party as a result of their acting on or failing to act on this information. Views and opinions expressed herein may change with market conditions and should not be used in isolation. Wealth Preservation Strategies (Pty) Ltd is an authorised financial services provider (License Number 14577).