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Simon Brown: We're talking to Philip Bradford, Head of Investments at PortfolioMetrix. Philip, thank you very much for today. You plan to bring an active income ETF to market later this week, with a current total yield of about 11.8%. We are like the golden age of income funds in South Africa, where you can get equity-like returns without the equity risk.
Philip Bradford: That's exactly right, Simon. Current yields on long-term government bonds are actually higher than the inflation rate plus 7%. It's very unfortunate, but I think one of our best exports for many years from an investment perspective has been bond returns.
Simon Brown: And people will say, “Wait a minute, we're expecting the prime rate to go down this year.” However, there is not necessarily a direct relationship between prime yield and bond yield. And indeed, there is also the rule that “yields fall, prices rise.” He says there are two ways to make money in a bond environment.
Philip Bradford: that's right. There are two main types of bonds we focus on. One is fixed rate bonds, which are investments with fixed interest rates such as term deposits, and the other is variable rate bonds, or variable rate bonds, where the bond's yield rises and falls according to prevailing interest rates. Fee.
Typically, most of the corporate bonds on the market purchased by income funds for investors are floating rate bonds. Most government bonds are fixed-rate bonds. And when we actually get to the top of the interest rate cycle, we want to move further into fixed income bonds, as we're proposing now. It's not particularly complicated, but you want to lock in your interest rate at a higher level. [where] Literally a lot of bonds are still above 12%. This is a really good opportunity for investors who don't want to take too much risk but still want to get double-digit returns.
Simon Brown: And one of them is that we have an active local bond market. In fact, we have a fairly large bond market, but it's not really designed for retail customers. It's not just the complexity, but also the scope and size of the deal. So ETFs like this work well because they take away that complexity.
Philip Bradford: Yes, even in the regular government bond market, that makes up the bulk of the SA bond market. And from a market cap and size standpoint, you're still really playing with the big boys and girls. You handle a large amount of products. You can buy them. However, most of the interesting bonds are corporate bonds and floating rate bonds issued by banks and large corporations, and are difficult to obtain. Large pension funds, asset managers, and life insurance companies buy them when they are issued in the primary market and trade them less frequently in the secondary market.
Therefore, even individual investors like me need access through fund-type vehicles. And things like ETFs here are a really great way for investors to access a lot of good high-yield bonds issued by solid companies like big banks. You can then hold them in a pension fund, superannuation or in your personal capacity.
Simon Brown: You mentioned banks because of course they understand the risk of default on government bonds. Many people will say wait a minute, but there are risks if you go into corporate bonds. That risk is managed. Like you said, you're not going to go to the Simon Super Saver Store and pick up my bail money. These returns are managed by credit risk.
Philip Bradford: Yes, exactly. We try to be focused, and we've historically done that because we've been doing similar missions, identical missions in this area for almost a decade now. And I try to stick to the “too big and important to fail” rule. When you buy a bond, you're lending money to someone else, and you want to make sure they can repay you.
The second is liquidity. Liquidity is largely determined by how good the borrowers are, such as large banks and non-government insurance companies. To be honest, we don't really look beyond that because liquidity starts to dry up quickly.
And the same could be the set of shares of listed companies on the JSE. You want to stick to companies that you can buy and sell, and those tend to be better companies as well.So [with] As far as the bonds that we have available and the bonds that we have access to, we try to stick primarily to the banks and then also some of the insurance companies.
Simon Brown: As you mentioned, I managed the same thing within a unit trust. I understand it's the exact same mission, but how did it work?
Philip Bradford: We've done very well over the years.partially functional [of the fact] In other words, bonds and interest-bearing products have consistently performed well despite tough times. Back in 2015, the portfolio averaged just under 10% per year, which in itself is an impressive return. But at the same time, the stock market performed poorly, with cash yielding only 6% or a little more.
I like to say that bonds are like fruit trees, but stocks are just like the trees in the forest. At the end of the day, what matters is the fruit that can be harvested from the tree through bonding. So what if you tend to buy bonds with a yield of about 10%?Your return over the period will be closer to 10%. So on average it's hovering between 9% and 10% a year. There may be some fluctuations in capital, but you won't get the same thing from the stock market.
Simon Brown: that's right. So going public on Wednesday is PortfolioMetrix Prescient AMETF, an actively managed ETF. Do you have a code and target total expense ratio?
Philip Bradford: Total expenses are just over 0.5%. I think it's up 0.58% when manco costs are taken into account, which is actually the same as the unit trust hub fund. PMXINC is code. This actually allows investors who want a fairly high level of income to earn income through a stock brokerage account without having to try to earn that income by buying stocks, high dividend stocks, or real estate stocks. It's just a means.
Simon Brown: One hundred percent. I'll leave that aside. Dear Philip Bradford, Head of Investments, PortfolioMetrix, thank you for your time.
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