Investors are brought up on the conventional wisdom that over the long term equities will perform better than bonds, making up for their volatility.
Yet bond unit trusts have outperformed equity funds over all periods since bond funds were first started 15 years ago.
The oldest surviving bond fund in SA, Investec Gilt, has provided an 18,25% annualised return over the past 15 years. This is to be compared with an average 14,25% return over the same period from equity funds. Even the best-performing general equity fund over that time, Investec Equity, returned only 16,65%.
You would have needed the good fortune to invest in either Liberty Resources or Old Mutual Mining & Resources to beat the gilt fund over that time.
Bonds have been in a spectacular bull market worldwide for the past 20 years, as inflation has fallen. On the supply side, governments have been borrowing less. Both trends have increased the capital value of bonds, pushing down yields.
Over the short term, the difference has been even more pronounced. Over the past year, the average general equity fund has lost 15,0% (even before charges) while the average bond fund has provided a 25,8% return.
Bond managers do not deviate as much from the all bond index as equity managers deviate from the all share, so there is a much narrower range of returns.
Internationally, there is an opportunity to make money by investing in higher-yielding corporate bonds, which have the potential to provide capital gains when the spreads between corporate and government bonds narrow. But the SA corporate bond market is small and relatively illiquid.
Bond fund returns over the three years to March varied from 27,2% for Henk Viljoen's Liberty Bond fund to 16,2% from the bottom-performing FT NIB Gilt.
This difference is significant, especially when it is compounded over three years, but it is nowhere near the difference in equity performances.
Over three years, top performer Oasis Crescent has provided a 22,2% return. Nedbank Harlequin has returned a negative 17,9%.
SA unit trust investors have been voting with their feet. Over the year to March there has been a R2,2bn net inflow into domestic bond funds and just R450m into domestic equity funds.
The inflow into bond funds is dwarfed by the R3,5bn that has gone into the specialist income funds. This category incorporates cash-plus funds, with a maximum average duration of six months, and flexible fixed-interest funds, which can move from cash to bonds at will .
But will this appetite for fixed interest prove to have been the correct decision?
Andrew Salmon of Standard Bank Managed Prudential fund says equity investors will be rewarded for their patience as equities offer long-term value.
