Page 130 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 7

Buying Bonds
Buying bonds directly requires knowledge of the bond industry. The timing of purchases
is particularly important because the bond market is volatile.
SA government bonds are issued by Treasury and sold at auction. A minimum
investment of R10m is required to invest directly into SA government bonds, making direct
purchases the preserve of institutional investors such as fund managers, pension funds and
corporate investors. Government and corporate bonds can also be bought through JSE debt
market members. For retail investors, funds in the Fixed Interest sector are the most accessible

Bonds and Gilts
Funds in the Interest Bearing Variable Term category invest predominantly in bonds. Bonds are
also held by Multi Asset funds and may be used from time to time by Equity funds to reduce
volatility. Bonds approaching maturity (eg, with less than two years to redemption) may be held by
Short Term funds.
A bond is a type of security, an IOU written or issued by a private company, government or
semi-government institution. Investors effectively lend money to the issuer, typically for 20 years
or more. In exchange for borrowing money the issuer promises to repay the amount loaned (the
principal, also known as the face or nominal value of the bond) on a specific maturity date. In
addition, the issuer pays periodic interest payments, usually half-yearly in arrears. The advantage
of buying bonds through collective investment schemes is that investments can be monitored and
managed by professional fund managers, who can combine and vary maturity dates to best effect.
After a bond is issued, it may be traded by stockbrokers and institutions in the secondary
market. (The original transaction between the borrower and the lender takes place in the primary
market.) The proceeds of transactions in the secondary market accrue to the dealer and the
investor, not to the company or organisation that originally issued the bond. However, the price at
which a bond trades differs from its face value because the price or value is related to the
movement of interest rates in the economy. As interest rates fall, the value of bonds rise. This
makes investment in bonds more risky than alternative interest-bearing investments.
Underlying Investments
Central bank bonds, known as RSA bonds, dominate the South African bond market. (Central
bank bonds are sometimes referred to as gilts, a term derived from the phrase “gilt-edged bonds”
used to describe bonds of the highest quality and lowest risk.) About five RSA bonds comprise
80% of the government bond market in South Africa. These bonds have different maturity dates,
and prices fluctuate on a daily basis in response to interest rate movements. Other government
guaranteed bonds are issued by Eskom, Transnet, and the Development Bank. Money is borrowed
through the bond market by these corporations to fund the development of infrastructure.
Some 1500 debt instruments with a nominal value of approximately R8 trillion are listed on the
JSE’s debt market (previously BESA, the SA Bond Exchange, acquired by the JSE in 2009). These
instruments are very liquid with turnover velocity far exceeding nominal value. Roughly R25
billion is traded daily.
The corporate bond market (where the private sector can raise money) has also become a lot
more active in recent years. This is partly due to the government’s privatisation initiatives.
Telkom, for example, used to be a “parastatal” bond: it is now listed under the corporate sector.
The South African Sugar Association has listed a bond to raise money to help black farmers acquire
farms. It is also possible to buy bonds issued by the Department of Safety, Security and Justice.
Classification of bonds
Bonds are typically classified in three ways:
By the issuing company/organisation
By maturity
By quality

128 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts