Page 127 - Profile's Unit Trusts & Collective Investments - March 2025

Understanding Asset Allocation

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 way to access the bond
market, although Treasury does offer retail savings bonds directly to the public.

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.
The value of outstanding listed and unlisted rand-denominated debt securities issued by in the
domestic primary debt market increased by 7.4% year-on-year to R6.7 trillion at the end of
October 2024. The domestic debt capital market remains an important source of financing,
especially for national government, which is the highest contributor to the total outstanding debt
listed on the JSE.
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.
Classification of bonds
Bonds are typically classified in three ways:
By the issuing company/organisation
By maturity
By quality

Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts 125