Page 128 - Profile's Unit Trusts & Collective Investments - September 2025

Chapter 7 Understanding asset allocation

simple example, if a three month banker’s acceptance with a face value of R1m is sold for R970 000,
the buyer will make a profit of R30 000 when the instrument becomes payable, equivalent to interest
of 3.09% over three months or 12.37% per annum (12.94% compounded).
Most discount instruments can be traded (ie, the instrument can be sold to another party before
it becomes payable). This is true of some interest bearing instruments, like NCDs, but not true of
ordinary fixed deposits and call accounts.
The main underlying instruments of Money Market funds can be divided into government loans
and commercial loans (see table on page 125).
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 SA. 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 of Southern Africa. 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.

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. Direct investment in
SA government bonds was historically dominated by institutional investors such as fund managers,
pension funds and corporate investors, due to high minimum bid amounts at Treasury auctions. Today
retail investors can also access government bonds through the JSE Debt Market or RSA Retail Savings
Bonds, which have much lower minimum investment requirements.

126 Profile’s Unit Trusts & Collective Investments September 2025