Introduced in 2006 as a means of encouraging South Africans to save, RSA Retail Bonds have found a niche market in the low- to middle-income sectors. A means of enabling government to disintermediate the banking system by funding its annual budget deficit directly from the people, they offer a better rate of return than savers could get from a traditional fixed deposit bank account.
But is it for you?
So they’re not for everyone, and certainly not for any entrepreneur burdened with liquidity or cash flow challenges, because their major weakness is they tie up capital for the duration of the term, which is two, three or five years.
Chris Hamman, Sanlam Investment Managers portfolio manager, recommends the product for the entry-level market. You won’t find your financial adviser recommending it though, because he earns no fees from it.
“Wealthier individuals typically save by their own discretionary efforts through private client wealth advisers, where they have access to a far wider range of products,” he says. There are no tax advantages as interest is taxable on both types of bonds, retail and government.
Vivienne Taberer, fixed income portfolio manager at Investec, says: “For the entrepreneur, this investment is very good if they have capital they don’t need for a while, but if a business or wealthy individual needs flexibility it is not to be recommended. You would be better off in the money market, which offers greater flexibility, albeit at slightly lower returns.”
Pros and Cons
But for lower income groups, these bonds have the advantage of enforcing saving and yielding returns. In addition to being for a fixed duration, they cannot be used as collateral for any loan, ensuring the investment is safe.
Bonds have a place in any savings portfolio, and RSA Retail Bonds in particular boast a number of advantages: for no risk (they are after all backed by government) they offer a better return than you could get from a bank, and as a direct investment there are no hidden costs or commissions.
Hamman explains that the average private investor cannot access government bonds in any other way outside unit trusts, and retail bonds offer advantages over those too. Government bonds are sold only in units of R1 million.
To encourage private investors, government made them readily accessible at no cost; available in amounts as low as R1 000; and for sale over-the-counter at any post office, Pick ‘n Pay, Boxer or Score stores countrywide, as well as electronically via the Internet, or by telephone from the National Treasury Helpline.
“The system is made to be convenient, transparent and safe, with interest paid twice a year. And if you can prove you’re a pensioner, the payments can be more frequent,” says Hamman.
“The drawback is their illiquidity. The concept is that you buy a bond and hold it to maturity. While you may redeem them early, there is an early settlement penalty.
On the positive side, you cannot lose money – which you can in the equity or bond market. For instance, the JSE’s All Bond Index last year delivered a negative return. That is the major difference,” says Hamman. He adds that they ought not to be compared to other listed investments but to the fixed deposit market.
Is the return worth it?
RSA Retail Bonds offer competitive rates compared to both fixed deposits and the bond market: whereas government bonds currently pay 8,50% for R1 million or above, amounts as low as R1 000 invested in retail bonds offer 8,75% (two years duration); 9% (three years); and 9,25% (five years).
This is also better than money market rates: you would get 6,79% on call for larger amounts, while one year money market rates are 8,15%.
Taberer says the relative attractiveness of RSA Retail Bonds therefore depends on two factors: your risk appetite (which should be low as these are above-all safe investments) and your time horizon.
Comparing them to unit trusts, retail bonds have zero-costs while unit trusts attract costs of about 1% that over time eat away at the ultimate return. The flip side is that unit trusts offer liquidity.
“The difference really boils down to mindset – if you are going to invest in RSA Retail Bonds you had better be certain you don’t need the capital for whatever duration you select, because you are surrendering flexibility for a yield enhancement,” says Taberer.
A further characteristic of RSA Retail Bonds is that they offer a fixed rate, whereas other rates vary with market rates. Hamman explains this can work for or against you, depending on the direction rates move.
“It’s a niche market for lower- to middle-income families, and not something that will become huge,” he says. But for someone who already intends tying money up for a fixed term, it offers the best rate available.