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Which one to choose

21 June 2005 Angelo Coppola

Investors reliant on income are said to be moving into specialist income funds in an attempt to maximise their income yields in a low interest rate environment.

Investors are trying to find ways of bumping up their income in the wake of substantial falls in interest rates over the course of the past two years.

Money market funds delivered 7,39% during the past 12 months and income funds gave a 9,78% return.

Current yields are even lower in the wake of April's 50-basis point decline in interest rates.

Arno Lawrenz, Old Mutual’s Enhanced Income Fund portfoliomanager, says in this environment, investors will have to be prepared to take on more risk in order to achieve capital growth as a hedge against the fall-off in income levels.

Lawrenz is not optimistic that bond yields will continue to fall in the medium-term and thus is not expecting significant capital gains from bonds for the rest of the year.

He says: "Bonds are neither cheap nor expensive at the moment. They are trading at a fair value given the current fundamentals."

"Property offers higher income yields than bonds, but this does come at an increased risk.However, the current growth environment and Reserve Bank monetary policy stance support property fundamentals."

He believes the prospective returns offered by the inflation-linked bonds, currently comprising about 7% of the portfolio compare with a zero holding at the end of last year, "are quite attractive relative to other available sources of income".

But Lawrenz points out that the investors shouldn't necessarily expect those past returns to continue going forward. He adds investors coming into the fund in the wake of the interest rate cut are likely to experience lower total returns than those delivered during the first quarter.

All signs point to the search for yield continuing. Old Mutual Asset Managers (SA) economist Rian le Roux says interest rates are likely to remain stable to lower for the rest of the year barring any unforeseen shocks.

Quick Polls

QUESTION

The second draft amendments to Regulation 28 will allow retirement funds to allocate up to 45% of their assets to SA infrastructure, with a further 10% for rest of Africa; but the equity & offshore caps remain unchanged. What are your thoughts on the proposal?

ANSWER

Infrastructure? You mean cash returns with higher risk!?!
Infrastructure cap is way too high
Offshore limit still needs to be raised
Who cares… Reg 28 does not apply to discretionary savings
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