An investment gem tarnished by an unfair reputation…

Part Bonds are back on the investment radar thanks to a set of appealing characteristics which compliment the prudential investment stipulations set out by Regulation 28 of the Pensions Fund Act. First formalised in 1964, Part Bonds gained popularity as a secure investment option. The product built a trusted reputation as a low risk investment vehicle that appealed to pensioners and the more conservative investor.

The Masterbond scandal, which burnt the fingers of more than 22 000 South African pensioners in the 1990s, meant that Part Bonds became synonymous with terms such as "high risk” and "dubious”.

What investors failed to see was that Masterbond offered two investment vehicles – a Part Bond offering and an unsecured debenture that financed major property developments. The unsecured debenture was structured in much the same way as those used in current property syndications.

Pensioners who lost their life savings 15 years ago were invested in the unsecured debenture and not the Part Bond offering. Investors associated the loss of their savings with the Part Bond product, when in fact the unsecured debenture, which had individual investors wholly invested in individual properties, was to blame.

Although 73% of the R650 million lost has been recovered, Part Bonds are still linked to the notion of fraud and un-rightly so. Nowadays, thanks to the product’s attractive characteristics, industry experts describe Part Bonds as "unearthed investment gems”.

A Part Bond investment is entrusted into a debt instrument which holds a fixed rand value and is in turn secured against a property asset. Complementing its low risk is the attractive level of income provided by a Part Bond.

The income (or return) generated by a Part Bond is interest-based and is usually a couple of percentage points below the prevailing prime rate. Thus, Part Bonds provide a more stable return in comparison to other debt instruments, such as money market funds.

The already low risk is minimised thanks to strict regulation. One of the lessons learnt in the aftermath of The Masterbond scandal was that investors needed greater protection from the law. Part Bonds are regulated by the Collective Investment Schemes Control Act of 2002 and are governed by rules that ensure stability and security.

One such rule is that no more than 75% of the value of a property to be mortgaged may be lent out. This rule ensures capital preservation as the 25% that remains in the pool of funds can be used as a recovery mechanism if need be.

Risk, is further mitigated due to the capital being spread across a collective investment portfolio. Thanks to the large pool of properties within a single portfolio, an investor’s capital value is safe-guarded against the possibility of a borrower defaulting on a loan.

Unlike an unregulated debenture, as offered by property syndications, a Part Bond is a regulated and secure investment vehicle. A Part Bond presents an investor with a vehicle through which the certainty of capital preservation, coupled with a consistency of interest and security of property can be enjoyed.

Within the correct competitive climate, Part Bonds will validate their value, negating their tarnished reputation.