Issue: March 2012 / May 2012
Affirmation for part bonds
They can now have a larger weighting in the portfolios of pension funds, points out FedGroup Financial Services executive Scott Field.
Changes to Regulation 28 of the Pensions Fund Act came into effect last July as a regulatory intervention aimed at diversifying retirement-investment portfolios. These changes saw the differentiation between two asset classes, with a pension fund now having the ability to invest up to 30% of its assets in Participation Bonds (15% under the ‘debt instruments’ classification and a further 15% under ‘immovable property’).
It’s an encouraging change. The differentiation between the two classifications affirms Part Bonds’ place on pension funds’ investment radar.
Part Bonds were first formalised almost 50 years ago. Appealing to pensioners and the more conservative investor, they gained popularity in the 1980s as a secure and sought-after investment vehicle. Promising a consistency of interest income and a certainty of capital preservation, they have built a trusted reputation as a low-risk investment vehicle.
Feeding a low-risk appetite, such as that of a pension fund, a Part Bond investment is entrusted into a debt instrument which holds a fixed rand value. The debt instrument is secured, with property acting as its security. Thus is capital value preserved and protected.
Complementing its low risk is the attractive level of income. The income or return of a Part Bond is interest-based and is usually a couple of percentage points above the prevailing repo rate. Thus, Part Bonds tend to provide a better, more stable return in comparison to other debt instruments such as money-market funds.
The low risk associated with investing in a Part Bond is further minimised by regulation under the Collective Investment Schemes Control Act. Part Bonds are governed by rules that assure their stability and security as an investment vehicle.
One such rule stipulated by this Act 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 minimised by being diversified across a collective investment portfolio.
All in all, a Part Bond presents the Investor with a vehicle through which the certainty of capital preservation, coupled with a consistency of interest and the security of property, can be enjoyed. Such attractive characteristics would account for their enhanced recognition under Reg 28’s requirements for prudential investment.