{"id":66918,"date":"2024-04-19T12:46:06","date_gmt":"2024-04-19T12:46:06","guid":{"rendered":"https:\/\/dynasty.co.za\/?p=66918"},"modified":"2024-04-19T12:50:15","modified_gmt":"2024-04-19T12:50:15","slug":"barbell-approach-investing-generating-steady-income","status":"publish","type":"post","link":"https:\/\/www.dynasty.co.za\/staging\/barbell-approach-investing-generating-steady-income\/","title":{"rendered":"The barbell approach to investing: Generating steady income while pursuing maximum long-term growth"},"content":{"rendered":"

For many years we have been consistent in our belief that offshore investments offer a far better set of opportunities for our South African-based investors than local options. At the same time, some of our domestic<\/em> investors may need to protect themselves against the volatility that the local currency and the global equity markets may cause. Therefore, unless their local income requirements are truly insignificant when measured as a proportion of their overall asset base, it isn\u2019t necessarily appropriate for clients who need to draw a consistent rand income to have 100% exposure to offshore markets.<\/p>\n

Our approach for these clients is to balance a focus on offshore equities for long-term growth, with short-duration fixed-income exposure in South Africa to provide for their income requirements.<\/p>\n

Harvesting South African yields while mitigating currency risk<\/strong><\/h2>\n

We gravitate towards short-dated income funds rather than long-dated South African government or corporate bonds because the latter amplify volatility over the longer term, increase exposure to South Africa-specific risks, and don\u2019t offer compelling returns over time.<\/p>\n

Given the fact that our analysis shows that a buy-and-hold position in bonds does not tend to outperform lower-risk income funds over the longer term, we see bonds only as a short-term trade that can be profitable when yields fall. We, therefore, don\u2019t favour holding bonds as a consistent weighting in portfolios. Bonds are also strongly correlated to the rand and don\u2019t protect portfolios in a risk-off environment in which global equities fall.<\/p>\n

Short-dated income funds can offer a stable income in rand terms, meaning that clients won\u2019t risk repatriating money when global equities markets are down. This option enables us to take advantage of yields in South Africa that outstrip inflation and are higher than in developed markets. It is important to remember, however, that the rand\u2019s tendency to weaken over time will inevitably negate much of this yield differential. (It\u2019s also worth noting that dollar yields are currently above inflation for the first time in many years.)<\/p>\n

Why we’re betting on offshore equity markets<\/strong><\/h2>\n

South African equities have significantly underperformed global developed market counterparts, especially the US, since the peak of the commodities supercycle and the subsequent Global Financial Crisis. We are not at all convinced by the narrative that the JSE is cheap and that local equities offer better value than international equities.<\/p>\n

With South Africa expected to barely muster 1% in annual GDP growth going forward, local companies will struggle to deliver attractive returns. The greater opportunity set offshore, plus the likelihood of continued rand weakness over the long term, leads us to strongly prefer global equities over local for the growth portion of portfolios. Some factors that support this thesis are:<\/p>\n