The low-risk investments

SSL In The Money

with Ronalda Blackwood

Wednesday, January 04, 2012

THE year 2012 has arrived and many investors are reflecting upon the year that was -- reviewing the performance of their portfolios in 2011 and brainstorming how to improve their returns for the new year. However, given the numerous options that exist, the selection is often based not only on the potential return but also on the risk associated with the decision.

Even for those investors with high-risk preferences, lower-risk investment opportunities act as a buffer and should not be overlooked. Fixed-income investments offer lower risk and help to diversify one's portfolio ie to achieve an overall higher yield/return and lower risk across the number of investment opportunities, as opposed to investing in a single type of investment.

Fixed-income investment options offer returns that are generally reliable and predictable; and received in fixed periods. As the name suggests, the income is fixed and the bond-holder can rely on this cash inflow on a quarterly or semi-annual basis and knows in advance the interest payment that will be received based on the amount invested. Also, when the bond matures, the amount invested (principal) is repaid to the investor as well as the final interest payment. As such, these types of investments are especially suited for investors seeking steady income streams, such as pensioners.

There are numerous fixed-income investment options in Jamaica and globally such as repurchase agreements, treasury bills and bonds. While overall interest rates are at historical lows locally, there are still opportunities to be taken advantage of in the fixed-income market that offer stable, consistent returns.

Repurchase agreements, commonly referred to as repos, are ideal for persons with short-term goals and needs. With a repo, a sum of money is invested at a specified interest rate for a specified period, at the end of which the investor is repaid the principal plus interest. Repos are very similar to a savings account or fixed deposit at commercial banks but usually offer the advantage of higher interest rates for tenures of either 30, 60, 90, 120, 180, 270 or 365 days. The minimum investment is stipulated by the investment house.

Another short-term, fixed-income investment is Treasury bills (T-bills) issued by the Government. With T-bills, one should note that the interest rate is determined at auctions which are held monthly for 30, 90 & 180-day tenures. This offers investors the option of bidding for the rate they would like to receive on the instrument, thereby 'naming your price'. Bidding takes place via a broker after the consideration of recent trends or auction results as well as the advice of your wealth advisor.

The minimum investment is J$5,000 and it is important to note that T-bills are issued at a discount from par. For instance if you buy a 90-day T-bill priced at J$4.9 million, upon maturity you'd receive approximately J$4.96 million and the gain would be J$60,000 (net of taxes). Hence, there are no fixed interest payments. Investors need to consider the fees charged by the broker, if any, and compare with the potential net gain if their bid is successful.

Among the most popular investment options are bonds -- instruments issued with longer tenures than repos and Treasury bills and thus often considered long-term investment options. They are debt instruments used to raise capital by companies and governments and are issued with a specified maturity date, a specified rate (coupon or interest rate) and numerous terms as stated in the prospectus. As with repos, interest is paid to the investor and the amount invested is returned at the maturity date. Gains can also be made by an investor when the price of the bond increases (capital appreciation).

The Government issues local (JMD & USD denominated) bonds as well as global bonds with maturity dates to 2046 (locally) and 2039 (globally). Bonds are issued with varying minimum amounts, ranging from as low as 500 units or nominal value to 100,000 units or nominal value. Among the more attractive bonds are Barclays 6.05 per cent 2017 (rated AA), Venezuela 5.75 per cent 2016 (rated B+) and Ford 6.625 per cent 2028 (rated BB+).

The Barclays 2017 and the Venezuela 2016 bonds are relatively short in tenure and offer attractive yields and coupons. However, the Venezuela 2016 offers a higher yield due to the fact that it is riskier than the others therefore it is not advised that more than five per cent of one's portfolio be invested in this bond. The political environment in Venezuela is tense, similar to countries such as Syria and Egypt, however but the country has not defaulted on any of its bonds.

Ford is a stable company, relative to its competitors, providing preservation of capital and offering diversification outside of the financial sector. The company's One Ford plan has resulted in fuel-efficient line-ups, continued investment in global assets, efficient management and strengthening of its core businesses.

With the global economy sluggish and equity markets volatile, fixed-income instruments are a viable option for investors concerned about risk and in search of stability. While interest rates on some instruments are at historical lows, opportunities still exist in fixed income markets and investors should take these into consideration when realigning their portfolios.

Ronalda Blackwood is a fixed income trader at Stocks & Securities Ltd. You may contact her at rblackwood@sslinvest.com

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The low-risk investments