Absa will today close its participation (or part) bonds, because, it says, it is no longer viable to run these portfolios.
Wayne Dicks, general manager at Absa Fund Managers, says the R1.8 billion that investors had in Absa’s part bonds will be paid out to them today.
Absa obtained approval from the Financial Services Board (FSB), which regulates these collective investments, to close its portfolios, and investors were given notice of the closure in March, Dicks says.
Investors need to be given advice in terms of the Financial Advisory and Intermediary Services (FAIS) Act about investing in part bonds.
However, no commission was paid on Absa’s part bonds, so advisers did not typically recommend them to investors, Dicks says. Before the FAIS Act, part bonds were distributed by Absa’s banks.
Dicks says that part bonds have a complicated and inflexible structure.
The closure of Absa’s part bonds leaves only Fedgroup’s Fedbond, with R1.1 billion under management, and a few small players, offering part bonds to investors.
Typical investors are retired people looking for an investment that offers security of capital and consistent returns. The investment term is five years, and the interest is linked to the prime rate.
Dicks says Absa’s part bonds offered a return of 5.5 percent a year.
John Field, chief executive officer of Fedgroup, says it is very sad that Absa has closed its part bonds, because these investments have a valuable role to play for both borrowers and investors.
Field agrees that part bonds need to be more flexible, and that the five-year investment term is particularly problematic.
Field hopes to lobby for the removal of these restrictions and to encourage new part bond providers through the Association of Participation Mortgage Scheme Managers in South Africa.
Fedbond is paying investors six percent on its part bonds linked to the prime rate, or seven percent if they choose a fixed rate for the term.
Field says this is 0.5 to one percentage point more than you can earn at a bank. Your capital is in a secured investment held against a registered mortgage bond in an FSB- regulated nominee company.
Field says that Fedbond pays advisers commission of one percent on investments.
Part bond issuers specialise in commercial and industrial property and can therefore offer a better rate on a secured loan to borrowers than can the banks, Field says.
Dicks says each Absa part bond investor was offered access to an adviser and many are reinvesting their funds in line with their needs.
He says that, depending on their risk profile, investors could move to alternative low-risk products aimed at earning an income, or funds that target an absolute return, or low-equity multi-asset class funds.