I have R100k that I want to invest for six months, and I’m hoping to get the right stock, gold etc. I need to repay the R 100k in six months’ time, monthly for five years, with the interest rate currently at 7.75%. What do you suggest?

Thanks for your query. I’m not quite sure if your intention is to make as big a profit as possible with the R100 000 and if that is the reason you borrowed it in the first place. As a worst-case scenario, I’ll assume you are looking to make a return that is at least equal to your rate of interest. I’ll also assume (although it will not really impact my response) that each month, starting in 6 months’ time, you will repay part capital and the interest.

In the current environment earning a net return of 7.75% per annum may prove to be quite challenging. Total interest rate cuts for 2020 now amount to 2.75% with further cuts of between 0.50% and 0.75% widely expected at the next meeting on the 23rd of July. The impact of these interest rate cuts means that you’re likely to a get a return of around 5.25% interest in a decent money market account. Your required return of 7,75% is almost 50% higher than you would earn on cash, and almost double the current inflation rate. If we look to the JSE, the current 5 year annualised price return is -0.75% per annum.

In your query, you alluded to buying a particular stock, or perhaps commodity, that is going to get you your required return. If you get lucky and pick a ‘winner’ you are sure to be able to pay back your commitment quite easily. The trick here is getting lucky. I recall hearing a statistic many years ago that a good manager gets approximately one third of their stock picks correct, and then has the skill to hold on to the winners and cut the losers.

Equity investing should have a time horizon of 10 or more years. Over shorter periods, you can have huge variability in your returns; this is clearly evident in the following chart which shows the best and worst annualised outcomes of the JSE ALSI (the data represented excludes the effect of dividends, fees, inflation and taxation on investor’s actual returns) over different periods:

The data in this chart is taken over the last 25 years. Over one year, your best return could have been 68.33%, but the worst would be -39.8%. Once you get to ten years, the range of returns reduces drastically where your best outcome was a return of 19.98% per annum, and the worst 5.84%. It can certainly be argued that, at the moment, there seems to be many cheap stocks, and I mostly agree – but you need to consider when and how the value is unlocked.

A last point on equity is that long term (measured from 1996) average JSE ALSI dividend yield is 2.81% which is not enough to meet your interest obligation on its own. Equity does deliver great long-term return, but you’ll need some luck over the short term to meet your debt obligation.

There are options that have lower volatility risk than equity and could be considered, inter alia:

1. RSA Retail Bond – I’ve just gone on to the website and see that on the five-year bond they are offering an interest rate of 10%. A few things to consider:

a. Liquidity – you can only access capital after 12 months and that comes with a penalty
b. Tax – the interest/coupon is taxable
c. If you are under 65 interest is paid semi-annually which is a mismatch to your repayment terms

2. Preference shares- as an example the current yield on the FirstRand preference share is 8%

a. Risk - Preference shares do have capital risk i.e. the price can go down or up
b. Tax - The coupon is subject to dividend withholding tax
c. As with any share there are costs to buy and sell
d. Liquidity isn’t always so good, and if you are a forced seller you may incur capital losses

3. Bond unit trust – you can currently get an after-cost yield of approximately 7.5%-8%

a. Tax – the interest/coupon is taxable
b. Liquid – 5 day liquidity
c. The distribution periods range from 1 to 3 months and depending on the fund, you may have a timing mismatch with your monthly obligation
d. The capital value of bond has an inverse relationship to interest rates. When you redeem capital you may have a capital gain or loss

I haven’t included any offshore ideas as developed markets yields are currently very low, and you also have currency volatility to deal with. I’m certainly not saying that investing globally is bad idea, but rather that in my view I’m not sure it is appropriate for your circumstances.

There is unfortunately no perfect solution to your scenario, but hopefully I’ve given you some ideas to think about. Please remember to take tax, costs liquidity and capital risk into consideration.

Good luck!

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