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Money Market Funds in South Africa

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2011 & 26 Apr 2012. Money Market funds lend investors' money to government or companies for periods of up to a year (if government or companies want to borrow for longer periods they issue bonds). At some stage most investors use a money market fund for their short-term savings, to store emergency funds or to park their assets when equities and other sectors are looking relatively expensive. Money market funds offer higher rates than a savings account, but also require higher balances. Depending inter alia on your tax status, over the longer term money market accounts may struggle to keep up with inflation, and there's always the risk of defaults.

Which money market fund is best?

The first money market fund I used was ABSA's, until I discovered what they were charging me (0.57% p.a. plus initial fees). I then switched to using Allan Gray's Money Market Fund which was one of the cheapest when I started and I consider Allan Gray to be solid to be solid, and I still make extensive use of it, because of its convenience, having investments on the Allan Gray platform. I also use the Sygnia Money Market fund, once again for conveniene as I have investments on the Sygnia platform.

According to Fundsdata.co.za the cheapest money market fund is the Colourfield BCI Money Market Fund, which had a TER of 0.17% to 31 December 2017. But since the fund only launched on the 3rd March 2017, I suspect the TER calculation isn't for a full year - this view is bolstered by the fact that the annual service fee is advertised as being 0.26%.

So, it appears that the cheapest is the Investec Money Market Fund - class A (TER = 0.18% to 31 Dec 2017) and the RECM Money Market Fund - class A (TER = 0.19% to 31 Dec 2017).

Why fees are important

Usually I would only pay managers more than other managers if (1) it's possible to achieve significantly higher returns with skillful managers without increasing risk, and (2) I'm relatively confident that I can identify the skillful managers. With money market investments I place more emphasis than usual on minimising the fees that I'm paying, as there's not much difference in returns between the best and worst manager (as equities for example), and much of the difference in return reflects differences in risk taken rather than manager skill.

Usually not much difference in returns

Most money market instruments are so efficiently priced, that asset manager skill does not contribute much, and the difference between the best and the worst performing money market fund is marginal (unless there's a default - yes, even money market funds carry risk). For example, over the 5 years to 31 Dec 2017; the 5 year cash value of the best performer (Cadiz) was R139.92 comparing to R133.85 for the worst performer (Investec Money Market -H). And if you chose a manager who was charging fees of 0.1% p.a. lower fees than everybody else, you'd perform better than average even if the manager only had average gross performance.

Credit risk explains much of the difference in return

Money market funds have far lower risks of losses than equity investments, but losses do occur from time to time. Unfortuanately, most money market funds aren't credit rated, so it's difficult to get a handle on exactly how much risk is being taken. However, my opinion is that much of the difference in return between managers is driven by credit risk taken, rather than manager skill (which is another reason to focus more on fees, rather than returns, as higher returns may indicate higher risk).

VAT

Half the asset managers in South Africa think that they can quote their fees excluding VAT (I'd love a legally minded person to explain how they get away with this, as my understanding of South Africa's VAT act is that you must quote including VAT), which makes their fees look lower relative to those who are playing by the book. Remember to add back VAT (at 15%) to compare on a like for like basis.

Minimum investments

Whist RE:CM has the second lowest fees, it also has the highest minimum investment requirement of R150,000. Here's a sample of minimum investment amounts:

 

Cadiz

SIM

Monthly

R1000

R1,000

not allowed

R500

R1,000

?

Lump sum

R20,000

R10,000

R10,000

R20,000

R20,000

R150,000

Money Market Funds

Allan Gray Money Market Fund

From 1 November 2011 Allan Gray changed the benchmark of their Money Market Fund to the Alexander Forbes Short-Term Fixed Interest Composite Index (STeFI Composite Index), which is the benchmark used by most money market funds, and consists of the overnight interbank call rate, and the rates of negotiable certificates of deposit (NCD) of various maturities. The main advantage of the STeFI Composite Index is that it is independently calculated and available daily, as opposed to the previous benchmark which Allan Gray calculated monthly by estimating the sector’s average return.

RE:CM Money Market Fund

The RE:CM Money Market Fund was launched on 1 October 2010 and is managed by Thompson Ganyeka. There are no initial fees, just the ongoing fees of 0.171% (including VAT). A minimum investment of R150,000 is required. The Fund aims to provide better returns than one can achieve with call deposits at a bank. The Fund "will only invest in the highest quality, short term money market assets. It will not 'reach for yield' by buying poor quality, lowly rated securities." The Fund has a maximum duration of 12 months for a specific security and 90 days for the average duration. The Fund wont "invest in securities rated lower than F1 (the second highest rating)". At 30 June 2011 the fund size was R1086m.

Old Mutual Money Market Fund

Launched on the 26th August 1998, "the fund has never experienced a negative return over any calendar month". "The fund invests in money market securities with a maturity of less than 12 months. The fund’s average maturity may not exceed 90 days." The benchmark of the fund is the (STeFI) Alexander Forbes Short Term Fixed Interest Index.

Accrual v Mark to Market

Something to be aware of when switching from or to a Money market funds, is that a lot of them are valued on an accrual basis (as opposed to valuing it on a willing buyer/willing seller basis). The accrual basis means that every day one day's proportionate share of the coupons/interest is added on to the previous day's valuation. What this means is that if short term rates move higher then the accrual basis slightly overvalues the assets in the fund (poor time to invest, but good time to disinvest), and if short term rates drop lower then the accrual basis slightly undervalues the assets of the fund (good time to invest). The longer the duration of the assets the greater the extent of the under or overvaluation. The impact of this is usually tiny, and may well be outweighed by other investment considerations.

Money Market rates

Money Market rates are heavily influenced by the repo rate, which is the rate at which the Reserve Bank is willing to lend to commercial banks. Navigate to the Reserve Bank website to see the current repo rate.

Are Money Market Funds risk free?

No, all investments carry risk, including money market funds. Even investing in a bank account with one of the big 4 (ABSA, FNB, Nedbank & Standard Bank) carries some risk.

How do Money Market Funds achieve their objectives?

Money market funds invest in instruments like promissory notes, negotiable certificates of deposit (NCD for short, a promise by a bank to pay a fixed amount on the maturity date) and securitisations/conduits (commercial paper representing collections of home, car &/or credit card loans) to achieve their objectives.

CIS restrictions

The Collective Investment Schemes Control Act restricts funds to individual instruments which mature in 12 months, and the weighted average duration of the fund must be less than 90 days.

Alternative options

Banks offer short-term fixed deposits.

If you don't require immediate access to your investment, a retail bond is worth considering.

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