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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 as it was the cheapest manager I considered to be solid, and I still make extensive use of it. The RE:CM Money Market Fund is my favourite, as it has the lowest retail fee, 0.171% p.a. and steers clear of "poor quality, low rated securities", so the risk of default is low. I don't use the RE:CM Money Market Fund though, mainly because it has a large minimum investment amount of R150,000.

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. This quote from Abri du Plessis of Grypon is insightful, explaining that he doesn't feel he can add value when it comes to making calls on the direction of interest rates: "I don't think I can have a better view than 17 other economists".

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 May 2011, the Alexander Forbes Money Market Survey showed a difference between the best and worst performer of only 0.7%, or 0.14% p.a, and if you chose a manager who was charging fees of 0.1% p.a. lower fees than everybody else, there was a good chance that you'd outperform 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. For example, the Old Mutual life money market fund's taxable portfolios were written down by 0.5% in February 2011. Unfortuanately, most money market funds aren't credit rated (Investec have told me theirs is the only one with an official credit rating, rated AAA by Fitch in February), 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).

Money market unit trust fees

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 (I've highlighted in red the managers who quote excluding VAT). Anyway, I've added VAT back into their fees, so we can compare them on a like-for-like basis. Note that if you're paying a financial advisor then your fees will be higher than those below.

 

RE:CM

Gryphon

Allan Gray

Cadiz

Coronation

Marriott

Prudential

Metropolitan

Efficient

Nedgroup

Old Mutual

PSG

RMB

Oasis

Investec

Standard Bank

SIM

ABSA

Initial

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.57%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.00%

0.29%

0.34%

0.40%

Ongoing

0.171%

0.29%

0.285%

0.285%

0.285%

0.285%

0.399%

0.46%

0.57%

0.57%

0.57%

0.57%

0.57%

0.57%*

0.57%

0.57%

0.57%

0.57%

* 0.57% is the maximum Oasis may charge, currently they are charging 0.34% p.a.

RE:CM have the lowest fees (0.171% p.a. including VAT), and the next best managers (which includes Allan Gray Money Market, where I'm currently invested) are 0.114% higher, which means they would have to outperform RE:CM by 0.57% over a 5-year period just to break even on a net basis.

Investec have told me that their "I-Select Money Market Fund", which they don't advertise on their website, has a 0.285% fee.

Minimum investments

Whist RE:CM has the lowest fees, it also has the highest minimum investment requirement of R150,000.

 

Gryphon

Oasis

RMB

Efficient

Old Mutual

Nedgroup

Metropolitan

Allan Gray

Cadiz

Standard Bank

PSG

SIM

Investec

Marriott

Prudential

ABSA

RE:CM

Monthly

R200

R500

R500

R1,000

R1,000

R500

R1000

not allowed

R500

R1,000

R2,000

?

R1,000

R1,000

R5,000

?

R1,000

?

Lump sum

R5,000

R5,000

R10,000

R10,000

R10,000

R10,000

R10,000

R10,000

R20,000

R20,000

R25,000

R25,000

R50,000

R50,000

R50,000

R50,000

R100,000

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 current benchmark which Allan Gray calculates 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.

Nedgroup Money Market Fund

The Nedgroup Money Market Fund is managed by Taqaunta Asset Management. Taquanta doesn't take a view on interest rates.

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. Short term rates have gone up very slightly over the 3 months to 30 June 2011, meaning that the accrual basis will very marginally overvalue the assets. The impact of this is usually tiny, and may well be outweighed by other investment considerations.

Allan Gray and RE:CM both value their money market funds on an accrual basis.

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. At the time of writing the repo rate was 5.5% - 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

Another option is to invest in a Standard Bank retail note, SBR003, which expires 5 Nov 2013, and pays JIBAR+0.3%.

Capitec Bank is known to pay high short-term rates, where you can earn u Saving Plan. At the time of wrigin, if you invested less than R10,000 in your primary account you could earn 6% interest (over R10,000 you earn 4.75%). The Monthly admin fee is R4.50 (which equates to about 0.54% p.a. leakage). To withdraw that money, you could go to Pick and Pay it would cost R1.

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

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