With the economy being so unpredictable at present, leaving investors unsure and taking even economists by surprise, one cannot help feeling rather cautious as to what the best approach is regarding investments, let alone whose advice to follow
With interest rates currently at a multi-decade low in South Africa, many investors have been enticed to fix their money for longer periods to take full advantage of the marginally higher interest rates, as many rely on income from investments for their livelihood. But with the surprise move by the Reserve Bank earlier this year, one asks, is this truly the wisest move, as their fixed deposit rates could now be lower than what they would currently have earned following the rate decision.
Ansie van Rensburg, Head of the Money Market Fund at Stanlib, has managed the fund since its inception in 1997 and has almost 27 years of banking (asset management) experience. A money market fund offers various benefits, she feels.
“There are three key differences between fixed deposits and money market funds that investors should be aware of,” she explains. “First, a money market fund is exposed to multiple debtors (counterparties), whereas when fixing your money with a bank, your exposure is concentrated. In a money market fund, you are essentially a holder of a pool of money market assets which means if one of the underlying institutions in which the fund invests defaults your risk is spread and your loss will be negated by the diversification of the money. But if the institution you fix your money with fails, this could have dire consequences for you.”
Ansie adds: “With the environment we are currently in, it’s just better to diversify your risks and get a professional person to manage those risks.” A money market fund is a unit trust that is regulated by the Financial Services Board (FSB). Says Ansie: “Typically what will happen is that we have to adhere to the set of regulations when we invest in the money market fund, and that includes the diversification of risks, the minimum credit quality, and the maximum maturity you can invest in. The FSB, as well as your trustees, then monitor that you stay within those investment guidelines. Most money market funds have independent trustees – that means that we as asset managers invest the cash and then instruct the trustees to pay for that investment and the assets are kept in safe custody by an independent trustee. Your own company cannot be the trustee, and that’s just an additional layer of security that you provide to your client.”
Second, unlike one-bank investments with “all your eggs in one basket”, with a money market fund you can never have an exposure greater than 30% to any one bank, as that is what the regulations allow you. Some money market funds can have a wider mandate, giving an even wider diversification of risks, and every 90 days the credit is reassessed. Take note, though: a money market fund is not the same as a money market account, as the latter is something similar to a bank deposit that does require a minimum amount that one should invest, but with only a single-name exposure.
Ansie elaborates: “You must remember you have a whole pool of assets in a money market fund, so we’ve invested some areas in the call, some in one week, one month, six months, etc; so every day there are assets maturing. If rates move up today, assets that mature tomorrow can be re-invested at a higher yield, whereas if you are invested in a fixed deposit for six months you can only re-invest your deposit six months later. By then interest rates may have already come down again, or may have gone up.”
Third, although it’s considered a conservative kind of investment because of the short-dated nature of the instruments that are invested in and the diversification of risks, you earn a much better rate than what you could earn from a call account, money market account, or savings account, but still but enjoy the same benefit as with those types of accounts, as you can access your cash within 24 hours. “Although,’’ Ansie warns, “it shouldn’t be used as a current account.”
There are different money market funds you can invest in. Stanlib, for instance, runs a money market fund that only takes exposure to banks. If you don’t wish to forfeit exposure to the government, then one would invest in the banks-only type fund; however, if you are happy to take the other exposures and have more diversification, you can invest in one of the other funds.
Stanlib currently manages three different money market funds – the corporate money market fund, institutional money market fund, and retail money market fund, with a total of R113 billion in the money market.
For corporate, a money market fund is also a great cash management tool: “Currently we have a lot of corporates who are investing in our corporate money market fund because they have seen the benefits it creates. When I networked with corporate treasurers at a conference in the USA recently, they said they find this a wonderful product because of the diversification angle and also because they don’t have to spend time every day looking for the best rate.”
Ansie adds: “Traditionally most corporates have appointed a whole team of people or their own treasurer to look after this, but typically what happens in a corporate environment is they need to look after their own divisions and their own departments and they don’t always have the time to phone every single bank every day, whereas I have a dedicated team to find the best possible rate. We do a lot of research on all the companies, we research the economy, and my job is to make sure that I get the directional move of interest rates right. If rates are going to move up I need to shorten the duration of my fund so I have enough dry powder to invest at a higher rate. My job is to make sure that we are fully on par with what is happening in the economy and what is happening worldwide so that we don’t overlook anything and if there are any risks that may affect any investments, we have identified them.”
With the credit crunch the whole world became more aware of the risks involved and a lot more investors began to worry about the type of credit they invest in. With a money market fund, along with the great interest rates and diversification of risks, you get the benefit of professionals doing the risk analysis, yield curve management, and risk and credit risk management. This just makes the life of an investor a whole lot less stressful. ❐
Author: Author: Lynn Grala is Publications Assistant at Accountancy SA