Having started in South Africa in 1995, money market funds are a relatively new development. And already the sector has attracted R240 billion; this figure amounts to just under a quarter of the unit trust industry and is a similar ratio to that in Europe and the USA.
According to Sean Segar, Head of Product at Nedgroup Investments, Cash Solutions; this popularity is because of the convenience of money market funds and the many benefits that they offer over traditional bank deposits. As interest rates remain stubbornly low at near 40-year lows, investors are paying more attention to how to invest their cash holdings better. Money market funds are versatile vehicles that can be used by both large and small investors, individuals or corporate entities, for short or long periods.
Segar discusses some of the benefits of investing money market funds:
1. Money market funds offer higher yields than call accounts and other immediate access deposit accounts.
According to Segar, money market funds have consistently delivered higher returns than their traditional benchmark which is the STeFi Call rate. “They are able to do this as money market funds can be invested in longer dated instruments – up to 4 months at fund level, and 13 months for a single investment”, he explains. “However,” he continues, “the fund will always retain an element of liquidity in order to fund client redemptions. By aggregating the funds of thousands of investors with different cash flow cycles and requirements, the fund size remains fairly stable despite the many investors entering and exiting the fund.”
Hence a certain portion of the fund is kept liquid while the balance is invested in longer dated, higher yielding instruments.
2. Money market funds offer exposure to a spread of underlying counterparties as opposed to being exposed to call accounts which have exposure to a single bank.
Segar says that while a deposit of funds at a single bank results in 100% exposure to that bank, money market funds spread their exposure between banks and other high quality counter parties resulting in a diversification of exposures and hence risk.
3. Money market funds are regulated.
Money market funds are highly regulated by the Collective Investments Schemes Control Act and closely monitored by the Financial Services Board. “The investment guidelines for money market funds are spelled out in this act and dictate the maximum duration and minimum credit quality that a money market fund can invest in,” he adds.
Being unit trusts money market funds have to have independent trustees who represent the unit holders providing a further layer of control.
4. Money market funds are very liquid and offer quick and easy access to investor funds.
While investor funds are very accessible as with a call account, Segar says that higher daily rates are still achieved. “In order to earn yields comparable to those offered by money market funds banks and other investment providers typically fix or “lock up” investor funds for a minimum period” he says. Interest is paid out monthly, but investors can elect to have this re-invested in the fund.
5. Money market funds can be used to park cash or to diversify an investment portfolio.
The easy access to funds and the higher yields offered by money market funds make them an ideal vehicle for parking cash until it is needed offering the investor comfort that while it is invested funds are working hard at generating superior yields. “In fact,” says Segar, “investment portfolios can use a money market fund as the cash building block again knowing that it is working hard for the portfolio, but easily accessible to take advantage of opportunities that may arise or to facilitate asset allocation changes.”
6. Money market funds are not volatile but priced at a constant 100.
The unit price a money market fund remains at 100 cents per unit reflecting the stability of investor capital. Investments in money market funds, the lowest risk category of unit trusts, do not demonstrate fluctuations in capital. Funds are also priced daily and interest accrued daily enabling investors to track their investment through their discreet account which reflects their unit holding and accrued interest at any point in time.
7. Money market funds have scale.
Segar says, “Being large pools of investor funds, money market funds are able to achieve better yields on their investments on behalf of their investors by leveraging their buying power with treasurers. The size of money market funds also helps with the provision of liquidity and efficiency”.
8. Money market funds are managed by professionals.
Money market funds are actively managed by specialists who are dedicated to achieving the best yields on behalf of investors in line with the investment mandate set for the fund. “The role of the specialist money market fund manager is to manage the liquidity of the fund, trawl the treasuries for the best yields, and perform credit analysis on the funds existing and prospective counterparties” he says.
9. Money market funds charge low fees.
There are no charges to deposit funds into or redeem funds from a money market fund. Segar says that nominal management fees (annual service charges) are paid by the fund to the fund management company and the yield quoted for the fund is net of all fees.
The annual service charges vary depending on the size of investment.
10. Some money market funds are rated by independent international rating agencies.
To add a further layer of comfort to investors certain money market funds have been rated by independent international rating agencies. These rating offer an indication of the underlying credit quality, the fund’s volatility, the quality of the investment manager and the fund’s structure.
“The case for using money market funds to more effectively park surplus cash until it is deployed is compelling. Corporate entities and individual investors should have money market accounts in place with a reputable manager for those instances when they will be holding cash balances” he concludes.
* This report was prepared by Nedgroup Investments