The low interest rate environment is not helpful to people who are dependent on income, plus a high degree of capital stability. A favorable alternative to money market funds, i.e. Cash Plus Funds, could possibly be considered for providing stable income or stable yield to investors seeking returns in excess of money market funds without taking on much more risk. “The search for yield becomes order of the day” is food for thought offered by Arno Lawrenz, one of our Industry’s respected experts in managing cash-type and income generating funds. For further discussion and appropriate advice that will suit your needs, give us a call on 041-365 1303.
The search for yield becomes order of the day.
The scarce commodity of the modern era is yield. Thus the search for this yield is moving investors up the risk spectrum in order to satisfy their demands. Developed market interest rates are at record lows and are set to remain so for at least the next two years. In South Africa our interest rates are also at multi year lows – and contrary to what was believed earlier in the year, there is now the danger of a further fall in interest rates, rather than the increases expected during the first half of the year. The implication of low rates and low economic growth is that investors cannot expect to receive the same returns as they have experienced in the past. In a low interest, low yield environment, clients need to readjust their return expectations and when moving up the risk spectrum to compensate for the lower return they need to ensure that they are familiar with the manner in which this additional return is being delivered.
Currently interest rates in South African money market funds are on average 5.00%, which is pretty low considering the current inflation rate of over 5%. The Association for Savings and Investments in South Africa (ASISA) reports that there is a staggering amount invested in money market funds, one of the largest categories in the unit trust industry by way of assets under management.
Given the low interest rate environment we are expecting, should these investors not be looking outside of the money market funds for additional yield? If so, what of the risks you ask?
The alternative low risk option is to move into a Cash Plus fund (this category of funds is currently undergoing a name change to Stable Income or Stable Yield Fund). Cash Plus Funds by way of their mandate have the ability to deliver a higher return than money market funds without taking on much more risk. Generally this is done by increasing the maturity date of the instruments held in the portfolio. The potential yield enhancement that is achieved can be significant when considering the compounding effect overtime.
A Cash Plus Fund is therefore an alternative to a long-term strategic holding in money market, since it will provide both the income and stability that is prized in a money market fund, while adding a bit of extra return – something which can be a valuable commodity these days.