Absa customers are still recovering from the news that the bank is closing its Money Market Fund that has nearly R80 billion invested in it, but asset managers are warning that they should not make any hasty decisions on where to move it to.
Choosing to avoid a media statement about its decision, Absa said in a letter to customers that the unit trust fund, which was established in 1997, would be wound up in terms of Section 102 of the Collective Investment Schemes Control Act and be closed on 6 July.
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While speculation continues about the reasons for closing the fund, many fixed income investors are now forced to explore alternative investment options at short notice, but Lyle Sankar, PSG Asset Management fund manager, warns that they should take stock of their fixed income needs within the context of their entire investment strategy before they leap into the next best option.
Good time to review
“Given the extreme circumstances we are currently seeing in the markets, now is an excellent time for an advice refresh and a review. A key challenge for investors re-evaluating their money market investments at this time is that short-term rates are the lowest that they have been in 55 years. Despite this, there are opportunities to generate adequate income.”
Sankar says PSG believes that the current rates cycle and low inflation outlook makes it harder to choose, but the market still offers compelling prospects for income-seeking investors who are willing to look through the current noisy environment.
“However, investors who flock into the shorter-dated end of the market, or who ignore material risks in the corporate credit market, are increasing the likelihood of underperforming their income needs.”
Unprecedented support for MMFs
Investors’ unprecedented support for money market and income funds, seeking yield as well as lower risk, has eroded the prospective returns available from the instruments these funds typically use, namely corporate credit, bank funding curves and cash/cash-like instruments.
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On the other hand, many investors are sceptical about the value in longer-dated nominal and inflation-linked sovereign bonds.
“However, the real yields of these longer-dated bonds offer significant compensation for the current visible fiscal risks South Africa is facing and they still trade at significant higher yields than developed market bonds.”
According to Sankar, PSG has been extremely selective in the fixed income market for a considerable time.
“Focusing on removing emotion from the decision-making process, across all asset classes, remains central to our process and philosophy and it has continued to reward our fixed income investors over time.”
He says there is still opportunity for investors to maximise the opportunities of South Africa’s steep and distorted yield curve and lock in attractive yields in the near term, but typically these opportunities are found slightly further along the yield curve. Therefore, these opportunities will not be seen in the typical money market fund.
Think carefully
“The key for investors re-evaluating their income portfolios at this time is to carefully weigh up the available fixed income opportunities and deciding based on a considered evaluation of the risks. Investors who have longer investment horizons should also consider whether their current allocations support their long-term investment goals.”
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Sankar explains that money market funds are a default choice for many investors and have a definite role to play when it comes to generating income.
“However, the current cycle does not suggest attractive income levels for clients, especially when compared to inflation.”
Income investors have opportunities to generate attractive levels of income at marginal additional risk, but Sankar advises that investors should take a step back and critically review if their strategy was perhaps too focused on short-term or too conservative.
It is a good time for investors to evaluate the positioning in their income portfolios and get an expert to help them to ensure they consider the risks as part of a holistic approach.
“Opting to invest at the short end of the curve will make investors forego some of the attractive income options available. It is important to be selective about the additional risks you take on in the pursuit of higher income,” Sankar advises.