Enjoying the best returns means making good decisions
While investors using money market funds have benefited from market conditions and returns before tax have tended to be ahead of those delivered by growth assets, it may well be time to shift into growth assets.
Paul Hutchinson, sales manager at Investec Asset Management, says the investment environment is quite difficult and investors have responded in various ways to the situation.
Some have opted for the money market and they have had the luxury of earning 8%8.5% and as a result they are reluctant to move from money market to growth assets such as equities.
On the other side of the coin, people invested in growth assets have experienced disappointing one-year returns and they are now looking at what they would have earned if they had been in a one-year fixed deposit.
MONEY MARKET
This leads to many of them asking themselves if they should rather move their money to the money market.
“However, timing the exit from the money market and entry into growth assets requires a lot of luck. In addition, if you are invested in a fixed deposit, the liquidity of the fixed deposit comes into play,” Hutchinson says.
He also makes the point that while investors have enjoyed better returns from the money market in the recent past — as high as 8.75% in some cases — this has fallen to about 8%.
“The market is pricing in a rate cut later in the year and it is unlikely that people will be able to get 8% going forward and that will impact money market fund returns,” Hutchinson says.
He says money market returns have already started to roll over and come down and (at the time of writing) the one-year return for the average money market unit trust fund was about 7.76% until the end of May and they will be even lower a year from now.
“The attractive returns, not taking tax into account, that investors have had from the money market are unlikely to be repeated without inflation coming down materially.
“Inflation looks to be under control and commentators are predicting inflation of about 5% in the near term and this suggests yield pickup over inflation without taking tax into consideration,” Hutchinson says.
This is where an adviser
SOME HAVE OPTED FOR THE MONEY MARKET AND THEY HAVE HAD THE LUXURY OF EARNING 8%-8.5% AND AS A RESULT THEY ARE RELUCTANT TO MOVE
plays an important role in helping their clients to maximise their tax benefit.
“There is an interest exemption allowance of R23,800 (under 65 years) and investors should recognise that interest earned in excess of the allowance will be taxed at their marginal rate; in some cases — given the increase of the maximum rate to 45% — this could almost halve their returns.
PAYING MORE
“Moreover, with bracket creep not being adjusted in the budget, effectively on average we are all paying more tax,” Hutchinson says.
Summing up, he stresses that short-term interest rates are coming under pressure.
At the same time, there is a place for flexible fixed-interest funds where investors take more risk but aim to achieve a higher rate of return than money market rates on a 12-18 month view.
MAXIMISE BENEFITS
“Conservative investors can consider flexible fixed-income funds where they can look at a yield pickup of about 1% over cash or money market.
“As the bulk of the returns are in the form of interest income, investors using these funds need to work with their advisers to maximise their tax benefits,” Hutchinson says.
He says most investors require an emergency fund and flexible fixed-income funds can fit the bill, delivering returns while being accessible.