With rate cut looming, money market funds far more attractive than call deposits

The MPC meets later this week and the market believes that a further 0.50% interest rate cut is a given. Lisa MacLeod, fixed income portfolio manager, Investec Asset Management writes about the implications of this for South African investors.

 There are several reasons for this. Global economic data has deteriorated and there is a high degree of risk aversion, while uncertainty about the risk of a double dip persists.

In South Africa, the currency remains strong on the back of record inflows into emerging market bonds as international investors are allocating a larger portion of their assets into this space. On top of this, domestic economic growth is anything but robust and South African inflation data continues to surprise on the downside.

A further rate cut will make money market funds a lot more attractive than call accounts. Money market funds are able to lock into higher-yielding instruments with a maturity up to one year, while call account rates drop as and when the Reserve bank cuts the Repo rate. Therefore, as interest rates come off, the spread between money market fund yields and cash rates invested on call accounts will widen, making money market funds far more appealing.

Over the last year the average money market fund outperformed the return of the average wholesale bank call deposit by over 0.70%. 

Cash investors are beginning to understand the benefits of investing in money market funds over call deposits, as call rates also vary depending on the amount invested.  A smaller investor, for example, who has R100 000 to invest and needs liquidity, could earn up to 4% lower than an investment in a money market fund.

This has contributed to the significant growth Investec Asset Management has experienced in our money market funds, which have grown from R30.5bn in assets a year ago to R38.6bn today*. Whereas money market fund investors traditionally comprised individuals or institutions such as pensions and medical aids, we are now seeing growing interest from corporate clients given the benefits of diversification, same day liquidity and the yield pick-up.

* to 31 July 2010