Think carefully: If not money market, then what?

Money market funds are making news headlines after one of the industry’s biggest funds unexpectedly announced it would be closing. Many clients are now faced with important decisions about where to invest their money market funds.

Whatever the real reason may be for ABSA closing their money market fund, it may be worthwhile to consider alternative options – not only at ABSA , but also in the broader investment market.

ABSA’s options, according to the letter they sent to clients, are:

• To withdraw your money and transfer it to one of your bank accounts;
• To talk to a financial adviser should you want to easily transfer your funds to one of ABSA ’s financial products; or
• To transfer the cash to an ABSA investment banking account in your own name, within 90 days.

All the options they present are with ABSA – presumably for ABSA to regain the money market assets and to reinvest it into their own banking products, to reflect on ABSA’s balance sheet.

The default option, which will be exercised on behalf of investors not reacting to the letter, is to transfer the existing money market funds to a guaranteed bank product, the returns of which are ‘comparable’ to money market returns.

Alternative options for investors

It is prudent to consider various options and to make an informed decision for reinvesting money market funds. Other options for investors include, but are not limited to, the following:

• Alternative money market funds
• Income funds
• Multi-asset funds
• A complete, holistic review of your current investment strategy and goals.

Good time to review your money market investment

Lyle Sankar, fund manager at PSG Asset Management, argues that “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 they have been in 55 years.”

Focus on the investment process and strategy

We are committed to remain focused on removing emotion from the decision-making process, across all asset classes. It is central to our process and philosophy and it has proven to reward our clients over time.

We believe that these recent developments present a prime opportunity for money market and fixed interest investors – not just ABSA’s investors – to reconsider their devotion to money market and fixed interest investments.

The typical investment goal for a money market or fixed interest investor is capital preservation. This usually means to reduce the probability of permanent capital loss, in real terms (i.e. not to take any significant capital risk, and taking inflation into account). The current return on money market investments is approximately 4% per year. If inflation rises from current levels, then investors are facing a challenge to preserve capital and generate returns in excess of inflation, when only invested in the money market. Moreover, the net return (after taxes and costs) will be far less than the quoted 4%. In short, while investors’ money is protected in nominal terms, they are still losing the purchasing power of their money, because of the negative effect of inflation.

If not money market, then what?

Income fund solutions give you the opportunity to preserve and protect capital against the negative effects of inflation on an after-tax basis, at slightly increased risk levels. Investors should also consider multi-asset funds, taking their investment goals and strategy into account.

The key for investors re-evaluating their income portfolios at this time is to carefully weigh up the available fixed income opportunities and to base their decisions on a well-considered evaluation of the risks. Investors with longer investment horizons should also consider whether their current allocations support their long-term investment goals.

In summary

It is a good time for investors to evaluate the positioning in their income portfolios and get an expert to help them ensure they consider the risks as part of a holistic approach.