It would be tough to find an economist who would describe South Africa as a country with a savings culture. Statistics show that households only saved 0.2% of their income in the second quarter of 2017. Eager to find out why there is a lack of incentive for saving, we had a look at the interest rates that the major SA banks are offering on three-month fixed deposits and created an average yield using our findings. We then simulated what an investment of R25 000, reinvested every three months, could have looked like over a one-year period. As a comparison, we plotted it against another low risk, high yield investment, the Sharenet Income Plus house view portfolio. This is the strategy we deploy in the Sharenet BCI Income Plus Fund (a regulated unit trust – see fund details HERE)
(Click image to enlarge)
(Click image to enlarge)
As can be seen in the graph above, the result is truly astounding. The returns delivered by the Sharenet portfolio dwarfed the returns delivered by the bank average, but it is important to note that the Sharenet portfolio returns are not guaranteed like that of the banks. There is a small amount of risk involved when investing in a typical Income Fund unit trust, but this small measure of extra risk should likely be more than compensated for by good liquidity, a mixture of top fund managers looking after your money, and the potential for a greater return than leaving your money in a bank deposit.
Considering that our readers have different risk profiles, we then explored more options to find an alternative to the “all or nothing” approach, as diversification is one of the core components for successful investing. Making use of various asset classes or strategies could stand an investor in good stead, especially with rating agencies keeping SA under the microscope due to our increasing debt levels, lowered growth forecasts and politics that never cease to entertain. One attractive solution we considered was to allocate a blend, say 30% to a fixed deposit at the average rates of the banks and the remainder in the Sharenet Income portfolio. The result can be seen in the table, labelled as the “30/70 Mix” and shows that there could be more value added to your savings by applying a blended model. A prudent approach would be to keep your own risk profile in mind when selecting your own mix.
Imagine you were planning a trip for next year: you would want to get the best safe return on your money until it’s time to take the trip, but you also want quick access to the money in case of an emergency or to start paying for early trip-related expenses such as accommodation deposits and flight tickets. By placing a portion of that saving in something like an income unit trust and the balance in cash, you will be able to withdraw enough money to fund those unexpected and early expenses, while the remainder of your savings continues to grow due to the attractive yield offered by the unit trust. An additional bonus to this solution is the fact that, unlike bank deposits, unit trust investments, specifically when making the deposit or withdrawal, carry no transaction fees, so you can deposit or withdraw as many times as you want without incurring costs.
After looking at the table above and the uninspiring returns offered by the cash invested in the average bank deposit, you can almost be forgiven for not wanting to save your hard-earned income - but at least the bank savings is a start. Hopefully this article shows you that there are ways of getting better returns out of your investment, and helps you to perform the necessary investigation which will empower you to make informed decisions, resulting in a better savings culture.
Why not contact Sharenet today?
If you would like more information on how to start saving smartly, then feel free to contact us on 021 700 4800. Sharenet Investments also offer various other Unit Trust strategies that can be viewed HERE and could be attractive options to consider if you are looking to save for any period, ranging from as short as months to longer term, such as for retirement. You can invest in our funds at any time of the month and access your money, with no admin, transactional costs or penalties for withdrawals and expect your request to reflect in your own bank account within two days.
Please note: The article covered a unit trust, managed by the Sharenet Investment team, called the Sharenet BCI Income Plus fund INVESTOR PROFILE: This fund is for the short-term investor who is sensitive to capital loss. This fund is suitable for investors who are looking for a high level of income at low risk, and investors seeking a highly liquid investment vehicle for the liquid portion of their portfolio. It is the perfect place to park cash and gives higher returns than a savings account or fixed deposit.
Joani van Wyk
Joani van Wyk joined the asset management team in January 2017, responsible for quantitative research of equities across all industries. Joani completed her degree in Mathematical Science in 2015, as well as an Honours degree in Financial Risk Management in 2016, both at the University of Stellenbosch. She is currently a CFA candidate.