';
Views Article – Sharenet Wealth

How To Outperform The General Money Market In Uncertain Times


Lately, I have experienced two questions that seem to be on a lot of South African investors’ minds, namely;

  1. How has the US market performed this year compared to the past two years?
  2. Is there a way to preserve capital, yet outperform the general money market?

In response to question 1:

How has the US market performed this year compared to the past two years?

With 96 trading days that have passed on the global markets in 2019, I thought it is necessary to provide some perspective on global performance. When comparing the S&P500 Index on the U.S. market with the two previous years, it is easy to observe on the chart below that we have experienced quite a strong run year-to-date.

image1

Source: Macrotrends (www.macrotrends.net)

Although we experienced a good run on the United States market, one can sense that uncertainty is starting to creep in, mostly due to the looming trade war between the United States and China.

I am still of the opinion that South African investors should continue to move cash abroad, even if it’s only to build a US Dollar cash reserves for the short-term. One can then draw up a strategy to phase into the market over a couple of months as opportunities arise.

The abovementioned uncertainty is making investors act a lot more cautious, which results in more capital flowing into the relative safety of money markets, instead of the equity market.

In response to question 2:

Is there a way to preserve capital, yet outperform the general money market?

The short answer is yes, a good option is probably to invest in an income fund that has a high probability of outperforming the money market (money in the bank).

Since the devil is always in the detail, I have decided to point out the difference between investing in the money markets versus income funds, by using our Sharenet BCI Income Plus Fund as a practical example.

On average, the Sharenet BCI Income Plus Fund has outperformed most money market funds by about 2% per annum over the past few years. However, some investors have asked whether they are taking on a lot more risk.

We performed an analysis of money market funds and drew a comparison with the Sharenet BCI Income Plus Fund and these results were quite interesting.

When we consider the risk of these type of investments, it can be separated into 2 components:

  • Credit Risk (of the issuer of the interest-bearing instruments) and;
  • Market Risk (the duration of the fund) (volatility).

Credit Risk:

We analysed six of the largest, most popular money market funds and the table below shows the % exposure that each fund has to various other issuers.

image2

What the abovementioned results indicate:

  1. The Sharenet BCI Income Plus Fund is 100% invested in income instruments just like the money market funds;
  2. All the funds predominantly invest in the top 5 banks and if any of these banks defaulted, all the money market funds would suffer severe losses, just like the Sharenet BCI Income Plus Fund;
  3. If you use the exposure to “other” issuers as a measure of credit risk, then the Sharenet BCI Income Plus Fund’s exposure is in line with that of large funds like Nedgroup, Sanlam and Allan Gray;
  4. One can ignore the ABSA fund as it has a size of almost R80 billion and they do not invest in “Other” stocks;

Market risk (duration)

Duration can be defined as a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.  Keep in mind that bond prices are said to have an inverse relationship with interest rates. Therefore, rising interest rates indicate that bond prices are likely to fall, while declining interest rates indicate that bond prices are likely to rise.

  1. The average duration of money market funds normally is 3-6 months, while the duration of the Sharenet Income Plus Fund is 11-12 months. This means that the Sharenet BCI Income Plus Fund has a slightly higher duration than the money market funds, but it is still low in absolute terms. This is proven by the low volatility (as measured by standard deviation) of the Sharenet BCI Income Plus Fund which is only 0.75%, one of the lowest in the industry;
  2. With its low duration and predominant exposure to floating rate notes, the Sharenet BCI Income Plus Fund has a very low probability of negative growth in any given month.
  3. The Sharenet BCI Income Plus Fund has not experienced a negative month since December 2015 under its current management team;

RISK/RETURN PLOT

Data period: 31 Dec 2015 – 30 Apr 2019

Source: Morningstar

im

 

image4

Considering these findings, the extra 2% return per annum from the Sharenet BCI Income Plus Fund looks very attractive when compared to money market funds, as it does not carry significantly higher risk. Cash is also available to investors within 48 hours should they wish to withdraw from the fund (at no cost), unlike fixed deposits where you have a notice period and sacrifice liquidity for the higher potential interest received.

Concluding:

The income fund is very attractive versus money market investments as it delivers about 2% per annum extra return at very little extra risk to the investor plus attractive liquidity when you need the money.

 

Iwan

Iwan Swiegers
Director: Sharenet Johannesburg

Iwan joined Sharenet in 2018 and is a director of the Sharenet Johannesburg branch. Prior to this, he was a director at Capilis Asset Managers, an asset management company he co-founded with Steinman de Bruyn. Iwan obtained a B.Com degree in Financial Management from the University of South Africa in 2012. He is also a level 2 CFA candidate. Iwan has been involved in the financial markets since 2004