Markets & Equities

The differences between SA Multi-Asset Income Funds and Money Market

If we take a look at the following incorrect statements made by individuals over the years, one thing becomes clear, and that is that no single human being is perfect:

  • “While theoretically and technically television may be feasible, commercially and financially I consider it an impossibility, a development of which we need waste little time dreaming.” (1926: inventor of the Audion vacuum tube.)
  • “I think there is a world market for maybe five computers,” (1943: Thomas J Watson, Chairman of IBM.)
  • “It doesn’t matter what he does, he will never amount to anything.” (1895: Albert Einstein’s teacher to his father.)
  • “It will be years before a woman either leads the party or becomes Prime Minister. I don’t see it happening in my lifetime.” (1974: Margaret Thatcher.)
  • “We don’t like their sound, and guitar music is on the way out.” (1962: Decca Recording Company executive, turning down the Beatles.)

Ignorance is often the main culprit when it comes to such incorrect statements. With markets becoming quite volatile over the past few months, investors have become well aware of the fact that shares do not necessarily always move upwards in value.

On the other hand, the problem with money market is that the after-tax returns can hardly keep up with inflation. After recently recommending the alternative of investing in multi-asset income funds to an investor, he responded by saying that it was exactly the same type of investment as money market funds, and that the low after-tax returns would only be a waste of his time.

Before we get into why I recommended multi-asset income funds as an alternative, let’s take a quick look at what they are. These funds are unit trusts that invest in bonds, fixed deposits, money market instruments, property shares (up to 25%), preference shares and other high-yield stocks (up to 10%). These funds aim to deliver maximum returns, along with capital stability or moderate capital growth to investors. The underlying risks and returns can vary from fund to fund, due to the difference in strategies and mandates between the various funds.

So, what are the differences between multi asset income funds and money market?

Returns

Table 1: Returns – multi-asset income funds vs. money market until 23 July 2019 (source: PSG Wealth Old Oak & Profile Data)

If you had invested R100 in money market 10 years ago, your capital would be worth roughly R186 (Source: Profile data) today (23 July 2019) before taxes and after costs, income and capital growth – an annual return of 6.41%. If you had invested the same amount in the average multi-asset income fund 10 years ago, your capital would be worth R205 before taxes and after costs, income and capital growth – an annual return of 7.42% (i.e. 1.01% more in returns per year than money market investments) during a time when certain fixed interest investments were plagued by massive rand volatility and international credit downgrades.

Risk

Graph 1: 5-year annual standard deviation (source: PSG Wealth Old Oak & Profile Data)

When we view money market investments from a risk point of view, you will see that with a standard deviation of only 0.33%, the investment risk is extremely low. Multi-asset income funds’ annual standard deviation over the same 5-year period, amounts to 1.19% per year, so although you would have enjoyed more growth, you also would have had to endure more risk. But when we compare the standard deviation of these funds to that of the stock market at 12.1%, multi-asset income funds suddenly appear to be a much more attractive investment.

Of course, shares grew by 12.5% over this period, which is more than 5% per year more than what investors would have earned on multi-asset income funds. But you also would have had to endure 10 times the risk to earn the additional return. For the higher risk investor that wouldn’t necessarily be a problem, but for the more conservative investor, it would have been a nerve-wracking experience.

Although I do have a strong preference towards the stock market, I also know that there is a time and place for everything. With markets on the more volatile side at the moment, I definitely believe that there is a place for multi-asset income funds as part of a balanced investment portfolio. Consider the facts, and don’t let ignorance determine the outcome of your investment decisions.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice.  This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.

 

Schalk Louw
As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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