Share

Why cash has been King

accreditation
Money
Money

Investors in cash have had better real returns in the last two years than at any time since the end of the credit crisis fallout in 2010. A real return is the difference between the interest you earn and the inflation rate. The rule of thumb is that an investment in cash matches inflation or maybe provides a small real return.

Yet recently it is not unusual to see adverts of interest rates as high as 10% for fixed deposits – despite inflation being only around 5%.

Even risk-averse money market funds like the Allan Gray Money Market Fund, which only invests in securities with a duration of 13 months or fewer, has paid out an interest rate of nearly 8% for funds that are accessible within 24 hours. This has meant a real return for investors of 3.3% with very little risk.

Mark Dunley-Owen, fund manager of the Allan Gray Money Market Fund, says these higher-than-average real returns have been driven in part by a lower than expected inflation rate. Inflation has remained under 5%, which is the lowest rate in over ten years.

The other reason is that banks are prepared to pay a higher rate to attract deposits for more than 30 days. This is in response to provisions of Basel III that require banks to hold a certain number of “high-quality liquid assets”.

In a nutshell, it means banks need to have deposits that cannot be withdrawn immediately, to protect against “a significant stress scenario”. In order to attract these deposits, banks are prepared to pay higher rates for fixed deposits.

allan gray
Allan Gray Money Market Fund return

Dunley-Owen says that apart from higher rates from banks, government Treasury bills have also offered a higher return, as government clearly needs access to cash. As an institutional investor, the fund can get an 8% per annum rate on a six-month Treasury bill.

Although international ratings agencies have increased the risk rating of South African government debt, Dunley-Owen says, in a South African context, a Treasury bill is a risk-free investment. Given the short duration of a Treasury bill, it is highly unlikely that government would default.

But how long the real interest rate party lasts will depend on the next move by the South African Reserve Bank (Sarb) on interest rates. Dunley-Owen says South Africa has high real interest rates (the difference between the repo rate and inflation is about 1.75 percentage points) which have been maintained to protect against any currency or oil price shocks.

Although it is still possible to invest in securities paying 8% for the next year, he expects real interest rates to drop – due to either higher inflation or cuts by Sarb.

BEST RATES

Unit trust money market funds are offering yields of up to 8% at the moment. These usually have higher minimum deposits of about R20 000.

While your money is available within 24 hours, keep in mind that this rate is not fixed and will decrease in line with interest rates.

For fixed rates, the RSA Retail Bond, Absa and African Bank are offering some of the best rates in the market. You would need to leave your money in the fixed deposit for the full period if you wanted to earn the quoted interest rate.

  • RSA Retail Bond: 8.25% for three years and 9.25% for five years
  • Absa: 8.6% for 18 months and 9.55% for five years
  • African Bank: 8.45% for one year and 10.03% for five years

Source: www.mytreasury.co.za

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Voting Booth
Do you believe that the various planned marches against load shedding will prompt government to bring solutions and resolve the power crisis?
Please select an option Oops! Something went wrong, please try again later.
Results
Yes
20% - 103 votes
No
80% - 401 votes
Vote