The difference between SA multi-asset income funds and money market | Fin24
 
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The difference between SA multi-asset income funds and money market

Aug 02 2019 14:43
Schalk Louw

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.

But, at the same time, there is the problem with money market that the after-tax returns can hardly keep up with inflation.

I recently recommended 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 to the investor above, 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

Returns of multi-asset income funds versus money market until 23 July 2019

graph, multi asset fund, schalk louw

Source: PSG Wealth Old Oak & Profile Data

If you had invested R100 in money market ten years ago, your capital would have been worth roughly R186 (Source: Profile data) at the time of writing (23 July 2019) before taxes and after costs, income and capital growth. That is an annual return of 6.41%.

If you had invested the same amount in the average multi-asset income fund ten 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 percentage points 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

Five-year annual standard deviation

schalk louw, risk, graph

 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 five-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 five percentage points per year more than what investors would have earned on multi-asset income funds. But you also would have had to endure ten 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.

Schalk Louw is a portfolio manager at PSG Wealth.

investments  |  psg  |  markets  |  south africa  |  money market  |  schalk louw
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