For the first time in 10 years real interest rates are now negative. What that means is that the inflation rate is higher than the interest rate set by the Reserve Bank (repo rate).
The situation is even worse for savers as the interest earned on cash savings is several percent lower than the repo rate. With inflation running at 7% and money-market returns at 6% at best, savers are losing 2% a year to inflation.
Unfortunately, this is not expected to improve as real interest rates will continue to be sacrificed in favour of trying to boost economic growth.Right now the risk is that mediumterm inflation is going to be higher than expected. Yet, despite the negative returns from cash, retail investors continue to favour the asset class.
Quarterly statistics released by the Association for Savings and Investment South Africa (Asisa) for the local collective investment schemes (CIS) industry showed that individual investors continued to place their money with money-market funds, which attracted net inflows of R14.8-billion last quarter and R59.2-billion for the 12 months to June.
This means many individual investors missed the rally in the equity market, which saw the All-Share Index (Alsi) run up 21.7% from its lowest point in early March to the end of June.
In the second quarter alone the Alsi gained 8.3%. And by the middle of July, the Alsi was up a massive 30.1% from its March lows.
Leon Campher, chief executive of Asisa, says institutional investors, namely pension funds, were better placed with strong inflows into domestic equity funds during the second quarter.
‘Money-market funds are not the place to be for investors who want to achieve inflation-beating returns,†says Campher. ‘Professional investment managers know this and therefore it does not come as a surprise that it’s the institutional investor moving back into equities.â€
Although cash protected investors from last year’s market crash, it has still not been the best performing ideal asset class in the past five years.
Campher says the five-year pretax performance statistics to the end of June this year show that the domestic general-equity sector returned 18% a year, double the 9% returned by money-market funds.
Interestingly, it is not because of advice by intermediaries that caused this bias for cash. Asisa statistics show that in the second quarter this year 42.3% of inflows into money market funds were made directly by consumers, without intermediary intervention.
Intermediaries were responsible for only 15.8% of inflows into money-market funds. Investors still sitting in cash may feel that it has been too late and the rally has passed them by.
Unfortunately, this is often the inertia that occurs when one is trying to time the market. At the bottom one is usually paralysed by fear and then as the rally takes us by surprise we feel we have missed an opportunity and wait for a market correction that often doesn’t arrive for another few years.
Rather than trying to time the market, investors can opt for an asset allocation fund where the managers can make the decisions for them. This takes the emotion out of the asset allocation decision and at the very least the manager is closer to the market.
Fund managers will be waiting for opportunities to buy into any weakness in the market in the next few months. But if you remain nervous about moving completely into the market right now, you can phase in your money over several months.
Cash is not the only income
If you are sitting in cash because you need the income, high-yielding dividend funds can offer a more attractive option.
Dividends have proven over the past 10 years to be a far more stable source of income than even cash. Take for example Old Mutual’s High Yield Opportunity fund.
If you had invested R100 000 into the fund 10 years ago you would have received so far R162 000 of income and the investment would be worth R473 000.
Or put another way, today you would be receiving an annual income equal to 30% of your initial investment.