The closure of the Absa fund should have investors reflecting
By Andró Griessel
27 April 2021
Last week Absa released a letter, which in my opinion is on the verge of bizarre, stating that the money market fund will close and that all investors will have 90 days to exercise one of a few options. This is a fund that has more than R80 billion in assets under management, which is essentially investors’ money.
I believe the reason Absa provided for the closure, is or could perhaps not be the main reason, and that the closure of the fund probably has to do with the Basel III capital adequacy requirements. Basel III is an international regulatory framework for banks. Banks have to comply with these requirements by 1 January 2022, which most likely explains the urgency with which the closure of this fund is being handled. Nonetheless, whatever the real reason may be, it may be sensible to have a look at the alternative options that Absa are offering their investors and comparing it to a broader set of options.
Let’s just have a look at the options that Absa are offering their investors. I quote from the letter (the bold parts are my own, for you to take note of):
Note that all the options will allow Absa to regain whatever is withdrawn from the money market fund, directing it mostly to its banking products (which forms part of the bank’s balance sheet), while the money market fund is not shown on its balance sheet. The default option, which will be exercised on behalf of multiple investors who will not react on time or at all, is to transfer the funds to a guaranteed bank product that will give investors a return that is more “comparable” to money market returns.
What other options do investors have?
An alternative money market fund:
There are more than 30 alternative money market funds that you can invest in. If you have used your Absa money market account as a monthly transactional account and you have been withdrawing cash from the ATM, the alternative options might not be nearly as convenient as these will not be with Absa and will not give you the same flexibility.
However, these alternative options might be attractive for those who are using the money market account for capital preservation- and accumulation. See herewith a few of the more well-known funds and their comparable ten-year return figures.
I am of the opinion that it is a golden opportunity for money market investors, not just Absa’s investors, to reconsider their dedication to money market. The preservation of capital is the main consideration for the typical money market investor, in other words a strong need or responsibility to not take on any capital risk (even if over a short period of time). But this strict requirement causes capital to be exposed to significant risk (in real terms). The current return on money market investments is in the region of 4.18% (Allan Gray) per annum.
If the investor is a company, the return (after tax) is a mere 3.01%. If the investor is a trust that cannot make use of the conduit pipe principle or if the investor is an individual that falls in the top marginal tax rate, the return lowers even further to a meagre 2.3%. Even though investors’ funds are protected in nominal terms, they are losing the purchasing power of their money.
Income funds are a step up on the risk scale, but at least it gives you the opportunity to preserve your capital against the effects of inflation on an after-tax basis. See below five popular income funds and their annual ten-year performance figures.
Over time, the abovementioned funds perform slightly better than money market funds, with little added risk. Note that not one of these funds have given investors negative calendar year returns over the past ten years.
Low equity funds (maximum 40% exposure to equities):
Money market investors who are not obligated to avoid volatility, but who are willingly limiting themselves to this strategy, can in my opinion even consider low-equity funds, given that they have realistic expectations about short-term losses. See herewith the calendar year performances of five of the most popular low-equity funds over the past 10 years.
Among the five funds, only the Prudential Inflation Plus fund has given negative calendar-year returns. The rest have all had a clean record in this regard. The best of the five low-equity funds would have grown 55% more than the best money market fund in the ten-year period. The ability to tolerate a bit of discomfort has always been the ticket to better long-term returns.
I have a feeling that what will happen in practice, is that most of the investors who have received the letter from Absa will not give much notice to it and will simply opt for the default option. For the more discerning investor, it will be time well spent to:
Andró Griessel is a certified financial planner and director of ProVérte Wealth and Risk Management. Contact him at email@example.com.
Although all possible care was taken in the drafting of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone planning on taking any financial action based on this document, is strongly advised to first consult with their personal financial advisor. ProVérte Wealth & Risk Management is an authorised financial service provider with FSP no. 5966.
True to company culture, Samuel strives to build solid long term relationships with clients and has a meticulous way of identifying needs, defining goals and compiling an executable plan to reach one's goals. He firmly believes that one has to be a specialist in one's field to be able to add value, and continuous training & education is therefore paramount. To be objective and to have an independent approach to a client's planning is critical to make a difference.
Born & bred on a farm in the Montague region, Samuel matriculated in 2001 from Montague High School. He completed his BComm Honours degree in Business Management as well as his Postgraduate & Advanced Diploma in Financial Planning. Samuel is a CFP charter holder. Apart from a short stint at an agricultural company Samuel has spent his whole working career with ProVérte. Samuel is a shareholder and valuable member of the board of directors of ProVérte.