Money Market - Safety At A Price

Leon Campher, CEO of the Association for Savings and Investment South Africa (ASISA) has recently made some compelling arguments about the need to have equity exposure on part of your portfolio to counter the effects of inflation as equities are the only asset class to have consistently outperformed inflation over the long-term.

Campher says investors are easily scared into money market funds by volatile short-term movements in the equity market. “Unfortunately, once in a money market fund, few investors are brave enough to venture back into the equity market in time. Most miss the market upturn and lose out on that growth.”

Looking at the 10 year period to the end of March this year, a picture emerges that money market funds are not the right place to be for the long term. For example, A R1-million lump sum invested in a money market fund 10 years ago would have grown by 10.02% a year pre-tax to the end of March this year. This would leave the investor with R2.7-million. Had this money been invested in the general equity sector, it would have grown by 14.27% to R4-million. The end values in the above examples include interest and dividends.

What very few people have realised is that through all the bad news and market turmoil over the past year very attractive opportunities have arisen. This bears out the point that equity markets recover before economies recover. Take a look at how some selective indexes have performed since 1 March 2009 in the table below. Some truly outstanding returns are prevalent.

Though all the indices mentioned in the table above are still well below their levels of a year ago, it goes to show that when markets are oversold and the base is low, investors can enjoy very strong returns.

Most Asset Managers, such as Philipp Wörz of Alphen Asset Management, are questioning whether this is simply a rally in the midst of a bear market, or a new bull market, or whether it is too early to tell. According to Wörz, one would expect some kind of consolidation in the near future as asset prices do not move up or down in straight lines, but would argue that timing this would be rather difficult, if not impossible.

At the end of the day it does not pay to sit on the sidelines waiting for the market to recover if your investment time-horizon is longer term. More and more data appears to indicate that we are on the road to recovery.

For those clients who are still a trifle nervous, Silke Financial Services has a range of investments options with degrees of equity exposure and built-in stability. To find out, email us here

Markets recover before economies recover!

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