How Safe Is Your Cash?

I want to start this Communiqué with some light humour: The bank manager phones Mr Jones and tells him that his cheque will not be honoured due to 'insufficient funds.' Mr Jones then quips: 'Is the problem on your side or mine?'

The recent spate of bankruptcies in the US, UK and Europe has highlighted the risk of investing in 'on-balance sheet' money market investments directly with a bank. At the outset we are not saying that South African banks are on unsound footing but look at banking disasters of the recent past: Stalwart names such as Bear Sterns, Lehman Bros, Wachovia and smaller banks in the US such as Franklin Bank in Texas and Pacific Western Bank in California. In the UK we have the example of Northern Rock. Barings Bank in the 1980's was another example of how a very solid institution was brought to its knees by a rogue trader within its staff.

Bank deposits are, in theory, at more risk than money market unit trusts. The reasons for this are as follows:

• Money Market Unit Trusts are held in trust and are off the balance sheets of banks and unit trust management companies. Further, these funds may not be accessed by the managers of the funds for self-use. All unit trusts are separate legal entities and are ring-fenced, each having a registered trustee. Every unit trust is governed by CISCA - the Collective Investment Scheme Control Act - and the industry is regulated by the Financial Services Board and overseen by the Association of Collective Investments.
• Money Market Unit Trusts invest in all the major South African Banks and high investment-grade corporate financial institutions in order to reduce the risk of merely one institution. Interest rates on Money Market Unit Trusts are normally higher than retail interest rates offered by commercial banks as Money Market Funds invest millions at wholesale rates resulting in investors getting better interest rates.

Advantages of Money Market Unit Trusts:

• Available to individual and corporate investors seeking the types of yields that previously were only available to financial institutions.
• A Money Market Unit Trust offers an alternative to higher-risk volatile equity based investments. For many investors, a volatile market is too much to stomach.
• Money Market Unit Trusts are the perfect place for individuals and companies to park cash that is required for specific short term horizon events. For example: Money you'll soon need for emergency living and company expenses Money you'll soon need for both personal and company taxes [VAT] Money you haven't decided where to invest yet. Used mainly by individual investors when phasing lump sums into the equity market.

Disadvantages of Money Market Unit Trusts

• In the medium to long term an investor won't beat inflation by keeping money in money market - therefore not recommended as a long-term investment.
• Tax consequences of interest earned.

The Silke Cash Management Fund invests directly in the Allan Gray Money Market Fund. At the time of writing, the annualised yield net after all costs is 12.5% per annum [nominal daily rate annualised]. Naturally, the interest rate will fluctuate with prevailing interest rate movements.

For more information please email us.

Silke Financial Services has the skill and expertise to construct a well diversified portfolio to suit all risk profiles according to a client's investment time horizon.