Friday, 29th May 2020

The question we’re getting asked most often by intermediaries and investors at the moment:

Many clients use money market funds as the repository for their shorter-term and emergency savings, and some conservative investors prefer to draw their income from this source. As a result of recent interest rate cuts, money market funds look set to yield around 4% going forward. This means that, taking fees into consideration, investors in these types of funds could struggle to attain meaningful returns.

If money market funds are no longer a viable option for this need, where else can I look?’

Reuben Beelders, Gryphon’s Chief Investment Officer, responds:

‘The old adage “Cash is King” is still relevant. Cash gives you perpetual flexibility and liquidity that no other asset class does. While the current yield on cash is very low, it’s not going to stay there forever. However, 3 or 4 years may be too long for some investors.

Cash allows investors the option of acquiring other assets without having to liquidate an existing holding. By way of example, Gryphon’s decision to purchase bonds in our multi-asset funds; we did not need to liquidate equities at deeply discounted prices thereby incurring the huge bid-offer spreads prevailing at that time. We were able to simply bid for the bonds. (It’s worth remembering that Warren Buffet has > $133bn of cash on *Berkshire’s balance sheet. And, more importantly, he still has not spent any of it. My interpretation of this is that he doesn’t see asset prices having reached the bottom.)

For investors that want to remain invested in cash, I would recommend looking at the Gryphon Dividend Income Fund. This fund is only appropriate for non-pension fund clients; individual investors who have maxed out their interest exemption, or for corporates who have cash on their balance sheets. They will still get a pick-up in the yield offered by money markets on an after-tax basis with no additional risk. The funds has exposure to the top 5 South African banks only, i.e. FirstRand, Investec, ABSA, Standard and Nedbank.

I would consider Income Funds with caution right now. My concern regarding this category generally is that these funds tend to bumble along quite nicely for about 6 years and then have a disastrous 7th. To illustrate this point, in the South African-Multi-Asset-Income Funds category there are 121 funds; 15 of these have delivered negative returns over the 6-month period ended 28 May 2020. Further, the average returns of these funds for 6-months is 1.66% and for 12-months: 5.27%. (Source: fundsdata.co.za)

This, in my opinion, is very disturbing, considering the risk investors have had to take to generate this return. Any investor needing to redeem their investment within the first few months of this year would have really suffered. What is the purpose of having a “short-duration” product like this, i.e. one where your funds are easily accessible, if there is this level of volatility? Regrettably, these products are very often sold on the basis that they are “similar” to money market funds but offer better returns. What is not given adequate attention is that this increase in return comes with an increase in risk. We would not consider them an obvious alternative.

The Gryphon multi-asset funds are also worth considering. The Gryphon Prudential Fund has returned 17% over the past 6 months and the 23% over the past 12-months. The last 6 months’ performance has been helped by our recent exposure to bonds, but even prior to this, we managed to out-perform mainstream cash. For investors who have a slightly higher risk tolerance, I believe that this is a compelling alternative.

As a final note, I would also look to try and “stop the bleeding” for investors that are exposed to funds that have not performed consistently. Unfortunately, now is the time in the market where managers who have seriously under-performed will be inclined to take out-sized bets in order to restore performance and their careers. Not all those out-sized bets will pay off.’

*Cash on Berkshire Hathaway’s Balance Sheet as stated on the balance sheet at 31st of March. The amount is $133bn which comprises the sum of “Cash and Cash Equivalents” and “Short Term Investment in U.S. Treasury Bills”. This is per Page 3 of 49 of the Berkshire Hathaway 10Q First Quarter Earnings Release.