Money Market Account versus Money Market Fund
A few years ago I worked for a large corporate bank. At the time, my husband (who works in the investment advisory and management industry) would often ask me “what is the current money market rate that the bank offers to investors?” We would then have a debate because the “money market rate” which banks offer and the return which investment managers yield via actively managed Money Market Funds are not the same.
It is important to understand the difference between a Money Market Account (as offered by a bank and also called a Call Deposit Account) and an actively managed Money Market Fund as managed by an investment manager, as they are not the same.
What is a Money Market Account?
A Money Market Account is also referred to as a Call Deposit Account, Overnight Call Account, Investment Deposit or Savings Account. This account is available at a bank and is a deposit with that bank. For example, an FNB Money Market Account is a Call Deposit Account at FNB and repayment of your investment relies on a promise by FNB to repay your capital and interest on any particular business day. It is very similar to a transactional bank current account but pays a higher interest rate. This also means that your account is exposed to a single bank. If that bank runs into difficulties, like Saambou or African Bank, you could lose a large amount or all of your money.
The names “Call Deposit Account” and “Overnight Call Account” implies that you can call on your money immediately and have your money available the same day or the next day. These deposits are thus classified as “Short-term Deposits” by the Financial Services Board and usually carry a lower interest rate than Fixed or Notice Deposits that have longer notice periods and that are classified as “Long-term Deposits” by the Financial Services Board.
Interest rates for a Money Market Account is quoted either as Nominal Annual Compounded Monthly rate (“NACM”) or as Nominal Annual Compounded Annually rate (“NACA”), the latter also known as the effective interest rate. It is very important to understand the difference between the two rates to be able to compare rates between product providers. The effective interest rate is the one which caters for compounding periods. In general, the nominal interest rate is less than the effective one.
What is a Money Market Fund?
Money Market Funds offered by various investment managers are funds where multiple investors’ money is pooled together in a regulated collective investment vehicle (like a unit trust). This pool of money is then invested in various money market instruments which is not just limited to a single bank. In fact, these Money Market Funds have maximum limits as to how much money may be invested at a single bank or counterparty. Money Market Funds are therefore well diversified between counterparties and not exposed to only a single institution. Each unit has a R1 value which remains at R1. Money Market Funds are classified as a “Collective Investment Scheme” according to the Financial Services Board and are regulated by the Collective Investment Schemes Control Act (CISCA).
Actively managed Money Market Funds invest in a variety of instruments as well, such as promissory notes, Negotiable Certificates of Deposits (NCD’s for short, a bank deposit which is tradable between investors), commercial paper and securitisations/conduits (specialised commercial paper representing collections of home, car and/or credit card loans) to achieve their objectives. An actively managed Money Market Fund is therefore an actively managed diversified investment vehicle which does not simply invest investors’ savings into a Call Account, but rather actively looks for superior risk adjusted opportunities across the spectrum of short term investment instruments to provide a higher yield which compensates the investor for the additional risk taken but still aims to protect capital on a daily, weekly or monthly basis.
There are currently 30 approved Money Market Unit Trust Funds in South Africa. Further, we also monitor 16 institutional segregated Money Market Funds as per our monthly GraySwan Money Market ScoreCard and 14 Enhanced Cash Funds as per our monthly GraySwan Enhanced Cash ScoreCards. As at the end August 2016 there was R207 billion invested in actively managed Money Market Funds, which is 10.4% of all domestic Unit Trust Funds in the South African Collective Investment Scheme Industry.
The following general rules apply to actively managed Money Market Funds:
- Restricts Funds to invest in individual instruments that have a maturity date not longer than 13 months;
- The weighted average term to final maturity of instruments held by the Fund, as a whole may not exceed 120 days;
- Weighted average duration of the portfolio may not exceed 90 days;
- Money Market instruments with no fixed maturity or for which the interest rate is not known at date of inclusion may not be included in the Money Market Fund;
- In addition, investment managers are restricted in terms of how much money they loan to individual institutions for example how much they may loan to or invest with one bank or corporate.
Other Cash Equivalent Funds
In addition to Money Market Accounts and Money Market Funds, there are other cash equivalent funds that could offer marginally higher returns. Investors can access a Fixed or Notice Deposit Accounts at banks which are slightly longer-term in nature and therefore offer higher rates.
Similarly, investors can access Enhanced Cash and Active Income Funds that are slightly longer-term in nature than Money Market Funds and therefore offer marginally higher returns. These Funds are still very conservatively managed and provides daily, weekly or monthly.
Money Market Funds are allowed to invest in short-term instruments which result in a maximum weighted average portfolio duration of 90 days, while Enhanced Cash Funds are allowed to go up to a maximum of 180 days and Active Income Funds up to 12 months. However, this just refers to the duration of the underlying instruments. If an investor wishes to withdraw their money, all they need to do is notify the Fund and typically the investor’s money is available within anywhere between 24 hours and up to a maximum of a week, depending on the fund rules.
The graph below indicates that as the investment term (duration) increases from short-term to longer-term, the rates or returns also increase. Another important fact highlighted by the graph is that the Call Rate return (on the left axis) is below CPI (which refers to inflation). The Money Market, Enhanced Cash and Active Income Funds all outperformed inflation. This means that over time, your savings can lose real value in a Call Deposit Account relative to inflation.
Performance comparison between Money Market Accounts and Money Market Funds
The following graphs illustrate the difference in the returns between Money Market Accounts and Money Market Funds over 1 year, 3 years and 5 years. The Peergroup as calculated by GraySwan refers to the average of all the institutional Funds in each category is is reflected net of any investment manager fees but gross of any investment advisor fees.
Over each of these periods the average Money Market Fund, as represented by the GraySwan Money Market Peergroup, outperformed the Call Rate by 1.2% on an annual basis.
The differences between investing in a Money Market Account and an actively managed Money Market Fund can be summarised as follows:
|Money Market Account||Money Market Fund|
|Minimum balances||Some Money Market Accounts require a minimum balance, but such balance is usually much lower than those for Money Market Funds.||Money Market Funds may require a minimum balance.|
|Capital Preservation||Capital guarantee provided.||No capital guarantee, although it is a low risk investment – each instrument is effectively guaranteed by the issuer.|
Term of investment
|Money Market Account investors can withdraw funds without notice. Investments are typically available the same or within one day from disinvestment.||Money Market Fund investors can withdraw funds without notice. Investments are typically available within 1 to 5 days from disinvestment.|
|Interest rates||Interest rates quoted are forward looking.||Returns are historic and cannot be guaranteed.|
|Transparency||Money Market Account holders are sometimes not informed how the bank decides on the interest rates but such Accounts typically follow the yield of the Interbank Call rate.||Money Market Fund yields are available in the daily press and as per many Fund databases such as MoneyMate, ProfileData etc.|
|Money Market Account holders often offer banking / transactional services.|
These may include ATM access, internet access, stop order and debit order facilities, transfer facilities and so on but it is dependent on the financial institution.
|Money Market Fund investors do not have ATM access to their savings.|
|Fees||Money Market Accounts typically do not have any fees.|
Account holders are generally levied for transactional fees applicable to the account.
Transaction charges tend to be based on the balance in the account, the value of the transaction and the type of transaction.
|On average, Money Market Funds have an annual investment manager fee, and the fee depends on the size of the investment. This annual fee is incorporated into the yield i.e. the rate of return yielded is net of the investment management fees paid.|
|Tiered rates||The Money Market Account interest rates offered on deposit accounts tend to be tiered, offering different interest rates are offered depending on the balance in the Client's account.||All Money Market Fund investors get the same collective rate as they are invested in a pooled Fund.
The total income earned by the Fund is divided by the number of units to determine a "cents per unit" rate.
This means that smaller investors, those investing thousands of Rands, obtain the same rate as those investors investing millions of Rands.
The appropriateness of either a Money Market Account or Money Market Fund depends on your time horizon and risk tolerance. Smart investors tailormake their Money Market strategy by combining the various suitable categories of short term investment strategies to suit their overall performance target, risk budget, duration, credit risk tolerance as well as liquidity and cost budget. Key is to then select the most optimal combination of investment managers to manage the entire strategy, to actively monitor the composite portfolio and to rebalance such when and if required.
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