Beware of reckless conservatism
Massive inflows into money market funds in the first half of 2009 have once again highlighted the unfortunate tendency for investors to follow the route of “reckless conservatism” during times of market turmoil - usually with disastrous consequences.
The Association for Savings and Investment South Africa (ASISA) says local equity funds recorded net inflows of R10-billion for the 12 months to the end of June 2009, while money market funds attracted a total of R59.2-billion during the same period.
While ASISA does note that domestic equity funds attracted a relatively healthy R4.8-billion of net inflows in the second quarter of 2009, it says this was mainly due to institutional investors, with most retail investors continuing to shy away from anything riskier than cash.
“While investors opting to move into money market funds may perceive this to be a prudent approach to protecting wealth, they often don’t realise that they are in fact being guilty of reckless conservatism,” says Nico Coetzee, Head of Sales at PPS Investments.
By ignoring the stock market completely, investors who piled into money market funds in the first half of 2009 have already lost out on the recent strong recovery. The JSE All Share index recorded an 8% gain in the second quarter. In fact, since hitting lows at the beginning of March the index has risen nearly 38%.
He says that even the most of prudent of investors should consider some form of equity exposure.
“Spreading investments across asset classes not only reduces risk, but will generate a return in excess of that generated by cash over time. Investors seeking a safe haven should therefore consider using a low risk conservative balanced fund rather than a money market fund,” says Coetzee.
“Timing the market is extremely difficult and never recommended as most investors get it wrong more often than not. By the time you get the information on which you base your decisions, the market event has already occurred and you end up selling low and buying high,” advises Coetzee.
Conservative, low risk funds, meanwhile, offer investors a balanced approach to risk by positioning them to benefit from any potential upswing in the market, whilst managing the potential risk prudently.
Coetzee says there are other reasons why putting all your assets into money market funds rather than a conservative balanced fund could be seen as “reckless”. “As we were in a downward cycle on interest rates, the return on investment from money market funds has dropped significantly over the last fourteen months.”
And it’s not just returns that investors are potentially missing out on. Conservative funds offer additional perks such as tax benefits. While the entire return on a money market fund is subject to tax, with a low-risk fund, only the portion that is invested in fixed interest assets is taxable.
With the potential for inflation-beating returns and tax breaks, Coetzee says conservative funds are an ideal savings vehicle for older or conservative investors, who may want to maintain a low risk approach to investments with the potential to benefit from potential stock market gains.
“The catch phrase that investments can go down as well as up may be acceptable in the boom times, but when all seems to be heading south, risk-averse investors must be careful not to make costly, short-term decisions.”
