Making the most of high interest rates

If you’re worried about the impact of high interest rates on your mortgage and other debt obligations, here’s the good news. The current high interest rate regime can benefit you if you run the rule over your total investment portfolio and make some adjustments with an eye on tax efficiency, cost effectiveness and wealth enhancement.

Marius Fenwick, a financial adviser with Mazars Moores Rowland Financial Services says depending on your age, and current portfolio mix, the improved yields that flow from higher interest rates may result in greater tax liability. So where to start shuffling your portfolio?

“Take a look first at your retirement annuities and consider moving some of the underlying investments into a money market fund where yields are now close to 12%. The interest earned within the annuity won’t be taxed,” he says. Which is not to suggest that all the underlying investments should go into a money market fund. For long term growth, you need to be invested in equities, the asset class that has outperformed bonds and property over time. “And remember too, that once the interest rate cycle peaks and turns down, the stock market will start to run.”

This approach makes particular sense for living annuitants in a volatile market. Let’s say you’re drawing down 8% of the annual value of your investment as a pension. Deploying some of the underlying investment into a money market fund at a yield of approximately 11,5% means fewer equity units within the annuity will need to be sold to provide the desired income from the 8% draw-down.

“It may be worth considering shuffling the portfolio to ensure two years’ worth of income will be generated from an allocation to a money market fund while the rest is invested in a balanced portfolio and allowed to produce an inflation-beating real return over time,” says Fenwick.

There will of course be those whose tax rates are such that an interest-bearing investment in their own individual rights will be decidedly inefficient. High net worth individuals and trusts (which have a 40% flat tax rate), would do well to consider investing in dividend income funds which are yielding up to 9,4% tax-free net of fees - and preserving capital at the same time, Fenwick says. Such an investment may also be considered as a parking bay – and for the money to be moved when less volatility prevails in equity markets.

For those who are willing to lock money away for five years, a lump sum investment in an endowment product built on an interest-bearing instrument will deliver around 9,3% return – and that’s tax-free and guaranteed for the term.

High interest rates also exert pressure on our currency – so part of your portfolio shuffle should involve a look at offshore-linked funds and an additional investment outside South Africa, either directly or via an asset swap.

It should also be noted that while prices in the listed property sector, a favourite producer of income for retirees, has dipped markedly in the high interest rate environment, property fundamentals remain sound. Investors should remember property is a long term investment producing a steadily rising income and should ride through the current volatility rather than securing a loss on their investment by selling shares now.

Equally, given that listed property performance tends to track that of bonds, the time for bonds to shine will come again – and with it, the opportunity for investors to consider income funds with bond exposure.

The trick of course is not to try to time the market, and to get your selection of asset classes, rather than choice of asset managers, right. The solution is to choose a solid-performing balanced portfolio and let the advisor make the calls on asset classes over the long term.