Cuts to the repo rate of 3% over the last few months have severely impacted the returns investors can enjoy from money market funds. Read on for an analysis of the medium-term future of money market, and a look at some of the other options for those seeking above-inflation returns.

A recent article by Paul Hutchinson of Ninety One Asset Management (previously Investec Asset Management), caught my eye as it exposed a conundrum facing conservative investors in South Africa right now. Paul noted that the above-inflation returns investors have got used to from money market funds are evaporating before our very eyes. This is a direct result of the Monetary Policy Committee’s decisions to cut the Repo Rate by a total of 3% over the last few months (due to the economic impacts of COVID-19).

Sunny South Africa no more

In recent years, South Africa has been a place where investors could invest in money market funds and earn an attractive real return with very little risk to their capital – as evidenced in the chart below. This positive situation for conservative local investors was in stark contrast to the crazy situation faced by clients seeking low-risk, income-yielding investments in most developed countries.

The situation in developed countries was a direct result of the response to the Global Financial Crisis in 2009. Then, monetary policy committees pushed rates to ridiculously low levels in order to stimulate growth. Citizens of countries including Switzerland, Denmark, Sweden, Spain & Japan all earn negative interest rates (this means you actually pay in for the ‘luxury’ of putting money in your bank!) or rates of 0%.

Some key observations from the graph above:

  • As the Repurchase (“repo”) rate rises, so the returns from money market investments also rise – and vice versa. The repo rate is the key tool the SA Reserve Bank uses to control inflation by increasing or decreasing interest rates.
  • The recent repo cuts of 3% are yet to reflect in the graph above. There’s always a bit of a lag and the impact of the cuts will reflect soon.
  • We can therefore expect that annualised money market returns will trend down towards the repo rate of 3.50%.
  • Overall, for the full period in which the SA Reserve Bank has implemented inflation targeting, the money market has delivered an average return of 1.9% ABOVE inflation.

So what does this mean for investors?

Put bluntly, it proves that there’s no such thing as a free lunch. Those accustomed to relying on money market funds will have to look elsewhere for their returns. We are currently experiencing interest rates and cuts last seen more than three decades ago. In order to achieve attractive real returns, investors might therefore need to look beyond the perceived safety of money market returns for the foreseeable future. The prospect of this is difficult for some as most “growth” asset classes in SA, such as equities and listed property, have performed so poorly over the last five years.

The cash conundrum must be tackled though, as many of the items in our inflation basket – electricity, health costs, education, etc – will comfortably outstrip the reported inflation rate. This means anyone who is solely invested in money market funds will see the real purchasing power of their money go backwards (even more so after taking tax into account).

Where to now?

There are many excellent income funds which target a ‘yield pick-up’ over cash. Another option is multi-asset class funds where experienced portfolio managers decide what asset classes will best achieve a risk and return goal. You must be very clear of the potential risks and required time investment horizon when choosing income or multi-asset funds – all this information will be contained in the relevant funds’ info sheets.

The bottom line

While the cash conundrum is no problem for folks with home loans, those that rely on interest will need to readjust to this new normal. As we are all having to do in almost every aspect of our lives…

If you would like to discuss this further, please don’t hesitate to email me at [email protected].

Yours Sincerely



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