JOHANNESBURG - South African money market funds have seen a persistent rise in popularity as corporates look to adequate diversification and increased certainty amid an intensely volatile market.

Over the past 12 months, local money market funds have grown by 10% reaching over R300 billion in assets under management. Total interest-bearing fund assets, which also include short-term fixed-income funds and variable term funds, have grown by 14% over the same period.

“The reason behind this surge in popularity is due to the fact that money market funds offer corporates capital preservation with minimum volatility. This is an attractive proposition for corporates as they have vast amounts of finances on their hands and are looking for ways to safeguard it,” explains Marc Joffe, CEO of Global Credit Ratings Co. (GCR).

With the increased trend towards money market and fixed income funds, Joffe explains that there has also been a notable increase in the number of portfolio managers and investors calling for these funds to receive an independent rating.

“Ratings of these funds provide an essential tool to instill confidence among investors. In essence, a fund rating provides an opinion on the potential for Net Asset Value or return variability of a fund. It is an assessment of the fund’s relative ability to preserve capital and ranks a fund by portfolio quality and return volatility,” clarifies Joffe.

Why are money market funds so popular?

Local money market funds are subject to comparatively low volatility as they are invested in highly-rated money market instruments that are issued by the government, corporates and banks. There is also relatively low-interest rate risk or spread risk involved due to the short duration and maturity of these instruments.

“Money market funds also provide investors with timeous access to their money, similar to the accessibility of a call-account, yet they typically achieve comparatively better yields. They are able to do this as money market funds invest in short and longer-dated, high-quality instruments,” he says.

The performance of a money market fund is driven by the yields on the underlying instruments in the portfolio and the sensitivity of these yields to interest rate changes.

“As markets exhibit inefficiencies from time to time, investment managers look to take advantage of these opportunities and in the process extract excess returns available in the market. Managers aim to extract value from both the interest rate market and the credit market over time as both these asset classes offer varying amounts of value. These actions require various levels of risk tolerance, which is why fund ratings are an essential tool for portfolio managers and investors alike,” explains Joffe.

Money market funds important for effective risk management

Corporates have become increasingly aware of the importance of utilising money market funds to effectively manage their credit and liquidity. Not only are they a suitable vehicle to manage risk, but could also have direct implications for a corporate’s credit rating.

“In evaluating the adequacy of a corporate’s liquidity position, consideration is given to the current level and prospective sources of liquidity compared to funding needs. GCR also assesses the adequacy of funding and liquidity management practices relative to the institution’s size, complexity, and risk profile,” he says.

Joffe stresses that it is crucial for funding and liquidity management practices to ensure that an institution is able to maintain a level of liquidity sufficient to meet its financial obligations in a timely manner. “Money market funds are, amongst other investments, a suitable vehicle for organisations to assist in meeting their financial obligations” explains Joffe.

The future of money market funds in South Africa

Joffe believes that with the possibility of South Africa facing further credit downgrades, the trend of investment in money market funds could continue. “The increased utilisation of money market funds makes it increasingly important to undertake ratings on these funds.”

Marc Joffe is the CEO of Global Credit Ratings Co. (GCR).