Picture: ISTOCK
Picture: ISTOCK

Income-unit trust funds that invest across bonds, cash, listed property and other asset classes that earn interest, offer investors a low-risk, liquid alternative to investing in a bank deposit or money-market fund with potential to earn inflation-beating returns.

The recent interest-rate cut - to shave another 0.25 percentage points off money-market returns and interest income when you renew a fixed deposit - may prompt you to look for a higher-earning alternative.

While cash investments barely beat inflation especially after tax, multi-asset income funds are capable of delivering a return of two to three percentage points above inflation and rarely lose money over periods of more than three months, says Francis Marais, a senior research and investment analyst at Glacier by Sanlam.

A less risky investment strategy

The investor outlook in cash is not good due to more expected interest-rate cuts, but managers of multi-asset income funds are still finding opportunities to earn returns that outperform cash and inflation without taking on much more risk than you would as cash investor. These managers determine whether local or offshore government, parastatal or corporate bonds, cash investments, listed property, preference shares and even some equities that pay good dividends will offer you the best returns and allocate your investment in the fund accordingly.

South African multi-asset income funds are obliged to invest 70% of the fund in local fixed-interest asset classes, can invest up to 25% offshore and an additional 5% in African markets. The limit on exposure to equities is 10% and to listed property 25%.

The top ten funds in this unit-trust sub-category on performance over three years have earned returns of more than 8% a year for the three years to date, with four returning more than 9% a year over this period.

Cash: the worst performer

Jan Vlok, research and investment analyst at Glacier, says you can expect these funds to return between 8% and 10% a year. Call accounts are likely to deliver around 7% a year.

You may get a higher interest rate if you are prepared to lock into a 12 month (8.5%) or 60-month fixed deposit (9.75%), but Marais says locking into a fixed deposit denies you access to your money and is not a good idea especially if you are parking money to invest in the equity market.

Marais says investors often believe cash is a good place to park money when equity markets are falling or at risk of falling.

If you move from equities into cash, your chances of making the right call or timing the market correctly are nine out of ten, but making the right call when to go back into equities after a market fall is harder and investors only make the right call 45% of the time.

Cash has been the best-performing asset class in any given year only once over the past 17 years and at least seven times it was the worst-performing asset class relative to local equities and bonds, he says.

Many options

Multi-asset income funds are diverse and you need to consider the following:

Some funds invest only in bonds and cash instruments;

Some funds invest in bonds, cash and listed property;

Some funds invest up to 10% of their assets in shares that pay good dividends;

Some funds invest only in local markets, others in foreign markets. Some use derivatives to hedge this exposure; others do not. This can make a difference to the returns; and

Funds with a cash benchmark are less risky than those with a bond index benchmark.

Returns of up to 9%

Victoria Reuvers, director and senior portfolio manager at Morningstar Investment Management, says multi-asset income funds are "good alternatives" to cash investments.

Reuvers heads up Morningstar's discretionary investment-fund manager that selects funds for investment portfolios used by financial advisers. Morningstar uses funds like Prescient Income Provider, the Coronation Strategic Income Fund and the Investec Diversified Income Fund, expected to deliver in the region of 8.5% to 9%. A money market fund will give you 6.5% to 7% after fees.

She says you should remember that these funds are not without risks and you should take note of the fees charged.

When you compare the interest you get from a bank deposit, you also need to look at the after-fees and tax return - a 9.75% return on a 60-month fixed deposit could amount to as little as 5.36% after fees and tax for taxpayers on the highest marginal tax rate who have exhausted their interest exemptions, Vlok says.

Each year you are entitled to earn interest income of R23,800 without paying tax if you are under the age of 65; and R34,500 if you are over the age of 65.

Multi-asset funds have the advantage over fixed deposits in that they are diversified and therefore don't expose you to the risk of being invested with a single bank as you are when you invest in a call or fixed deposit, Marais says.

dupreezl@tisoblackstar.co.za

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