Page 128 - Profile's Unit Trusts and Collective Investments 2021 issue 2

CHAPTER 7

That only instruments with a maturity of less than a year may be included in a money
market portfolio
That the portfolio should have an average duration of no more than 90 days (this helps to
ensure that money market portfolios are not exposed to capital risk)
That instruments held in the portfolio should have an average weighted legal maturity of no
more than 120 days
That instruments with no fixed maturity date and/or an unknown interest rate may not be held
That the manager must, at all times, be able to calculate the return on the portfolio
Constant Unit Price vs Accumulating Unit Price
Unlike other unit trusts, money market funds do not have a variable price. The value of each
unit remains constant at R1, whether investors are buying or selling, on the assumption that the
capital value of the fund’s investment remains constant. With money market funds it is the
interest rate, not the capital value, that increases and decreases. The entry costs for some money
market funds are slightly above R1 due to initial charges. Each investor’s proportional income
earned is accumulated and reinvested monthly in the form of further units or cash.
The quoted yield on money market funds usually fluctuates every working day. Unlike money
invested with banks there is no “fixed” yield. Instead, the yield moves up and down in accordance
with the interest earned on the investments in the money market fund. The investment conditions
of some money market funds stipulate that investors can withdraw funds at any point, but they
will be penalised if the balance falls below the minimum investment level. The objective of this is
to prevent clients using the money market account as a current account, and creating high
administration expenses for the management company.
Investment and Withdrawal Costs
Minimum initial investments for money market funds range between R5 000 and R50 000
(only three of the 26 funds available have lump sum minimums below R5 000, two have
minimums of R100 000). Debit order minimums mostly range from R500 to R2 000 a month (two
funds are below R500 at R100 and R200 respectively).
With one exception, money market funds charge no initial fees.
Typically, withdrawals from money market funds are free of transaction costs. Most managers
pay out cash in at most two or three business days, but in some cases instructions submitted in the
morning are processed the same day and the investor will receive the money the following day.
Annual fees charged by money market funds range from 0.12% to 0.575% per annum of the
money invested. Some money market funds charge a commission on the reinvestment of income,
others don’t.

Performance Measurement of Money Market Funds
Performance measurement of equity funds is generally focused on the issue of capital growth.
Money market funds are designed to pay high interest over the short-term, and therefore require
different performance measurement techniques.
The CIS industry has agreed on indicative short-term yield figures (eg, for publication in the
newspaper) calculated in a specific way.
The formula for the money market yield calculation is as follows:

This formula provides investors with an up-to-date figure which in effect shows the average
yield over the last week. (In contrast, yield figures on equity funds reflect distributions over the
last year as a percentage of the NAV price.)
Note that for the fund fact sheets in the Unit Trusts Handbook a different method is used in
order to give an historical perspective on monthly yields (see page 184). Each month’s distribution
is annualised to give its annual equivalent – as if that rate of return had been earned for the full

126 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts