- Absa's shock decision to shut down the 25-year old Absa Money Market Fund has sparked furious speculation.
- It says too many retail investors were under the wrong impression that the unit trust returns and capital were guaranteed by the bank.
- But experts say other reasons - including profit margins - may also have been deciding factors.
- For more articles, go to www.BusinessInsider.co.za.
The abrupt closure of the massive Absa Money Market Fund shocked many in the industry, and some are still not entirely convinced that Absa’s official explanation was the only reason for the decision.
With around R80 billion under management, the Absa Money Market Fund is the third biggest unit trust in South Africa. The fund represents nearly a fifth of all the money in South African money market funds.
The way Absa is shutting down the 25-year-old giant unit trust is puzzling. It didn’t release a public announcement about the closure, and it is moving very quickly. The whole fund will disappear by July. Investors have a choice of getting their money back or transferring their savings to Absa investment accounts, or to a new fund, called Absa Prudential Money Market Fund.
In a notice to clients, Absa said the reason for the closure is that many investors don’t understand that the fund is not guaranteed by the bank.
A survey of investors showed that most of its retail clients believe their investments and returns are guaranteed by the bank. As it is a unit trust – and not a bank product - this is not the case.
Confusion over unit trust
It’s easy to understand why the lines may appear blurred to investors. So, for example, Absa clients can withdraw money easily from the fund via an ATM, just like a bank account.
Absa also has the only money market fund whose name is so closely associated with a retail bank. Others – like the Stanlib Money Market Fund and the Nedgroup Investments Money Market Fund – are much further removed.
Accordingly, its new fund is named Absa Prudential Money Market Fund, presumably to make the distinction clearer. You also won’t be able to withdraw money from the new fund via an ATM.
But some analysts remain puzzled about why Absa deemed it necessary to close such a massive unit trust – and not just rename the fund, and launch a marketing campaign among investors to remove any confusion, for example.
It’s also not clear that South African regulators put pressure on Absa to close the fund, or even had objections about its structure.
A spokesperson for the Reserve Bank’s Prudential Authority, which supervises the country’s banks, says the authority did not raise any specific concerns regarding the structure of the Absa Money Market Fund with Absa. “The said closure of the Absa Money Market Fund was based on an assessment and decision made by Absa Group Limited.” Absa and the authority have been in talks since last year ahead of the planned closure.
So why did Absa take the drastic decision to close the massive unit trust?
Apart from investor confusion, there may have been other considerations, experts say.
Bank deposits suit Absa better
There are a couple of reasons why Absa would prefer small investors who are currently invested in the money market fund to rather invest in its own saving and investment accounts instead.
Currently, the investments in the fund are made via Absa’s asset management business, and cannot be incorporated on its balance sheet in the same way as bank deposits. Deposits strengthen the company’s liquidity and capital positions, and also enable Absa to lend more, says Kokkie Kooyman, one of the founder members of Denker Capital, which manages the award-winning Denker Global Financial Fund.
In the end, this means that Absa earns a fatter profit margin from investments in its savings accounts, than from its money market fund, another industry expert told Business Insider.
It is also possible that, in the end, it will pay less interest to individuals, who are now losing the collective power of being in a massive fund.
Investors in the money market fund are currently earning around 3.9%, while the rate on an Absa notice deposit for an investment of R100,000 is 3.4%.
Money market fund can hurts Absa
It does not necessarily work in Absa’s favour to have such a powerful money market fund in the market. To deliver the best returns for its investors, the fund is constantly searching for the best interest rates on offer from financial institutions which require short-term capital – including Absa.
Because it is such a giant fund, it has a lot of pricing power, says Kooyman. The fund may effectively increase the rate of interest that Absa has to pay for its own short-term borrowings.
Pension fund benefit
Unlike its predecessor, Absa’s new money market fund is compliant with Regulation 28 of the Pension Funds Act. Regulation 28 puts limits on where money in retirement funds can be invested, and being compliant means that, theoretically, a pension fund can be entirely invested in the money market fund.
One analyst says Absa may well have faced calls from pension funds to make this change.
Another theory – that Absa doesn’t want to comment on – is that it is restructuring its asset management business ahead of a planned sale, probably to Sanlam and Patrice Motsepe’s African Rainbow Capital (ARC). For more than a year now, there has been fierce speculation that such a takeover was on the cards.