Of course, looking at a fund factsheet doesn’t help if you don’t understand how to interpret the numbers. In this article, Bianca Philogene, Portfolio Analyst at 10X, looks at the cash entry on the factsheets as this not only impacts your retirement savings, but also gives some insight into our economy.
If you are a 10X client invested in the 10X High Equity fund 7% of your retirement savings is invested in SA cash.
If you open the fund factsheets and look for SA Cash you will see that the benchmark for 10X is the STeFI 3-month, which is the interest rate on 3-month SA cash deposits.
The SA Cash return is, therefore, driven by interest earned, and these interest rates are driven by the repo rate, which is the rate at which the Reserve Bank lends money to banks.
Do we need to care about the repo rate?
Your mortgage or vehicle finance rate, for example, will be something like the repo rate plus 3.50%, therefore 7%, which is known as the prime lending rate. However, the rate you will get on any money in a savings account will most likely be repo minus 1.25%, therefore around 2.25%.
So the repo rate is a key factor, like VAT perhaps, in determining the economic climate. It has a big effect on the cost of money you borrow (ie. your mortgage, your car finance, student loans, and your credit card). It also impacts the return you get on cash you have in the bank and the cash portion of any investments you have. Furthermore, it can also be a life-or-death factor for any pensioners who have stashed their cash in a bank and are living off the interest.
So what drives changes in interest rates?
Most people know that the Reserve Bank sets interest rates in response to developments in the SA economy. The Bank (PS. Bank with a capital B always indicates that you are referring to the one and only Reserve Bank) uses interest rate-setting as a mechanism to manage inflation. So interest rates are driven by current inflation and what the Bank predicts inflation will be in the coming months.
As part of efforts to keep the inflation rate stable, the Reserve Bank targets inflation within a certain range. How the Bank manages this is that when inflation is too low, the Reserve Bank will lower rates to encourage spending. When interest rates go down everybody spends because money is cheap. Lowering rates also disincentivises saving because interest earned on money in the bank goes down as well.
Conversely, an increase in the repo rate is like pulling up the handbrake to slow down the economy.
So, you see, apart from your wages and the size of your family, interest rates and inflation are the biggest factors affecting how much you have to spend, and these are the two key drivers of the SA Cash return in your portfolio.
To illustrate, let’s have a look at the 1-year return to SA Cash for March 2021 and for March 2020.
In the table above, you can see that the 1-year return has come down quite significantly. Since fears about Covid started to hit SA in the first quarter of 2020, the Bank has lowered the repo rate three times, to the current 3.5%. This is the lowest rate we have had in South Africa in more than 50 years. Given that repo rates drive interest rates on SA cash assets holdings, the return has come down from 6.9% to 4%.
