In the Beginning there was a Bank Manager

That’s a good place to start, the beginning. When I was young, the beginning was the Post Office. Yep, the place with the red box outside. That’s where my dad took me to park my birthday money, my loot. By end of primary school, I had R212 saved. (In case you laugh, that’s a lot of 5c ice cream cones!) Then I noticed that in order to receive my interest, I had to send the book to Bloemfontein once a year. I never bothered. Too much trouble, too little moolah. Hey Dad, maybe a little was your fault, you could have urged me to do so. That’s Ok, I forgive you. But my remuneration of 2c per wheelbarrow of topsoil – that we have to talk about. Seriously, there’s laws against child labour!

The world has changed since the moon landing. Nowadays, you do your banking with a smart phone. Interest on your savings account is calculated daily and added to your account monthly. No more trips to Bloemfontein! And since you claim to be a savvy investor, you no longer park your moolah at a bank, but in a money market account. Just as safe, just better interest rates. And there is just one like that available for ETF investors, the NewFunds TRACI 3 Month ETF (JSE Ticker NFTRCI). The NewFunds range of ETFs is offered by Absa Capital, a division of Absa bank. TRACI stands for Tradeable Cash Index. Since there are several of those, the one offered here is the 3 month duration. That is a very short time frame, short enough that your capital is always guaranteed to remain unchanged, no market price fluctuations, no risk. The return you get is pure interest. What I like about this ETF is that the interest is capitalised, i.e. it is not paid out to the investor as income. In that way one doesn’t pay income tax on the interest, but capital gains tax (which at current rates means about 60% less tax). Nice.

Let’s rewind the clock to March 1985. (This is why this blog is so amazing – we can travel back in time!). R1,000 deposit into your brokerage account, a few clicks and you’re the proud owner of 743 NFTRCI shares @ 134.54c per share. Fast forward to 30 June 2019 and your investment has grown to R18,647. Wow, that’s an 18x bagger. Amazing, that thing they call compound interest! Doing some maths, we calculate that our investment returned on average 8.95% per annum. Cool. Far better than the 5% Post Office rates I was used to not used to.

Hang on buddy, I here somebody shout. Not so fast. What about inflation? Yeah, what about it? Well, the first goal of investment is to beat inflation. If your investment can’t do that, don’t even bother. Fine,I get that. So, visiting STATS SA website, and doing some more maths, we conclude that to keep up with inflation, our R1,000 investment should have grown to R14,330.

Value of R1,000 deposited in NFTRCI money market ETF over time against inflation

Fortunately, it did beat inflation. But we had to wait 18 years before doing so. During the eighties SA still suffered from high inflation. And low interest rates to fund the bush war. For the first 10 years our investment under performed by nearly 4% per annum. During the next 10 years (1995-2005) our fortune turned around and we beat inflation by 4.6%. Over the last decade we received 1.21% above inflation, about the same as the long term average. Overall, our return after accounting for inflation was 0.8% p.a. Dad, why didn’t you tell me, that’s awful!

Return p.a.1985-19951995-20052005-2015
Money Market9.97%10.55%7.25%
Inflation (CPI)13.67%5.96%6.04%
Return after Inflation-3.70%4.59%1.21%

Whenever my mother-in-law and I had discussions over her bank investments, I would always here the same story from her: “My money is safe and I can sleep at night”. That’s when I told her “Mom, you need to invest in shares, the stock market”. “That’s too risky”, she would say. “And I like the bank manager, he’s nice. He always takes me to lunch every year.” The bank man was from Absa – her bank, her type of people. But after 15 or 20 years, she started complaining, everything had become so expensive. And we would have the same discussion over and over. The problem was, she was not reinvesting her bank interest but living from it. So her capital depreciated with the rate of inflation. After 25 years, she finally admitted that I was right, she should have put her money in the stock market. By that time it was too late. At 85 her world had grown smaller, her needs too. “Don’t worry Mom, we’ll look after you, just enjoy every day that you have.”

Moral of the story: Don’t let your bank manager take you out for lunch

Yes, there is a place for a money market ETF in your portfolio. More about this next time.


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  3. Duval van Zijl

    Still have a yellow “Ploeg Bank” savings book …….worth nothing now except for the memories ….should rather have been some share certificate ……love the story Tom !

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