The Innofin Money Market Fund (Class B) has performed exceptionally well over the past year. Gert Steenkamp, portfolio manager from Sanlam Investment Management, says the fund yielded a stable income in spite of market conditions not being favourable for money market funds.

"The investments in long-term assets over the past 12 months have paid off for shareholders – the performance is fantastic for a zaAAAm-rated fund", Gert says. "Money market funds pay interest on a monthly basis. With this type of fund it is very important for the stream of income to be equal to the interest payments that have to be made every month."

Shane Tremeer, head of Advice and Fund Management at Sanlam Personal Portfolios (SP²), says money market funds are not a popular investment choice at present, owing to the low interest-rate environment South Africa has experienced during the past year. "So the fact that the Innofin Money Market Fund (Class B) not only maintained, but actually showed a slight growth in its asset base, all the while yielding excellent returns, makes it a wonderful performance," he says.

The Innofin Money Market Fund (Class B) was launched in September 2001 and is only available to SP² investors. Money market funds usually invest for 90 days, whereas a zaAAAm-rated fund invests for 65 days. Only Innofin, RMB and the Absa Money Market Fund currently have this rating.

The zaAAAm rating means the fund may not invest in money market instruments for longer than 12 months, and money market instruments' term in the total portfolio may not exceed 65 days. The credit rating of assets purchased is of an extremely high quality. If the duration of the portfolio invested in these assets is for 65 days, 10% of the total portfolio must be in cash. Money market instruments include banker's acceptances, debentures, negotiable certificates of deposit, treasury bills and call accounts issued by the government, semi-government institutions and banks.

According to Gert, money market funds have experienced a stormy period over the past year as a result of volatile fluctuations in money market rates. "Since December 2003, the Reserve Bank has caught the market unawares on several occasions by adjusting interest rates. However, the Innofin Money Market Fund's ability to adapt quickly to change contributed to its stable performance. Thanks to the fund's short term (65 days) duration, it can adapt much faster to this type of change in the market."

Gert doesn't expect the Reserve Bank to announce any changes in interest rates over the next few months. "But there may be more pressure to increase them by the end of next year," he says.

During August the SA Reserve Bank cut the Repo rate by 1% from 12% to 11%. Money market rates at that time discounted nearly all of the rate cuts with only the 3 months NCD that came down from 11% to 10.50% while the 12 month NCD unchanged at 9.95%. On a breakeven analysis we still prefer the 3 month and 4 month area on the yield curve as the long end of the yield curve fully discounted all possible interest rate cuts.

Looking forward SIM expects another cut of 1.50% in the next 6 months. During this time the slope of the yield curve will change to a more positive sloping yield curve. This would give money market funds the opportunity to invest in the longer end of the yield curve.