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Making ‘lazy and tactical cash’ assets work better in a volatile market

13 June 2019 Bryn Hatty, Chief Investment Officer in South Africa at Stonehage Fleming
Bryn Hatty, Chief Investment Officer in South Africa at Stonehage Fleming

Bryn Hatty, Chief Investment Officer in South Africa at Stonehage Fleming

While many people believe that the ANC secured a sufficient mandate in the national election to implement Ramaphosa’s reform agenda and restore some investor confidence, there is still much uncertainty around South African politics and economics. In addition, ongoing concerns around corporate governance on the JSE as well as global economic risks are increasing investors’ risk perceptions. As a result, many South African investors are retreating to the safety of cash assets, according to international family office Stonehage Fleming. In many cases, investors are sitting with significant amounts of cash in bank deposits or money market funds for lengthy periods of time.

But is this the right decision? When cash is held for medium or even long-term savings and investment purposes, Stonehage Fleming’s Chief Investment Officer in South Africa, Bryn Hatty argues that it would benefit from ongoing active management.

“Nicknamed ‘lazy cash’, bank deposits often aren’t the best alternative,” says Hatty. “Term deposits lack liquidity and despite offering a relatively certain, but low income, they are also fully taxable. In addition, bank deposits represent a concentrated credit risk. Recent history reminds us that even big banks can run into problems, and in global terms, even the larger South African banks still represent relatively small market players.”

To benefit from active management, cash could be invested with a selection of top income portfolio managers. Such funds offer daily liquidity and diversification across multiple counterparties and types of investment instruments, such as corporate and inflation-linked bonds, money market instruments and even small amounts of property and high yielding equities. Although these funds can produce negative returns in the short-term, they typically yield a higher income than cash or pure money market instruments as the flexible mandates allow managers to invest where the best income opportunities lie at any point in time. The additional returns that can be earned over time are likely to outweigh risks associated with higher volatility of return. In addition, there are potentially some small tax efficiencies, as not all of the returns from these investments are in the form of interest income.

Globally, informed investors and their advisers are also becoming concerned about the opportunity cost of allowing cash to languish in low return bank accounts for long periods of time. Brexit is a perfect example. The process has taken over two years, and with the deadline for a decision having been pushed out to October, investors’ cash is not being optimised. The ‘pending’ US recession is another example as it’s impossible to know exactly when this might occur. It could be another 18 months to two years, during which time ‘lazy cash’ is just getting, well, lazier.

Hatty continued:

“In South Africa, the low return environment may also drag on until there is more policy certainty which could take some time. Therefore, investors should make their investments – including cash – work as hard and as efficiently as possible to produce the best long-term returns.”

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