South Africa’s corporates can enjoy a positive real (or absolute) return from their cash holdings as two more money market funds achieve AA+ ratings, creating more ‘cash and liquidity’ investment opportunities.
GCR has assigned AA+ ratings to the Old Mutual Money Market fund and the Old Mutual Institutional Money Market fund.
“The GCR credit rating decision opens doors for corporates and other institutional investors to park their yield-seeking cash in two more of our solutions, thereby benefiting from call account-like liquidity at fixed deposit-like yields,” says Sean Segar, Co-head of Old Mutual Cash and Liquidity Solutions. He adds that the AA+ rating is the highest credit rating the funds will practically achieve under their current investment mandates.
Ian Ferguson, the other Co-head of Old Mutual Cash and Liquidity Solutions, singles out credit ratings as an important tool that institutional decision-makers can use to test the veracity of a fund. “GCR offers a credible, independent verification of the process by which the funds are managed, together with the funds’ credit risk, duration, and yield components of our money market and short-term interest fund solutions; but investors can take additional assurance from the fact that Standard Bank, our fund trustees, are responsible for enforcing our funds’ mandates and ensuring that compliance requirements are met,” he says.
Old Mutual is a recent entrant to the cash and liquidity segment, but its executive team already boasts decades of experience in growing and running multi-billion-rand money market-type funds. Ferguson explains that the solution set is extremely commoditised, and that an asset manager’s competitive edge derives from operational efficiencies and subtle nuances in how portfolio managers structure a solution. All four of the Old Mutual Cash and Liquidity funds are managed by Futuregrowth Asset management, an Old Mutual subsidiary with R200b under management.
“After decades in service to corporates, we appreciate that liquidity is a top priority; our investors expect to access their investment as easily as withdrawing against a call account,” Ferguson says, before singling out diversification and yield as other notable considerations. Diversification is tricky, however, because there are only four or five domestic banks that can be included in the solution – and considering that yield ‘sweeteners’ such as corporate debt make up a tiny percentage of these funds, if at all.
The rationale for using a cash and liquidity solution is often lost on retail investors who are typically moving a few thousand rand into or out of a call account at their local bank and are unlikely to need same day liquidity which comes at a price; but when you talk about ‘parking’ a few billion rand over one-, three-, or six-months, every basis point counts. At the time of writing, the Repo was at 8.25%, with the call rate being around 8%, compared to money market fund rates of between 8.7% and 9%, meaning there is up to 100 basis points for astute money managers to ‘win back’ on behalf of clients.
Corporates could get an even bigger ‘money market fund versus call account’ outperformance over the coming 12 months. The secret is in the yields of money market funds lagging the central bank’s Repo rate.
“As yields start drifting lower, the yield gap between money market funds and bank deposits will actually increase,” says Ferguson. “If the South African Reserve Bank (SARB) begins cutting interest rates – as most market analysts expect them to do towards the middle of 2024 – the cash invested in money market funds will benefit from even more of a yield ‘edge’ over call account deposits than before.” He adds that the outperformance is more pronounced during rate cutting cycles than rate hiking cycles, and that it takes around 90 days for the gap to normalise, at which stage there may be another rate cut resulting in continued outperformance.
Another important plus point of staying invested in money market or short-term interest instruments is that cash remains the ultimate positive return asset. At the current decades-high Repo rate, local investors continue to enjoy a positive real (or absolute) return from their cash holdings, comfortably beating inflation without having to lose any sleep over the potential for equity market volatility.
The Old Mutual Cash and Liquidity team says that the US Federal Reserve interest rate decisions, the South African forward interest rates (FRA) indicator, and local economists’ survey all offer a look through to what SARB interest rate decisions might be. In addition, the 2024 National Elections and South Africa’s rather dismal GDP growth numbers add weight to the argument for a 25 to 50 basis point interest rate cut by June next year.
“Aside from the looming interest rate cycle yield bonus, there are two significant arguments for institutional investors to consider money market or short-term interest funds over bank deposits,” says Segar. “The first is that you get immediate access to your cash without having to navigate fixed deposit notice periods, and the second is that you get an appropriate yield.”
Ferguson and Segar estimate that South Africa’s cash and liquidity solution providers generate an extra R4 billion rand per annum in yield for large corporates and other institutional clients. “Our investors are getting R4 billion in ‘free’ interest without taking on any additional risk – and, more importantly, without compromising on liquidity,” Ferguson concludes. “We use our scale to structure the yield solutions that our institutional investors deserve, delivering the liquidity they demand with the yield they deserve.”
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