Africa-Press – South-Africa. The competition between South African asset managers to manage the R1.8 trillion pile of cash corporates are sitting on is heating up.
Many have created their own cash and liquidity solutions units, which focus specifically on managing the excess cash corporates have on their balance sheet.
The aim is generally to deliver better returns than a typical call account or money market fund may provide, while ensuring quick and easy access to the funds for the company.
This has become an increasingly attractive segment for asset managers as corporates are sitting on a substantial cash pile.
These cash-flush corporates have been hesitant to invest in the local economy amid poor growth and elevated political uncertainty.
The amount of cash has continued to grow, reaching over R1.8 trillion in October, with the majority of this sitting in call accounts or money market funds.
Corporate cash has been growing at a rate of around 12% per annum for the past few years, despite South Africa’s economic growth hovering below 1%.
“This is telling you a couple of things. Corporates are generating good earnings and managing to keep costs under control,” Stanlib chief economist Kevin Lings said.
“But, it also shows that they clearly do not want to deploy that cash in terms of fixed investment, in terms of expanding their business, or in investing in the local economy. There is very little of that happening.”
Cash-flush corporates are a lucrative target for asset managers looking to manage billions in assets.
An example of this is Old Mutual’s Cash and Liquidity Solutions, which was launched two years ago as South African corporates began sitting on an increasing pile of cash.
It has grown its assets under management from R20 billion to R50 billion in the past two years, with it focusing intensely on providing institutional investors with an appealing alternative to holding cash in a bank account.
“Our growth demonstrates that institutional clients are seeking more than just a place to hold their money. They also want liquidity and capital protection,” Old Mutual’s Sean Segar said.
“Clients benefit from competitive returns, operational flexibility and a trusted partnership that prioritises both liquidity and safety.”
“The build-up of cash presents a tremendous opportunity for specialised money market fund managers like us to partner with businesses and assist them to earn more interest without them having to compromise on risk or liquidity.”
Segar explained that Old Mutual’s key advantage is its scale, which means it is able to negotiate better-than-average rates with the issuers of the debt instruments held by its funds.
Competition heating up
Old Mutual’s growth in this segment shows that it can be highly lucrative for asset managers to begin competing with banks in this space.
Traditionally, banks would dominate this area of the market, with the majority of corporate cash held in savings accounts or money market funds.
They benefited from their ability to ensure liquidity and security of funds, earning a decent return for companies, while the funds were easily available to be deployed in the business.
Segar explained that Old Mutual has had some success in competing head-on with banks in corporate cash management, with continued growth reliant on the unit proving it can be a reliable alternative.
This reliability has to be coupled with a clear advantage for companies, with Old Mutual offering more attractive yields than a typical bank alternative.
Most corporates need to hold cash for operational purposes, and their cash levels can fluctuate enormously depending on their respective cash flow cycles.
In addition, amid an uncertain macro-economic environment and volatile investment markets, corporates require relatively easy access to these funds.
The funds offered by Old Mutual aim to create a compelling alternative for finance teams who need to hold high cash reserves that may need to be withdrawn at short notice, want the funds to generate returns, but also can’t afford to place the capital at risk.
Towards the end of 2023, Stanlib launched a fund specifically aimed at corporate treasuries sitting on piles of cash and seeking higher yields.
South Africa’s largest asset managers, faced with many headwinds, have been bringing new products to the market in search of returns for clients and as a way to get their hands on more assets to manage.
However, Segar explained that managing a fund in this area is challenging, particularly when looking for outperformance amidst a shallow pool of viable investments.
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