Old Mutual gunning for cash-flush corporates

South Africa’s stagnant economy has effectively capped the funds available for asset managers to invest on behalf of clients, forcing them to find alternative ways to grow their businesses. 

One way is to manage the billions of rands on the balance sheets of South African companies that are hesitant to invest in new projects. 

Despite the optimism surrounding the formation of the Government of National Unity (GNU), Old Mutual’s Ian Ferguson said many companies are still adopting a wait-and-see approach to investing in the local economy. 

This is because many are waiting to see whether the optimism that has gripped financial markets can be translated into economic growth. 

It is common knowledge that South African companies currently have large cash reserves. Business confidence levels have remained stubbornly low in the low economic growth environment with a lack of political stability.

“Instead of investing their capital for organic growth, corporates are opting to keep cash in bank accounts as they await a clear economic development plan from the new GNU,” Ferguson said.

Research from Old Mutual Wealth’s Cash and Liquidity unit shows that SA non-financial corporate deposits have grown by more than 9% this year to over R1.2 trillion in 2024.

Asset managers are increasingly looking at this idle cash on corporate balance sheets as a relatively easy way to boost their assets under management. 

Old Mutual also expects companies to use these funds amid declining interest rates, which limit the return on cash held in the bank. 

Ferguson says this can be achieved by taking advantage of money market funds that provide better yields than call accounts without the company giving up liquidity.  

Not only are yields attractive, but the funds offer a single entry point into a diversified basket of exposure, predominantly to the large domestic banks, depending on the money market fund used.

The 25-point cut in September kicked off the rate-cutting cycle and may push corporates to potentially move their cash into same-day liquidity funds such as money market funds offered by most asset managers. 

Companies have grown their cash reserves while waiting for a clear direction from the GNU. This strategy results in companies having more capital to invest when the government communicates its much-awaited economic growth policy. 

If this cash were to be injected into the economy, it would make a big difference to GDP growth as the multiplier effect in South Africa is powerful.

Ferguson explained that companies can park their cash reserves in a money market or enhanced money market solution offering better yields than traditional bank deposit rates.

The yield on money market funds lags the call rate during a rate-cutting cycle, resulting in higher returns than those offered by traditional savings accounts as their yields fall immediately following a rate cut.

Money market fund yields take longer to reset, meaning they stay higher for longer.

Late last year, Stanlib launched a fund specifically aimed at corporate treasuries sitting on piles of cash and seeking higher yields.

Faced with many headwinds, South Africa’s largest asset managers have been introducing new products to the market in search of returns for clients.

Old Mutual believes it has a competitive edge due to its operational efficiencies and product structure. 

Ferguson explained that managing such a fund in South Africa is extremely difficult given the lack of viable investments in this area. 

This also makes outperformance very rare as most debt is issued by the government or guaranteed by the state, with slim pickings with regard to corporate debt.

Despite this, there is a significant opportunity for South African asset managers in this space. 

The insurer estimated that these kinds of products generate an extra R4 billion per annum in yield for large corporates and other institutional clients.