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. In many cases, investors are sitting with significant amounts of cash in bank deposits or money market funds for long periods. But is this the right decision?
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 counter parties 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 more than 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.
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.
Bryn Hatty is Stonehage Fleming’s chief investment officer in South Africa.