In­come funds to ‘sweat’

Finweek English Edition - - IN MY VIEW -

Al­though South Africa’s rate cy­cle has turned and there may be fur­ther rate hikes to come, com­pa­nies con­tinue to recog­nise the need to en­hance the yield on their op­er­a­tional, core and strate­gic cash re­serves. Glob­ally, money mar­ket funds have been used by cor­po­ra­tions since the early Seven­ties to pro­vide for yield pickup, di­ver­si­fi­ca­tion and ac­cess to rates fur­ther along the yield curve. Fur­ther­more, by us­ing money mar­ket funds com­pa­nies do not have to sac­ri­fice liq­uid­ity and hence pay penal­ties on f ixed de­posits in those sit­u­a­tions where cash is re­quired be­fore the ex­pected or planned date of ex­pen­di­ture.

Notwith­stand­ing the re­cent rate hike in SA, global and do­mes­tic rates are hov­er­ing around all-time lows. This has forced com­pa­nies to look for al­ter­na­tives for their core or strate­gic cash and as a re­sult, in­vest­ment by cor­po­rates into fixed in­come unit trusts has be­come com­mon prac­tice in SA. While there are var­i­ous providers of­fer­ing suit­able so­lu­tions, it is im­per­a­tive that trea­sur­ers, fi­nan­cial di­rec­tors and chief fi­nan­cial of­fi­cers who are con­sid­er­ing in­vest­ments into fixed in­come funds clearly un­der­stand what they are in­vest­ing in and what the as­so­ci­ated risks are. SOME KEY POINTS TO LOOK OUT FOR AND UN­DER­STAND IN­CLUDE: Fixed in­come funds can have broad man­dates. To­day, for ex­am­ple, you may com­pare a few fixed in­come funds which on the sur­face look sim­i­lar as they all have ex­po­sure to cor­po­rate credit, an as­set class widely ac­knowl­edged to be in the ‘sweet spot’. The un­der­ly­ing man­dates of the funds may how­ever be very dif­fer­ent, with some able to in­vest more broadly into as­set classes like listed property. Cor­po­rate in­vest­ment man­dates may not al­low for this as­set class. Be sure to un­der­stand clearly what the fund can and can­not in­vest in. Pay at­ten­tion to the rec­om­mended in­vest­ment hori­zon of the fund. A twoyear hori­zon for core or strate­gic cash for ex­am­ple, may not be ap­pro­pri­ate, as longer du­ra­tion funds mean a larger risk to in­ter­est rate moves than shorter du­ra­tion funds and po­ten­tial cap­i­tal losses. A fund that holds mainly f loat­ing rate notes, such as the In­vestec High In­come Fund, will have lower du­ra­tion. The value of f loat­ing rate notes f luc­tu­ates much less in re­sponse to mar­ket in­ter­est rate move­ments than the value of fixed rate bonds. Make sure the credit risk is un­der­stood. Does the fund have a rat­ing? Is it limited to only in­vest­ing in in­vest­ment grade coun­ter­par­ties or can it in­vest lower? Credit risk refers to the risk that a bor­rower will de­fault on its debt. The risk rests pri­mar­ily with the lender, which in this case would be the cor­po­rate in­vestor, given the ‘ look through prin­ci­ple’ of in­vest­ments into unit trusts. Fixed in­come fund man­dates, that have been de­signed with the cor­po­rate in­vestor in mind, should have a con­ser­va­tive ap­proach to the credit in which it in­vests. The strength of the as­set man­ager’s credit process and team should be ex­plained. Fixed in­come f unds do not have a con­stant net as­set value ( NAV) like money mar­ket funds, which means that ac­count­ing for the re­turns will dif­fer to that of money mar­ket f unds. Your provider should ex­plain this be­fore the in­vest­ment is made so that the ac­count­ing for such f unds is un­der­stood. You also need to en­sure that your trea­sury sys­tems can ac­com­mo­date this. Be sure to un­der­stand the dif­fer­ent mea­sures of per­for­mance and yield. Ask your provider what the dif­fer­ence is be­tween the for­ward yield, cur­rent yield and past per­for­mance, as these mea­sures can re­sult in com­pletely dif­fer­ent out­comes and are some­times quite mis­lead­ing. Does t he f und dis­trib­ute i ncome monthly or quar­terly? Most cor­po­rate in­vestors pre­fer a monthly dis­tri­bu­tion, as ac­count­ing for the in­ter­est monthly is far eas­ier than quar­terly given that most ac­count­ing sys­tems are set up for monthly in­ter­est. Most fixed in­come funds al­low ac­cess to the in­vest­ment within 48 hours, but this does not nec­es­sar­ily mean that these funds are suited to op­er­a­tional or trans­ac­tional cash in­vest­ments. The depth and ex­pe­ri­ence of the in­vest­ment team man­ag­ing your cash re­serves is also a key con­sid­er­a­tion. Many com­pa­nies in SA have reaped the ben­e­fits over the last year of iden­ti­fy­ing what por­tion of their cash is op­er­a­tional, core and strate­gic, and plac­ing these into funds rang­ing from money mar­ket, ‘near’ money mar­ket to f i xed in­come funds. In­vestec As­set Man­age­ment’s core cor­po­rate fund range re­turned be­tween 5.70% to 7.60% gross of fees over the year to De­cem­ber. The blended re­turn has meant that cor­po­rates are bet­ter po­si­tioned to ‘sweat their cash’ in times of lower in­ter­est rates, but it is im­per­a­tive that these com­pa­nies who hold ex­cess cash ask the right ques­tions, un­der­stand the risks and match the re­turns ac­cord­ingly.

By Char­lene Muller, Head: SA Cor­po­rate Sales, I nveste c Asse t

Man­age­ment.

Char­lene Muller

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