Alec Hogg sat down with Sean Segar, Head of Cash Solutions at Nedgroup Investments to discuss investment vehicles from a perspective that focuses on making your money work for you in a smart way – whether you’re the man on the street, or a big corporate with lazy money. The duo draw on the big factors that affect return on cash at the moment, namely interest rates and uncertainty, clarifying where it makes the most sense to house that cash. – LF
This SA Investing special focus is brought to you by Nedgroup Investments. Sean Segar is with us in the studio. He runs the Cash Solutions side of Nedgroup Investments. You have quite a few funds under your control, Sean.
We have three funds. It’s a small range, but we tend to stick to the capital preservation space of the fixed income world. We wake up in the morning and say, we begin by preserving capital and then maximising the interest on that.
Warren Buffett would approve. Doesn’t he say ‘rule #1: don’t lose money’?
He does, but I don’t necessarily think he’d approve of the returns that Money Market Funds give in the long term. It is a parking place. It is an alternative to call accounts. Our view is that if you’re sitting on cash (especially as a corporate), it may as well work as hard as it possibly can instead of wallowing around. Everything adds up and does its bit, and we do come across some pretty horrendous stories – a real indictment on corporate management.
Don’t give us the name, but tell us about one of those nightmares.
You’d come across a corporate with R100m/R200m in a very poor call account. In other words, they’re not getting the maximum call account. They haven’t really pushed it.
Like a cheque account.
We have come across cheque accounts in the Retirement Fund space – very big numbers. That’s lazy cash and our mantra is ‘cash must work’.
How do you put it to work?
It’s using the Unit Trust technology as a wrapper. When they launched Unit Trust, I don’t think it was intended to make it user-friendly for Money Markets, but it actually works particularly well. This is the pooling/aggregation, so as soon as many investors put their money into the same trust or fund, we are able to spread that across the duration curve. As a result, we get to an average term to final maturity, of about four months. In other words, that gives you the four-month equivalent fixed deposit rate and that rate comes with total flexibility. In other words, the clients can come and go with literally, same day access.  While they’re in, they get exposure to the four-month rate, which is a cross-section of all the fund’s instruments but they can come and go. It’s a fantastic proposition in that sense. You have the liquidity. You have the yield of a four-month fixed deposit and you have huge convenience. That’s with the credit rating, compliance, and regulation of the industry that we’re in, which is highly credible.
From time to time, it does expose you to risk as well. We saw that with the Abil story last year – breaking the buck, as it was called in the Money Market Funds. Did that affect you at all?
Our funds didn’t break the buck. In fact, we have a fund that has no Abil at all. Different mandates have different investment criteria. The sentiment was more negative to the industry and yes, it spooked quite a few people. The short duration, fixed-income industry saw about R40bn leave it. Most of that has actually come back now, so sentiment is important. No one likes to lose money.
It was a bit of a knee-jerk, then.
Yes, I think it was a bit of a knee-jerk, and fair enough. There was quite a lot of smoke around and money was lost in the process. While it’s not material (in some cases, a couple of basis points or maybe a day or two of interest lost), it’s not what you expect from that space. That’s what spooked people. When they sat back and thought ‘hold on. We were receiving a percent higher than we would have in call, even while losing a few basis points, we’re still nett-nett up because we’d been there for a while’, so they’re coming back.
It does emphasise the reality that with these funds, there’s no guarantee. I recall that when I had my previous business, we had a chunk of cash and our Board wanted a guarantee that the capital was safe, but you can’t actually do that. Certainly, the place that we had the money invested in was not able to do it.
A guarantee is only worth the person who’s issuing the guarantee.  In the Unit Trust world, you cannot issue guarantees but in the Money Market space, every instrument that’s held by the fund is guaranteed by the bank/corporate/Government who issued that instrument. Individually, the instruments held by the fund are guaranteed by the issuer, but the fund itself cannot say it’s guaranteed and that puts many people off. It’s a very safe place to be.
Even in a circumstance like Abil; because of the diversity, there wasn’t really that big a loss.
Yes. Some funds were affected more than other funds were. We were pleased to hear in the Budget yesterday, the comments from Minister Nene saying that under curatorship (and we’ve had very little news, but I hear there’s a huge amount of work going on in the background), the bank is generating positive cash flows. It’s highly unlikely that there’ll be any further losses and the investors who’ve had their capital repayments and interests frozen are very likely to start seeing that being repaid and a normal funding program resumed. Very positive comments at the end of the Budget Speech yesterday, about Abil.
We have a strong banking system in South Africa but shadow banking is something that’s coming to the fore. On the online environment, you have Bitcoin beginning. In the offline environment, there’s peer-to-peer lending, etcetera. How do you think that’s going to affect the system and businesses like yours?
My favourite quote in this space (I think it came out of Woolworths) is if someone else is coming to eat you, rather eat yourself. That’s when they rolled out a whole lot of stores – cannabilising other stores. It’s a similar situation in banking. Shadow banking is emerging. It’s unstoppable and so the banks are almost starting to cover both bases. The Money Market space is dominated by banks. In online banking, the transactions are done by the Internet companies. In lending, the peer-to-peer lending/direct capital market issuances are taking place as an alternative to overdrafts and borrowing from banks. On the depositing side, the Money Market Funds are effectively, in shadow banking. A great case study here is Alibaba. Alibaba went into Money Market Funds in the middle of 2013. They raised $90bn in their Money Market Fund, in a matter of ten months. It just shows the power of a big client base – 150 million users, etcetera. They could go and take those deposits from what would have gone to banks and using their technology, bolt on a whole lot of functionality, which would traditionally have come from banks. Shadow banking is very real across the space and Money Market Funds take care of a part of the alternative to a call account, and they do it rather effectively.
Are they just, more competitive – the Alibaba type of fund?
I think the Alibaba situation is about convenience. It backs into the online retailing that they have, but once the investor sees that he’s getting a good rate from that Money Market Fund (and it’s convenient), it’s rather difficult to take them back to the traditional banking where they tend to not get the rates and it’s an extra transaction to interact with online banking. That’s the retail space. We tend to operate in the corporate space. We look after lazy corporate money – previously lazy corporate money.
You read through balance sheets and see that XYZ corporation has 100-million, which is earning very little interest and you say ‘hey guys, we can add a few million Rand to your bottom line’.
We do and we are approached as well, by the proactive corporates who want to put some of their money to work.
Who’s proactive and who isn’t? Not in names, but generally in the South African environment, what percentage of corporates would still have lazy balance sheets?
Not that many anymore, of the formal sector. You will come across some rather large businesses that might be family-owned and less dynamic, and there they need a bit of a shake and we need to show them this tremendous proposition of the fixed deposit rate with the easy access and credit convenience. It’s a very compelling sale so the hit rates in terms of Money Mark businesses like ourselves going to corporates is rather high, because it’s a win-win situation. They definitely benefit. As an industry, the rough calculation is that the Money Market industry in the short duration industry paid its clients about R2.5bn extra interest last year. That’s over and above the best call rate they would have gotten – R2.5bn – so the industry certainly adds value.
Indeed, it does. Sean Segar is the Head of Nedgroup Investments Cash Solutions. This SA Investing special podcast was brought to you by Ned Group Investments.
