We deal with a number of entrepreneurs that have accumulated cash within their businesses. These funds are usually kept for cashflow purposes and invested in a bank account, earning a low and taxable interest rate.
The cash often builds up to significant amounts over time, which is an untapped opportunity for additional financial growth akin to having a lazy employee.
The major issues with these funds earning lower interest is that inflation erodes at the real value. These funds often get left in cash for years, reducing the wealth of the business owners. For example, earning a standard 4% per annum in interest, with inflation at 7% the actual value of your funds depreciate instead of appreciate.
Yet, there are two items that often dissuade business owners from investing, namely:
- Liquidity – it is perceived that any investment other than cash is illiquid and this concerns business owners regards the accessibility of their funds.
- Risk – it is perceived that all investments outside cash, carry risk too high for consideration.
Dealing with point two, there is no way to have a risk free investment, but surplus cash will lose value if left in a bank account which in itself poses a business risk. To overcome that, surplus cash needs to earn more than a current bank account, yet choosing the best investment vehicle that offers the security of a bank account with higher returns is key.
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Most significant is to choose a risk averse investment from a market leading financial institution (think Investec, Allan Gray etc) and then select one of their proven stable funds offering consistent returns.
Let’s look at one suitable fund to offer a more detailed illustration. The Allan Gray Stable Fund, in this particular instance. Allan Gray manage the fund knowing that investors are risk averse and spread the assets of the fund over local equities, cash, bonds, hedged equities and offshore assets.
The fund has done remarkably well, returning 13.1% per annum since inception (July 2000). Over the past 12 months the fund returned 13.4%. These returns are no guarantee of future performance and I am expecting lower returns from this fund going forward, but it is indicative of a stable fund.
It is very dangerous to look at past performance in insolation: Maximum drawdown of a fund is the worst performance the fund ‘achieved’ over any measurement period and in the case of the Allan Gray Stable Fund this was minus 4.1% (May 2006). To put this in perspective, the maximum drawdown on a fully exposed (meaning higher risk, less diverse) Equity Unit Trust is minus 45%.
These two elements (diversity, returns and drawdown) are key indicators of the stability required for such a cash investment for a business.
Question 1, Liquidity. If you are concerned about needing quick access to cash then only invest on platforms that do not have any disinvestment penalties, such as Investec or Allan Gray.
Funds can only be returned to the listed entities bank account and typically will take between 3 and 5 days from receiving a signed instruction. Businesses may also add to the investments at any time in lumps sums of R20,000.
Typically businesses invest in the businesses name, although there is a fair amount of paperwork involved (resolutions, directors FICA, etc), but any good advisor (online or in person) should have an experienced back office team to assist. This means that you can quickly and seamlessly make your cash work as hard for you as your employees do.