Collective investment schemes tripled their share of assets under management in the form of cash and demand deposits to Sh35.3 billion in the 12 months to March 2024, chasing high interest rates on deposits offered by liquidity-starved banks.
New data on investment fund assets released by the Capital Markets Authority shows that the 29 funds now have 15.7 percent of their total assets under management (AUM) of Sh225.4 billion in cash at the end of the first quarter, up from 6.6 percent or Sh10.85 billion in March 2023.
They also held an additional Sh66.95 billion in fixed deposit accounts, meaning their total assets in interest-bearing deposits at banks stood at Sh102.23 billion in March, up from Sh75.7 billion a year earlier.
Fund managers say they are now getting rates of up to 18% on deposits from banks, well above the average return of about 16% offered on Treasuries.
Depositors increasingly bought government securities, which offered double-digit returns, forcing banks to raise their interest rates to compete.
Delays in government payments to businesses and contractors have also affected the flow of deposits into bank accounts, forcing lenders to ease their restrictions to attract available cash.
“Most banks will set a deposit rate higher than they have historically set a Treasuries rate,” said a Treasury official at a fund manager.
“Liquidity is also a factor. Bank deposits, whether demand or fixed, can be withdrawn at any time, even if a penalty is imposed. This is not the case with Treasuries, where converting them into cash before maturity can be a major challenge and a major penalty.”
As a result, mutual funds concentrated their assets in only two asset classes – government treasury bonds and cash deposits.
At the end of March, assets held in treasury bills and cash deposits stood at 93.2% at Sh107.65 billion (47.8%) and Sh102.2 billion (45.4%) respectively.
Unlisted securities (equities) accounted for 4.2 percent of assets or Sh9.6 billion, while listed equities accounted for Sh3.8 billion or 1.7 percent.
The remainder was held in foreign investments, real estate and deposits in other investment funds.
The fund manager added that compliance with regulations also contributed to the preference for keeping cash.
Money market funds, which represent the majority of the Fund’s managed assets, are required to invest only in interest-bearing money market instruments with a maximum weighted average time period of 18 months.
The term limit was set at 13 months in regulatory changes introduced in 2020, but was increased to the current 18 months in updated rules published in November 2023.
In order for fund managers to comply with duration rules, they need to focus more on deposits, reporting the fund’s duration at the end of each quarter.
