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Unit trusts pile into bank deposits on higher rates
Fund managers say they are now getting rates of up to 18 per cent on deposits from banks, beating the average returns of about 16 per cent offered on Treasury bills.
Collective investment schemes raised the share of assets under management held in form of cash and demand deposits threefold to Sh35.3 billion in the 12 months to March 2024, chasing the high interest rates on deposits being offered by liquidity hungry banks.
New data on unit trust assets published by the Capital Markets Authority shows that the 29 funds now have 15.7 per cent of their total assets under management (AUM) of Sh225.4 billion in cash at the end of quarter one, up from 6.6 percent or Sh10.85 billion in March 2023.
They held a further Sh66.95 billion in fixed deposit accounts, meaning that their total assets in interest-bearing deposits in 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 per cent on deposits from banks, beating the average returns of about 16 per cent offered on Treasury bills.
Depositors have increasingly bought into government securities, which offer double-digit returns, forcing banks to raise their rates to compete.
Delayed government payments to businesses and contractors have also affected the flow of deposits into bank accounts, forcing the lenders to loosen their purse strings to attract available cash.
“Most banks will quote a higher deposit rate than Treasury bills historically,” said a fund manager treasury officer.
“Liquidity is also a factor. Bank deposits, whether call or fixed, can be recalled any time even if there is a penalty. This is not the same for T-bills where converting to cash before maturity can be a challenge and is quite punitive.”
As a result, unit trusts have concentrated their assets in just two asset classes -- government treasuries and cash deposits.
At the end of March, 93.2 percent of assets were held in treasuries and cash deposits at Sh107.65 billion (47.8 percent) and Sh102.2 billion (45.4 percent) respectively.
Unlisted securities (shares) 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 offshore investments, immovable property and deposits in other unit trusts.
Compliance with regulations has also contributed to the preference for cash holdings, the fund manager added.
Money market funds—which account for the bulk of the fund’s AUM—are required to invest only in interest-earning money market instruments with a maximum weighted average tenor of 18 months.
The tenor 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 the duration rules, they need to be more heavily weighted in deposits, as they report the fund’s tenor at the end of each quarter.
