CASH is king. But no one can afford to bury it in the backyard. Surplus liquidity needs to be invested, at worst to retain its value and at best to make it grow.

While the ordinary saver with limited means face a dilemma in their choice of investment avenues, in the Board rooms of corporations, casual discussions can turn into heated arguments as far as the investment of surplus money is concerned.

Discussions with corporate bosses, analysts, long term investors and the study of balance sheets of some major companies brought to the fore the fact that companies seldom keep much of their surplus liquidity as ‘’cash-in-hand’’.

The mutual fund industry is perhaps the biggest source of liquidity with assets under management at Rs614 billion. Around 83 per cent of the funds are currently been invested while most retain about 20pc cash, should the certificate holders rush for redemptions. Two years ago, when the stock market was at its record high and rising, mutual funds were invested 95pc of their cash with a large amount going into equity funds.

While the ordinary saver with limited means faces a dilemma in their choice of investment avenues, in the boardrooms of corporations, casual discussions can turn into heated arguments as far as the investment of surplus money is concerned

Abdul Azeem, head of research at Spectrum Securities says that several funds are switching from equity to money markets. At the end of August, money managers had parked Rs164bn in equities funds while Rs139bn was vested in the money market funds.

Yield in money market which a few years ago was six per cent has now climbed to seven per cent. Mutual funds are the biggest participants in the stock market and have the power to set the direction of the market. They took away the initiative from the previous trend setters — the foreign investors who have been, for over a year now, on a selling spree.

Among listed companies, Engro Corporation is the envy of all with an unparalleled pile of “cash and equivalents”. At June 30, 2018, the conglomerate in the fertiliser-to-food-to-energy and petrochemicals held Rs66bn in cash and short-term investments, mainly vested in T-Bills.

Some other cash rich corporations included Dawood Hercules, a sister concern of Engro, with cash worth Rs23bn, the bulk of which is also invested in T-Bills. Lucky Cement, the giant in the sector, commanded cash worth Rs27bn, mainly parked in Islamic Saving Accounts.

Auto Assemblers, Honda Atlas Cars possessed Rs27bn and Indus Motors also held a hefty sum of Rs57bn, but almost all of that belonged to customers who had made advance payments against booking of cars.

“Corporations are not aggressive investors in new ventures and expansions due to the slower growth of the economy,” says Hamad Aslam, director research at Elixir Securities. He believes that companies find it prudent to invest in government securities — mainly treasury bills — which a provide yield of say 8.5pc over 6-month (about equal to Kibor), rather than invest in risky long term capital expenditure projects that take 3-5 years to take off.

“It would make sense to invest in ventures where the Internal Rate of Return is at least 15pc,” he argues. Most major corporations target Return on Equity (RoE) of at least 20pc and yield on investment at 10pc.

Several economists agreed that investment in long term bonds and Pakistan Investment Bonds (PIBs) were not the investment of choice in an environment of increasing interest rates.

But if diversification and expansions have been put on the hold, why are almost all big cement companies in the throes of giant expansions? A sector watcher explained that in order to maintain the “quota” allocated by the Cement manufacturers bargaining Association, the companies had to maintain their capacity.

Small investors in the equity market have benefited from a collateral advantage of surplus liquidity with companies. “Listed firms, mainly multinationals have started to voluntarily distribute bigger sums in cash dividends,” said a stock broker.

Compared to a decline in Foreign Direct Investment, profit repatriation by foreign companies in dividends has doubled in the last few years, regardless of the depreciation of the rupee.

Mr Amin Tai, regarded as the senior most broker at the Pakistan Stock Exchange and known to be a value investor, believes that companies tend to park cash in banks in the profit and loss sharing account. “It is simple, easy to withdraw and carries about an equal return with the T-Bills,” he argues.

He reckons that in the rising interest rate scenario, companies are able to post on their balance sheets, higher “other income” earned from interest on bank deposits. In the last released accounts for the six months Jan-June 2018 Engro Corporation shows earnings under “other income” in the enviable sum of Rs4.97bn.

Published in Dawn, The Business and Finance Weekly, October 1st, 2018