Lessons from a volatile cycle

Over the past few years, shifting interest rate cycles, periods of heightened volatility and structural changes to the investment landscape have brought renewed focus to two concepts that are often used interchangeably but are fundamentally different: cash and liquidity. 

Recent market cycles have highlighted how cash and liquidity have evolved, why cash played such a prominent role in 2025, and what investors should consider as they position portfolios for the year ahead. 

Cash and liquidity: related, but not the same 

Cash and liquidity are closely linked, which is why they are often spoken about in the same breath. However, they serve different purposes in portfolio construction. 

Cash typically refers to cash balances and high-quality, short-dated instruments, such as money market assets, treasury bills and negotiable certificates of deposit.

Money market funds are commonly used as a cash management tool, offering access to diversified, high-quality assets with a strong focus on capital preservation. 

Liquidity, by contrast, is not an asset class. It refers to the speed and ease with which an asset can be converted into cash without materially impacting its price. Importantly, liquidity is not guaranteed simply because an instrument is listed.

While certain listed assets, such as bank-issued paper, tend to be highly liquid, others can become difficult to trade during periods of market stress. Investors who assume that listed assets will always provide liquidity may find that assumption tested when market sentiment shifts. 

Why cash came into focus in 2025 

The past year was characterised by ongoing uncertainty and volatility, driven by global interest rate adjustments, shifting inflation dynamics and changing fiscal expectations. In this environment, cash became a more prominent feature in portfolios. 

From a practical perspective, both institutional investors and corporate treasurers increased their cash holdings significantly. For corporates in particular, cash served an important role in managing working capital and maintaining flexibility in an uncertain operating environment. 

This trend was reflected in strong growth in money market assets under management during the year, with the money market funds managed by Futuregrowth on behalf of the Old Mutual Investment Group attracting around R12 billion in inflows across four funds. Importantly, cash was not only held for defensive reasons.

Performance also played a role. With real yields around 4% during the year, cash offered a compelling risk-adjusted return relative to many previous low-rate cycles. As market sentiment improved towards the latter part of the year, some investors began to deploy cash more strategically into risk assets such as equities and bonds. However, the experience reinforced that cash can be both a defensive asset and a source of meaningful real return, depending on the prevailing market conditions. 

From idle balances to strategic allocation 

One of the more notable structural shifts in recent years has been the way investors use cash. Historically, cash was often treated as a passive holding; capital parked temporarily while waiting for opportunities elsewhere. That approach has evolved over time.

Increasingly, investors are using cash as a strategic allocation tool, actively managing exposures through money market funds rather than holding excess balances in bank deposits. Money market funds allow investors to access diversified portfolios of short-dated instruments, often at yields that are more attractive than traditional bank deposits, without compromising liquidity or capital preservation.

For institutional investors without the scale or infrastructure to build and manage these portfolios internally, pooled vehicles offer an efficient solution. Crucially, fund size alone does not determine outcomes. What matters more is strategy – how quickly a fund grows, how maturities are managed, and how inflows are deployed, particularly in lower interest rate environments where reinvestment risk becomes more pronounced. 

Liquidity under stress: lessons from COVID and beyond 

Periods of market stress tend to reveal the true nature of liquidity. During the COVID-19 crisis, liquidity across markets became severely constrained. Even traditionally liquid instruments were difficult to trade and access to short-term funding tightened significantly. These conditions underscored the importance of liquidity buffers, robust cash flow forecasting and strong banking relationships.

For fixed income portfolios, the ability to meet margin calls, manage unexpected outflows and maintain portfolio stability depended heavily on advance planning. 

More recently, the implementation of South Africa’s two-pot retirement system provided another real-world test of liquidity management. Ahead of implementation in September 2024, Futuregrowth undertook extensive scenario analysis to assess potential liquidity impacts. Money market funds were expected to experience higher levels of withdrawal activity. While outflows did materialise, they were manageable and did not disrupt portfolio operations.

Preparation, scenario analysis and conservative liquidity positioning played a key role in navigating this transition smoothly. The overarching lesson is clear: liquidity risk is best managed before it materialises, not during periods of stress. 

Managing liquidity in a world of unlisted assets 

The growing allocation to unlisted assets - including private debt, infrastructure and private equity - has added another dimension to liquidity management.

Read: Private debt begins to shine in SA

While these assets may offer attractive long-term returns, they are inherently illiquid and require careful alignment with investor time horizons and liquidity needs. 

A common misconception is that listed assets always provide superior liquidity. In reality, liquidity depends on market conditions, investor sentiment and the nature of the underlying instrument. Certain unlisted assets, while illiquid by design, can still play an appropriate role in portfolios when their characteristics are clearly understood and properly matched to investor objectives. 

From a portfolio construction perspective, this reinforces the importance of mandate design, client education and diversification. In practice, effective liquidity management often involves using different types of cash funds for different purposes – including highly liquid money market funds such as the Old Mutual Money Market Fund, designed to prioritise capital preservation and liquidity, as well as yield-enhanced cash funds such as the Old Mutual Interest Plus Fund, which may include exposure to credit or longer-dated assets where appropriate. 

Maintaining adequate exposure to high-quality liquid assets, avoiding excessive leverage and ensuring access to alternative funding sources remain central to effective liquidity management. 

The outlook for cash and liquidity in 2026 

Looking ahead, the market is pricing in a gradual decline in interest rates over the next year, with inflation dynamics likely to be a key driver of the pace and extent of cuts. While lower rates may reduce headline cash returns over time, cash is expected to remain an important component of portfolios. 

Money market funds continue to prioritise capital preservation and liquidity, with a significant portion of portfolios typically invested in instruments maturing within three months. This maturity profile provides visibility on cash flows and flexibility to respond to changing conditions. 

For investors, the role of cash in 2026 will depend on individual circumstances – including risk tolerance, liquidity requirements and return expectations. While other asset classes may offer higher return potential, cash continues to provide stability, optionality and capital preservation, particularly during periods of uncertainty – and remains an important enabler of portfolio resilience.