In today’s ‘lower for longer’ interest rate environment, building a cash strategy that can offer investors an enhanced return, capital preservation and liquidity seems like an extraordinary challenge. Caroline Hedges, Global Head of Liquidity Portfolio Management, and Tony Callcott, Head of Pan-European Liquidity Client Solutions, have good news.
How would you describe investors’ appetite for return in the current environment?
TC: Generally, investors have been somewhat affronted by the very low or negative rates of return seen in recent years. However, in the last 18 months, we have seen less acceptance of the status quo. As a result, many have been reviewing their policies and guidelines to see if they can push for a slightly enhanced return on slightly longer-dated cash, mindful of course, not to mistakenly start chasing yield at any cost.
CH: With investors and asset managers under significant yield pressure, corporate treasurers, institutional investors and even traditional credit investors have contributed to the net inflows seen in enhanced cash products this year. These longer duration credit investors are surprised at just how much additional risk needs to be taken for minimal incremental returns, since the yield curve is so flat. In contrast, enhanced cash products still offer the necessary liquidity and security but with higher risk-adjusted returns.
How are investors tackling the new environment?
TC: Today, investors are generally taking a more considered view – looking to blend their approach to see if they can improve their yield. Previously, traditional cash management desks concentrated all of their operational cash in short-term money market funds (MMFs) that offered daily liquidity. Now, they are closely scrutinising their cash and forecasting metrics. This gives them a far better understanding of their operational, reserve and strategic cash segments, and means they can begin matching the different cash segments with the most appropriate investment products. MMFs are still a primary destination for their operational cash, but treasurers are now leveraging a pick-up on yield in the enhanced-space for cash pools that have slightly longer horizons of around three to six months.
CH: Understandably, if an investor’s entire cash bucket fluctuates wildly, putting it in a same-day MMF makes sense. But if, through that deeper understanding, they know that a proportion of that cash bucket is more stable, and has a slightly longer horizon, they can choose to optimise it by putting it into a liquidity-plus style fund without sacrificing liquidity or security to achievethat yield.
How should treasurers approach building a bespoke mandate for their cash?
CH: Bespoke mandates are ideal for clients that have both large buckets of cash and require a tailored approach, in terms of not only risk and return, but also in terms of investment restrictions. For example, portfolios can be put together using two buckets: one for liquidity purposes and one for return. Clients can also decide on an allocation to ABS or fixed bonds, with co-management of the portfolio from credit portfolio managers, combining the expertise of two skill sets to produce a sophisticated portfolio designed to meet bespoke objectives.
What returns could an investor taking the cash-plus path anticipate?
CH: The universe of cash-plus funds is diverse, so it is important for investors to match the profile of the fund with their liquidity and credit constraints. For those with a conservative strategy, but able to invest for three to six months, an additional 15-25bps return can be achieved using AAA-rated cash plus funds. For investors prepared to take more risk, the ‘non-rated’ cash-plus universe, which stretch further down the capital structure and/or extend tenor, could potentially provide an additional 25-50bps.
Clients investing euros often ask if we can achieve a zero-rate of return; this is possible but requires taking significantly more credit and liquidity risk. For us, it is important for asset managers to educate clients about what’s achievable for the risk and volatility they are prepared to take.
With the large range and diversity of funds in this space, investor due diligence is essential, evaluating not only what the fund manager is investing in, but also how robust its credit analytics and credit risk management are.
What can Aviva Investors offer that is unique?
TC: A number of our clients have their own investment guidelines and policies in place, and recently many have been reviewing and changing them. Based on these alterations, we can create dummy portfolios, what-if scenarios and other indicators, allowing us to table opportunities that their new guidelines present.
For treasurers who may not realise the opportunities in this space, we stress that Aviva Investors is an asset manager and not a bank, so this is our area of expertise. In fact, we have a 40-year history in running bespoke mandates across a wide range of products.
We value the credit process above all else, not least because we look after our own cash, safeguarding it in the same way as we do our investors’ money. Furthermore, we always call upon our expertise in this area to offer our clients appropriate solutions.