Consider a Laddered Portfolio for Higher Return Potential on Corporate Cash
Risk-averse institutional cash investors know that rising interest rates can be a mixed blessing. Higher returns are expected, but lower asset prices can result in unacceptable losses, both realized and unrealized, in cash portfolios. Our research report this month, Optimizing Separate Account WAM in a Rising Rate Environment, is for cash managers striving to maintain liquidity and safety of principal while meeting new expectations for higher portfolio returns. It shows how a carefully constructed, conservative portfolio that includes corporate credits rated mid-A or higher often may deliver higher returns than Treasuries or government money market funds.
Our analysis runs multiple sample scenarios comparing separately managed account portfolios of agency and corporate securities with comparable portfolios of government securities. It tracks performance of buy-and-hold portfolios that include short-term investments designed to deliver targeted liquidity as well as higher returns. Every interest-rate scenario we sampled—including multiple anticipated rate hikes in 2018—showed higher return potential with minimized risk. The key was construction of sample laddered portfolios optimizing weighted average maturities (WAM) in ways that met both targets.
In the years before the financial crisis, prime money market funds provided returns that consistently outperformed government money market funds. During the decade of near-zero interest rates following the crisis, there was little expectation that cash portfolios would deliver significant returns. But now, the Fed’s rate hikes are coinciding with SEC-mandated money market fund reforms that increased risk by stripping the prime funds of their fixed net asset values. As a result, cash managers are searching for new ways to achieve the desired yield with an appropriate balance of liquidity and safety of principal. Many are going “back to the future” by turning to separately managed accounts, which institutional cash managers used extensively in the years before prime funds came along.
Optimizing Separate Account WAM in a Rising Rate Environment demonstrates how separately managed accounts may meet the needs of the current generation of institutional cash managers. If you are searching for a cash liquidity solution with higher yield potential than government money market funds and limited mitigated risk, be sure to download and read the report today.