Benchmark Selection for Cash Portfolios
Corporate treasury managers are frequently confronted with the task of picking the right benchmarks for their cash portfolios. Unlike stocks and long bonds, a market-based index is often too long or too risky for cash investments. Some treasurers resort to comparing “yield” earned on investments on the assumption that it is the only relevant factor in a “buy-and-hold” strategy. We want to offer our take on choosing appropriate benchmarks for corporate cash portfolios.
The Need for Benchmarking
Some argue that, if a cash investor’s main objective is to maximize yield, having a benchmark is irrelevant. Within reasonable risk parameters, the higher the yield, the better. Why, then, is there a need for benchmarking?
A benchmark is the yardstick to direct an investment strategy and to measure the success of this strategy. Its usefulness lies in its representation of a “neutral” position for the investor with matched investment horizon, risk tolerance, liquidity needs and return objectives with its investment policy. In addition to being a measurement of manager performance, the benchmark is frequently used to simulate interest rate scenarios and to analyze trading and opportunity costs Even though a perfect benchmark may not exist for a given cash portfolio, adopting one provides a good starting point for the cash manager to understand return attributions.
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