Markets are calmly weathering the turbulent start to the Trump years but if the turmoil continues and the Fed stays the course on raising rates, it’s a good idea to have a lot of flexibility in the company portfolio. All of this means segmenting cash into the appropriate buckets for flexibility. Consider separately managed accounts as one of those buckets, says Lance Pan, director of investment research and strategy at Capital Advisors.
Mr. Pan touts SMAs as great tools for risk management. “Besides higher income potential over money funds and bank deposits, it is portfolio customization that makes them a valuable cash alternative,” he said in a note to clients.
And cash alternatives are needed these days. The loss of prime funds as a place to park short-term cash has had an outsized impact on cash management, and aside from bank deposits and government funds, there’s no decent replacement. But all is not lost. In analyzing the corporate portfolio these days, treasurers should realize – given the relative stability of the markets – that segmenting their cash is a good idea. They will find that there are available overnight and other short-term investments as well as pools of cash that can be parked in further out the yield curve. This approach could potentially offer higher returns and more diversification.
And separately managed accounts can do just that. While not a replacement for overnight cash, they can still can be a great place to put money that’s not needed right away. Mr. Pan says SMAs should be thought of in several ways, including as liquidity vehicles or for coupon income, which can cushion the impact of unexpected volatility. An SMA can also be laddered in terms of maturity, which means they can be tailored to anticipate various levels of growth and inflation or changes Fed policy. Also, there are fewer tax or accounting issues. “Separate accounts with a buy-and-hold bias are not overly concerned with market value fluctuations unless securities must be sold prior to maturity,” Mr. Pan writes.
Finally, companies can have more control over the portfolio. “We think the biggest advantage of SMAs over commingled cash vehicles in times of uncertainty is the investor’s ability to limit exposures to certain sectors, asset classes and securities with additional layers of maturity and ratings restrictions,” Mr. Pan writes.
New president, new policies, new Fed direction, and host of global economic and political unrest all make for interesting times to alive. But they make it a very complicated time to be investing. That’s why treasury investment managers need to look at all options and in particular, to view cash in terms of timing and when it’s needed. Prime money market funds may not offer what they once did, but they are still viable for parts of the cash portfolio; and there are always government MMFs and bank deposits as well as other ultra-short products. But if your cash has a little bit of time and you’re interested in yield, control and liquidity, SMAs may be the answer.