CASH MANAGEMENT
Key takeaways
- Cash provides high flexibility in terms of availability and purchase power.
- Investors often overlook concentration risk and risk management in general for cash investments.
- The “Ultra Short-Term Bond Fund” provides a meaningful extra yield vs. private bank accounts or fiduciary rates, while accepting only very limited additional risk.
When Liquidity is Essential
Owning Liquidity is not only essential when there is a crisis. Having a well balanced approach to a diversified asset allocation, liquidity plays an important role. The management of this asset class is essential because cash not only represents the safety aspects but also provides the highest flexibility when it comes to availability and purchase power. It is overall accepted that holding cash provides little compensation. It is therefore key to find a solution that provides a portfolio with very low risk profile and active risk management.
Short term EUR-interest rates had been negative since early 2015 until mid-2022. Given the spike of inflation, interest rates in general are expected to move even higher in the months to come. Interest rates on private bank accounts are expected to move in tandem with the actions of the European Central Bank (“ECB”), but so far the move has been delayed and did not match the move of the ECB.
EURIBOR in % since 2014
Short term interest rates have been negative since early 2015 and have only surpassed the zero line in Q3 2022.
Source: Bloomberg, Alpinum IM
Ultra Short-Term Bond Fund
The Fund provides provide attractive positive returns with lowest risk and highest liquidity by investing in short-term bonds combined with money market products. It suits excellently as a defensive cash enhancement solution with daily liquidity, no Swiss stamp duty and is UCITS conform. The Fund serves investors seeking additional yield income than pure cash investments (daily NAV), while keeping risk level at the minimum.
The Fund offers ideal risk-return-liquidity profile offering a higher return in compensation for only slightly higher risk. Therefore, three factors need to be harmonized and optimized among themselves: A) Return, B) Risk and C) Liquidity
Cash Triangle
- Return is defined by the annual target yield of the investment
- Liquidity is expressed in time units until the money is available
- Risk is defined by the endangerment of the invested capital in terms of loss given default
Liquidity
Cash represents a variety of excellent attributes besides being a valuable asset class in a diversified asset allocation. Most importantly, it provides highest flexibility in terms of availability and purchase power. In this respect, it is accepted to earn a lower yield compared to other asset classes. Another essential characteristic of cash is the safety aspect. However, a variety of risk factors need to be considered, whereas the “default risk” (loss given default) is clearly the most prominent one. So, the ultimate avoidance of weak counterparties is a necessity. Other risk factors include: Liquidity, mark-to-market and concentration.
In practice, “concentration” risk is often underestimated as a risk factor and therefore, cash tends to be hoarded at one or very few counterparties only. However, concentrated cash positions can become a killing in case a counterparty faces a problem. Hence, it is advisable also to perform an active management for a cash position to avoid unwanted or unforeseeable risks.
An optimal cash portfolio is diversified across strong counterparties (avoiding concentration), offers daily liquidity and is overseen by an active risk management.