The difficulty posed by liquidating cash portfolios during the pandemic has highlighted the changing outlook for cash, according to IFM Investors.
The firm said it had been difficult to liquidate an entire cash portfolio in a few days as a result of central banks actions which altered fundamental money market relationships.
In May, the Reserve Bank of Australia announced it had purchased about $50 billion in government bonds in order to control the yield curve. This had the effect of reducing volatility in fixed income markets, liquidity returning to normal and that the RBA cash rate would likely remain at 0.25% for some time to come. However, it also altered the supply/demand balance for short-term securities.
But restricting what could be held in cash portfolios was not necessarily the best solution and could have unintended consequences.
Kashi Trathen, associate director of debt investment, said: “Relying on any one source of liquidity, be it at-call accounts, bank bills or even custodian accounts has the potential to be dangerous. We believe that narrowing the criteria for what a cash portfolio can invest in might have the opposite effect of what is intended.
“For example, had all cash portfolios in Australia been restricted to major bank negotiable certificates of deposit (NCDs), it is plausible that the liquidity stress would have simply occurred in this market instead.”
It suggested investors could hold other types of assets in cash portfolios as a way to diversify a cash portfolio which included adding Treasury notes and investing in offshore cash markets which would also give any benefit from exchange rates.
“We believe trustees should consider including securities such as Treasury Notes in their portfolios, and possibly investing in offshore cash markets. There appears to be broader liquidity available in global cash and investors may also benefit from moves in the cross current basis (AUD/USD) that can create attractive relative value opportunities,” Trathen said.
“For agile cash investors, we see a pronounced opportunity to buy USD-denominated short-term paper, hedged back to AUD, at all-in yields of over 1%. Furthermore, at times when liquidity is the primary focus, diversifying a portion of cash holdings into international markets may provide additional benefits, particularly when purchasing highly liquid government Treasury Bills.”
According to FE Analytics data, within the Australian Core Strategies universe, the Australian dollar cash sector had lost 0.08% since the start of 2020 to 28 May. However, the ‘other’ cash sector, which included Treasury notes, commercial papers and short-term bonds, had returned 3.8%.
While there were over 50 Australian dollar cash funds, there were only eight in the other sector.
IFM Investors said this environment would likely present challenges going forward and a return to normal was unlikely in the near term.
“One of the major lessons from the COVID-19 response is that cash portfolios can maximise liquidity through diversification. Whilst this may sound counterintuitive, holding a high proportion of securities in any one market (no matter how highly rated) is not a low-risk strategy in illiquid market conditions,” IFM said.
