Cash is often viewed as the poor cousin of other asset classes and perhaps for good reason. It typically forms only a minor part of an investment portfolio and today’s low interest rates mean low returns. Yet, with alpha increasingly difficult to capture,
putting cash to work in the most effective way possible can provide an important edge to portfolio performance. Is it time asset managers started paying more attention to their cash?
While returns for cash pale into insignificance when compared to other asset classes, the cost of transactions can be extremely high. As a result, these fees can quickly diminish the returns of better performing asset classes while also lowering the amount
of capital available to invest.
Foreign exchange is another factor eating into firms’ investment returns. With developed markets offering less attractive prospects in recent years, investors have been broadening their geographic horizons. With every cross border investment however comes
the associated cash flow and currency management implications.
In order to get the most from their cash, firms need to adopt a more streamlined approach to cash management. This includes aggregating cash transactions so managers get best execution in the marketplace rather than operating on a transaction by transaction
The ability to model cash flows from investments across all asset classes and in any currency is also becoming more important for investment firms. Portfolio modelling capabilities enable firms to plan and model the impact of any scenario – from changes
in dividend policies to fluctuations in exchange rates – helping to optimise returns, hedge FX exposures and mitigate reinvestment risk.
Ultimately, firms need a full picture of all their investments, which includes existing positions, but also crucially trades that have not yet settled. Many front office systems are reliant on back office feeds that only provide information on settled trades.
Yet, without a full view of all positions, it is impossible to accurately assess the impact of investment decisions on the overall portfolio.
Only if fund managers can view future cash amounts across accounts, taking in bond and loan projected cash flows, redemptions, unsettled trades and other cash flows, will they have the right information at their fingertips.
The reality is that many firms have not yet reached this point. Yet without this focus on cash management, fund managers are eroding hard earned returns and making investment decisions without seeing the full picture.
What’s clear is that achieving an accurate, up to date view of your cash is more important than the amount invested in it may imply. Perhaps the phrase ‘cash is king’ has never been truer than in today’s market.