While cash and other short-dated assets are being dialed up in multiasset credit portfolios as a defensive play, other money managers are being forced to increase holdings because of regulatory changes.
Since March 1, regulators in Europe have required that over-the-counter non-cleared derivatives trades have collateral held against them under the European Market Infrastructure Regulation.
Alex Veroude, head of credit at Insight Investment in New York, said firm executives do not have much cash in multiasset credit portfolios, although the level has increased in the past two to three weeks “as the market has tightened and we've made our money, made good returns in the first four months of the year, and we are taking a few chips off the table.”
He said cash levels are 2% to 4% higher than previously.
But the other reason is derivatives clearing and the collateralization of foreign-exchange positions, he said. “Specifically for FX we need a bit more cash for collateralizing derivatives — probably 2% to 4% more cash than compared to previously — (but) that is probably a structural change in the market, and we do not expect that to be undone anytime soon.”
BNP Paribas Investment Partners multiasset executives moved to underweight high yield, and have moved a lot of credit toward more short-duration positions, said Colin Graham, chief investment officer and head of active asset allocation within the multiasset solutions team.
“Instead of holding cash we can buy other assets. We have a reasonable amount of cash in our multiasset portfolios at the moment,” with the standard balanced strategy around 5%, and the more flexible portfolios around 15% to 20%. Exact figures were not available for comparison, but vs. this time last year the cash position is a little higher as credit positions have been sold, said Mr. Graham.
However, a major proportion is notional cash, which relates to hedging derivative trades and prevents leverage.
Alan Cauberghs, senior investment director for fixed income at Schroders PLC in London, said while executives there have not increased allocations to cash within fixed-income portfolios, they have “increased allocation to short-dated instruments,” although not in any significant way.
“The rationale for that has nothing to do with an anticipated correction … the reason for allocation to short-dated instruments is because since March of this year, we need to collateralize our currency exposure. That means we either need to hold cash or eligible securities (such as short-dated Treasuries) to collateralize those positions,” said Mr. Cauberghs.