Cash management — long a sleepy money management backwater — might undergo some of the most sweeping changes in the industry because of this year's unprecedented capital markets volatility.
In a year where money managers have had to spend billions of dollars propping up “safe, boring” money market and securities-lending collateral vehicles, there has been a “fundamental change in how people think about cash,” said Barbara Novick, vice chairman, BlackRock Inc., New York.
The whole concept of “enhanced cash” — taking on a lot of potential risk to deliver a few extra basis points of return — is in doubt, with far-reaching implications in areas such as securities lending, custodial relationships and index funds, she said.
In recent months, a number of institutional investors have stopped lending their shares after suffering unexpected losses in the investment pools where they parked the 102% to 105% of the value of the shares they made available for securities lending purposes.
Others may increasingly push for an unbundling of custodial fees, rather than reflexively allowing custodians to lend out their shares in return for lower fees. Big index fund providers, meanwhile, might have to raise fees for those vehicles if they can no longer automatically count on earning income by lending out shares held in client accounts.
The first rumblings of problems in the short-duration end of the market surfaced 15 months ago, but it's still “early days” for institutional investors in revising their approach to liquidity, said Cynthia Steer, head of beta strategies at investment consultant RogersCasey Inc., Darien, Conn. As 2008 comes to a close, investors are reviewing their liquidity needs, and mulling changes, such as narrowing the range of permissible investments for their short-term investments, she explained.