Cash managers are developing more revenue streams by implementing cash segmentation strategies at a time when investors are seeking enhanced cash portfolios.
As interest rates go higher globally, cash managers say they are seeing an uptick in interest in their services. With the average U.S. money market fund 7-day yield at 1.69% and a number of money market funds already offering 2% 7-day yield, according to data provider Crane Data, compared to S&P 500 dividend yield of 1.9%, investors are getting better returns from cash allocations. Asset owners also are increasingly looking for different segments of cash management.
Catering to these emerging needs is transforming the business for cash managers.
While in the recent past, cash managers would park their investors' cash allocations in low-yielding liquidity management strategies, they now are splitting their short-term cash business into two categories: overnight and reserve cash, which is invested from three months to a year, to help investors with tactical objectives.
Sources said the need to segment cash has become much more pronounced given persistent low-yield market conditions. As a result of central banks' quantitative easing, investors sought short-term cash strategies like overnight cash instruments to avoid low or negative bond yields. And "as a result of banks complying with Basel III regulations, clients holding cash have had to bear the cost of carrying that liquidity," said Beccy Milchem, head of international corporate treasury cash sales team at BlackRock Investment Management U.K. in London. "Now they are looking for that cash to work harder for them."
"Investors realized that they had too much allocation to liquidity cash (overnight cash) and that they were paying too much for same-day liquidity," added Neil Hutchison, lead portfolio manager within J.P. Morgan Asset Management's global liquidity group in London, in a telephone interview. "Managed reserve cash could earn you between 20 to 40 basis points more than an overnight liquidity cash fund."
J.P. Morgan has tripled its reserve cash business to $60 billion in assets under management globally, from $20 billion five years ago, thanks to the segmentation approach, Mr. Hutchison said.
Peter Yi, director of short-duration fixed income at Northern Trust Asset Management in Chicago, said cash has become a real asset class and is no longer considered insurance for a portfolio.
"We have seen growth of (our) business on the institutional side due to the increasing value of liquidity management in a volatile market environment, especially considering the uptick in the VIX (CBOE Volatility index) relative to last year. Investors went to risk-controlled assets and they are looking for an overall stability in their asset allocation," Mr. Yi said. Northern Trust declined to provide the size of its cash management business.
"Investors are looking to separately manage reserve cash because of a pickup in special situations. As you are aware of a merger or acquisition coming up, you are building cash for a particular point in time," J.P. Morgan's Mr. Hutchison added.