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It’s Not Easy Being a Cash Investor

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Cash investors may need to look into other ways to get income, says PIMCO’s Jerome Schneider.

While the Federal Reserve decided to keep interest rates at zero on Thursday, a rate hike may not have helped cash investors.

“Even after the Fed does begin to raise rates, money market funds who are a complete success will not necessarily give the net yield so the investor may need to find other ways to get income,” said Schneider, managing director and head of the short-term and funding desk at PIMCO, during a conference call hosted by Schwab on Friday. Adding, “Investors need to be nimble and then need to think a little bit outside the box.”

While yields on money market funds generally increased corresponding with the rate hikes during previous rate hike cycles, Schneider believes this cycle will be different.

“A variety of factors, including lack of supply of investable assets for money market funds amid growing demand, will likely leave net yields on many short-term instruments significantly lagging,” he wrote in an August blog post. “As the Federal Reserve moves 25, then 50 and even 100 basis points higher, the disconnect between the rate the Fed is targeting and the actual rates on short-term assets will likely continue to grow.” 

In addition to money market funds, traditional cash management strategies include investing cash with depository banks and buying U.S. Treasury bills.

Schneider had some suggestions for ETF managers working with cash in short-term fixed income allocation portfolios.

“They need to think about the immediate cash you need, they need to think about their alternative cash needs, what do they need in the next three to six months, and ultimately they need to think about strategic planning and more about cash-flow preservation,” he said during Friday’s conference call.

What this means, he added, is that investors need to bucket their cash allocations.

“Investors need to be more dynamic in their analysis,” Schneider said. “They can no longer pour all their cash in one bucket.”

By using multiple buckets, Schneider said investors are able to “maintain liquidity in the immediate cash” while also keep their capital safe in a low-volatility strategy.

Looking at U.S. fixed income ETF flows overall, the data shows some interesting trends leading up to Thursday’s highly anticipated Fed decision.

Heather Fisher, vice president of ETF Platform Management at Schwab, discussed the activity in this space year-to-date and leading up to the Fed’s announcement to keep interest rates where they are.

Overall, Schwab has $3.7 billion in flows into U.S. fixed income ETFs in the first 8 months of the year. Prior-year flows for the same 8-month period were about $3 billion.

On a percentage basis, flows into U.S. fixed income ETFs are slightly lower than last year (18% for 2015 vs. 23% for 2014). Looking more recently, though, the share of flows going into U.S. fixed income flows has “definitely been increasing” in the last few months – from 8% in June to 21% in July to 70% in August.

Comparing client types from retail investors to retail traders to RIAs, there are notable differences – especially recently.

“Retail traders actually have been shifting away from the category,” Fisher said. “The trader segment, we’ve seen slightly negative flows over the last three months.”

While retail traders’ flows were overall positive for the year, she said flows ticked down across June and July.

“The RIA segment has been more aggressive than retail investors in moving into U.S. fixed income, especially in August,” Fisher said. “Year to date [as of end of August], $2.3 billion of RIA flows went into the category, representing 24% of RIA flows”

Meanwhile, Fisher said retail investors allocated 10% of the year-to-date flows to U.S. fixed income, increasing a little bit in August to 12%.

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