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Portfolio > Portfolio Construction > Investment Strategies

Helping Clients Better Manage Cash Can Expand Relationships

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What You Need to Know

  • Investing can be a business of picking up pennies in an uncertain world, and cash management can add to a bottom line.
  • MMFs are diversified portfolios of highly liquid assets designed to provide income, price stability and liquidity.
  • MMFs are easy to use, easy to get into, easy to get out of, and offer a fair market rate of return.

With the U.S. Federal Reserve raising rates, managing cash has drawn greater interest. For the past two years, there was little cost to simply leaving money in a bank account; now the difference is more meaningful. Because of inflation, supposedly risk-free “money in the bank” actually loses money.

Cash should be an active part of every investor’s asset allocation decisions, and we believe superior cash management requires a dynamic approach to capturing yield.

To best serve their clients, financial advisors must go from passive to active investors in cash. Because cash is a vital if sometimes undervalued component of investor portfolios, these can become “value add” conversations with clients.

For those who do not want to risk their money by investing it, or who take some or all out of the markets while looking for the next opportunity, there are alternatives.

Investors may consider stable NAV money market funds (MMFs), diversified portfolios of highly liquid assets designed to provide income, price stability and liquidity.

Investing can be a business of picking up pennies in an uncertain world, and by staying very conservative, MMFs can add to investors’ portfolio of returns.

Inside Money Market Funds

Numbers are growing, and striking. According to iMoneyNet, the average seven-day current yield from the top institutional government MMFs provides a good measure: Over the past 12 months, MMF yields averaged 2 basis points (bps); on March 31, the top 10 MMF funds by AUM ($1.5 trillion) had climbed to 20 bps; and market pricing is implying a jump by year-end to 2%.

Since the COVID-19 pandemic hit, yield on cash has been hard to find. Fed rate hikes should lead to greater yield potential for cash investors and widening spreads between MMF yields and bank deposit rates.

Although bank deposits have sometimes offered incremental yield over MMFs in the lead up to rate hiking cycles, MMFs quickly overtook them in past cycles.

Cash investors must balance principal stability, liquidity and yield. Markets typically allow the achievement of only two of these goals at a time, often at the expense of the third.

Investors must consider how the features of bank deposits and MMFs can facilitate their investment objectives.

The differences are largely structural: MMFs are diversified portfolios of highly liquid assets; bank deposits are unsecured liabilities on the banks’ balance sheets. Deposit rates are dictated entirely by individual banks. Depositors’ yield potential is inherently limited by the banks’ balance sheet and funding needs.

Most banks are flush with cash, thanks in part to Fed liquidity, so they do not need depositors’ money. This gives them little or no incentive to raise the interest rates they offer.

This is nothing new — the last time the Fed peaked, in April 2019, interest paid on national jumbo deposits (greater than $100,000, 3-month CD) was 0.25% versus an average MMF 7-day net yield of 2.15%.

Banks also have been turning away deposits because of how expensive they are from a capital cost perspective. This is unlikely to meaningfully change soon.

As market prices continue to adjust to reflect new information, investors who passively own Treasury securities outright are more likely to either incur losses or miss yield opportunities if they do not actively manage their duration.

Run by active risk managers, most MMFs invest in securities issued by U.S. Government agencies, including the Federal Home Loan Bank, Fannie Mae and Freddie Mac, but the great bulk is usually in Treasuries. Some funds rely on Treasuries exclusively.

Most of these government MMFs offer stable NAVs, so they carry no mark-to-market risk for clients; daily liquidity, allowing for quick exits; and perhaps a small extra return. Investors typically pay a single management fee.

There are no entry or exit fees. As MMFs invest across maturities, they may offer yields exceeding policy rates or individual securities.

MMFs are easy to use, easy to get into, easy to get out of, and offer a fair market rate of return.

In these inflationary times, investors seeking to capitalize on increases in global central banks’ policy rates may consider putting their cash to work in MMFs or higher yielding bank savings accounts, although MMFs offer far more flexibility and many higher yielding bank accounts limit size and transactions.

For financial advisors, showing clients you can add value for the last basis point through superior cash management sends the message that you apply the same level of care to the entire portfolio. This is a terrific opportunity to remind clients of your value-add in coming months.


Ashish Shah is managing director, chief investment officer, Public Investments, of Goldman Sachs Asset Management.