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Cash is King: The role of managed liquidity

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For financial professionals only

Understanding Asset Classes: know what you have, and why you have it

This article forms the third in a series on asset classes. It’s easy to break down portfolio structure to simply diversifying between defensive and growth assets to deliver the appropriate balance of risk and return for your client’s chosen risk profile. But in this series, we dig deeper into our expectations of each asset class, and how we use those key characteristics in our different solutions.

With conversations abounding about the potential for negative rates in the UK, cash could be thought of (at best) as an uninspiring asset class right now.

Irrespective of rates, we know cash loses purchasing power over time; clients lose out against inflation if their money is under the mattress, so cash is a poor long-term home for capital.

But investors should remember that cash has an important role to play. In fact, the ability to turn other assets into cash – whether that’s bonds, shares, or property – helps us to value those assets, as we expect a premium for holding less liquid investments.

Safety first

When markets fall, the resilience of cash is invaluable for long-term investors who require some capital protection as part of a diversified portfolio, or, for those who have a need to take withdrawals irrespective of market conditions.

We hold some “near cash” assets in our lower risk grades as part of our long-term asset allocation for precisely this reason. This is different to the sum held to cover transactional costs, or adviser fees; it is a deliberate investment decision.

We call this part of the portfolio “managed liquidity”.

Cashing in

As with all the investments we hold, we carry out regular due diligence on the funds in our managed liquidity asset class. We follow our usual, robust research process, with some additional requirement specific to the sector. One of these is the quality of the underlying investments – we require AAA ratings by the major rating agencies to ensure the highest standard of creditworthiness.

Now, you may be wondering what creditworthiness has to do with “cash” – and this is an important point.

When we talk about managed liquidity, we aren’t talking about cash exactly, but money market instruments that are so close to cash they can be realised (and are due to be realised) in a matter of days, but aren’t quite cash yet – and that small exposure to risk is what enables a small degree of yield, above and beyond a traditional bank account.

A sterling performance

In 2019 we also launched a separate Sterling solution for advisers looking to harness the characteristics of cash for all or part of a client’s portfolio, where the client has ultra-low capacity for loss for those particular funds.

The solution is exclusively invested in managed liquidity funds and seeks to find a reasonable balance between quality of underlying credit, some yield versus traditional bank deposits, and that all-important ability to realise as cold hard cash. As with all our solutions, diversification is key.

Take a client in retirement who wants to have the next X years’ income needs covered by a sum of monies that isn’t exposed to market moves. If you divest and withdraw that up front, there may be income tax implications, it could be a crystallisation event, or perhaps it would remove enough from the pension wrapper into the client’s estate to create a potential inheritance tax liability.

In simple terms, our Sterling solution allows the money to stay in the pension wrapper on the platform, under your advice, and outside their taxable estate.



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