Cash Reserve Management

Cash Reserve Management

“What do you do with cash?” is an investment question as old as, well, investing. It’s rare (and usually unwise) that an investor would have the entirety of their assets or holdings actively trading in the market — folks almost always have some form of cash reserve. But, as inflation ticks upward, the value of that cash drops if it’s not outpacing the rate of inflation. Given the current market backdrop, the question we’re once again facing is: “What do you do with cash?”

 

For many investors, the answer has historically been money market funds. But according to Chris Ryon, one of CDI’s fixed-income portfolio managers, money funds have become ultra-conservative since the Great Recession, with an average weighted maturity of 20 - 40 days. This short maturity means that they tend to offer limited earning potential compared to other investment strategies.

As Sweta Singh, one of the fixed income portfolio managers at CDI, highlights in the video, we are currently in a volatile and interesting fixed-income market because of high yields for short-term rates and an inverted/flat yield curve. This environment makes cash reserve management an attractive option for investors who are seeking higher returns with low incremental credit or duration risk.

That’s why in many cases, CDI recommends our cash reserve management program to our clients. As Chris lays out in the video below, this involves putting a portion of the client's assets in a money market fund for liquidity purposes, but pairing that with a laddered portfolio with a maturity of 1-18 months (containing Treasuries, agencies, and high-grade corporations). 

This approach is designed to earn more net of fees than a money market fund while taking on very little incremental credit or duration risk. We aim to deliver 5 central objectives through our cash reserve strategies: 

  • Competitive yield and return

  • Principal preservation

  • Timely liquidity

  • Management of cyclical cash commitments

  • Tax sensitivity

By layering money market holdings with a short-term laddered portfolio, we believe we’re better able to deliver on these objectives than money market funds alone. This strategy can be particularly attractive for high-net-worth individuals or businesses that have reserves on their balance sheet and want to see those reserves be more productive in a low-risk, managed position. 

With a flat yield curve, investors can earn more in 1-year or 2-year bonds than they can in 10-year bonds, making a reserve management program an attractive option for those seeking to maximize their returns while minimizing risk. While money market funds offer low-risk and short-term investment opportunities, cash reserve management programs can often provide higher returns with limited incremental credit or duration risk.

 


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