UK - Historically cash has been a by-product of the investment process and most funds have generally been content to manage it passively usually through a money fund offered by their custodians.
Could this change?
Christopher Oulton, head of direct channel, UK institutional, at Investec said: “ For DB funds we wouldn't bet on it in the near term. In the longer term the role of cash will depend on the extent to which scheme liabilities shorten.”
However, the £6bn Strathclyde Pension Fund Superannuation Funds recently released details of a global custodian and related services tender which allows individual bids for the cash management business. Currently, Northern Trust provides custody, cash management and securities lending services.
Andrew Green, head of investment strategy in the UK for Mercer Investment Consulting, said: “There is a risk associated with a cash holding which needs to be diversified.
“Whether through a cash fund or through a custodian, it’s appropriate to take into account the risks associated with what appears to be a no risk investment of investing in cash.
“But, the custodian isn’t the only solution on that. Money managers can run funds which at least give you diversification of how that cash is placed. The custodian has got to show that if they are going to continue to manage that cash they are doing it in a way that ensures that they are at least getting the best return. It also depends on the amount of cash being managed.”
Jennifer Gillespie, investment manager at SWIP, said: “We always compare it with the return you would get on a bank account because effectively it is a bank account. We’re offering same day liquidity, the same as a bank. Particularly in pension funds I know a lot of them leave their cash with the global custodian.
“At the moment our funds are yielding prior to fees 3.88%. Now, depending on what the fees are going to be, knock those off and that’s going to be your comparison to what someone may be getting from their global custodian. Fees depending on size are generally about 20 basis points. But that’s obviously open to negotiation depending on the size of the money coming in.“
David Nash, investment officer at the London Pension Funds Authority, said of the cash/custodian function: “It depends on what cash we are considering. Operational cash is likely to be contracted out to money market funds. Cash held by custodians on behalf of managers is likely to remain with them in their in-house money market fund. We are paying the mangers to invest - not sit on lots of cash!”
He added: “Cash is unlikely to gain a strategic role, despite its recent impressive performance - when interest rates were circa 14%, which with the stock market declining in 1990 meant cash was the best performing asset class. On a long-term basis it is unlikely to be suitably attractive.”
The LPFA recently appointed Barclays Global Investors, Fidelity and JPMorgan to look after its money market needs. The managers will look after about £30m (E47m) apiece, pending the reallocation of cash to pension payments after the redemption of various index-linked gilts.
The redemptions contributed to a rise of cash weightings for funds totalling £3bn to 5% this March, against 1% the year before.
LPFA allocation targets are unchanged, said Peter Scales, chief executive of the local authority fund.
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