Andrew Short looks at how pension schemes can follow the Barclays Retirement Fund in ‘actively managing' their cash and how attitudes to cash and liquidity management have shifted since the financial crisis.
Suspend reality for a moment and consider this scenario: you are out for a lunchtime stroll and want to get some cash for a bite to eat.
While waiting in the queue at the bank you realise you owe a friend some money, you want to buy a new shirt, you’ve got to put electricity on the metre, plus buy your lunch, so you’ll need to get a hefty sum.
When you get to the cashier and try to draw the money he regretfully informs you of either two things: your cash is in longer-dated investments and can’t be accessed or it has lost its original value.
Annoyed? Scale this imaginary anecdote up from a personal perspective to an institutional one, mix in the credit crisis, and what you get is the same problem that many schemes faced with the cash funds they invested in.
There are two questions that are asked of any cash fund: how liquid is it and how safe is the money?
Prior to the financial crisis the assumption was that, as in the analogy above, cash funds were primarily the same as a high street bank account.
The belief was that the money was instantly available and the risk was minimal.
This lulled investors into a false sense of security, cash eventually became a blind spot and it was assumed anything short-dated would count as a cash fund.
This was a tragic mistake for some schemes. So after the smoke has cleared somewhat although some would argue things are still a little hazy have people’s attitudes changed toward cash?
Speaking at the Professional Pensions Investment Conference in June, Barclays UK Retirement Fund chief investment officer Tony Broccardo made plain the cash zeitgeist for the Barclays scheme and of many others.
Cash is now viewed as an asset class in its own right. Schemes no longer see it as something that can be relegated to the lower end of effort and attention.
It must be higher on the list. “We moved cash from a back-office facility into a front-office facility,” says Broccardo. “Managing cashflow means managing choices and managing choices involves some degree of investment decision.” (PP Online, 08 June).
Methods of management
The Barclays fund, an £18bn behemoth, has the capabilities to develop what Broccardo names an “implementation team” to oversee the liquidity management functions, but what about small and medium-sized schemes?
How do they actively manage their cash? A pension scheme can follow Barclays’ lead and build up in-house resources to do this, or they may choose to park the cash with a custodian or use a dedicated cash manager.
The answer, according to BlackRock head of international cash Mark Stockley, lies in appointing a professional cash manager (not a new phenomenon), a strategy that has been gaining traction for some time.
“Even before the crisis in 2008, people had begun to appoint professional cash
managers to take money and move it out of passive management via the custodian,” says Stockley.
Other cash managers have also seen funds engaging more with their cash strategy.
Prime Rate Capital Management head of sales Henry Buckmaster agrees with the Barclays Retirement Fund approach, and tries to help pension funds achieve effective cash management.
“Broccardo is absolutely right,” he says. “And we would concur 100%: cash is not a distant relation of the investment community. It should be actively managed within the cash parameters. We’re not talking high-stakes investment.”
Buckmaster also believes money market funds provide a product that clients can use to access the wholesale money markets in a way individually they could not.
He explains that because money market funds are pooled, and the manager actively manages the cash within parameters set by the pension fund, schemes are getting third-party specialist cash management.
For schemes that cannot develop the in-house capability because of costs, this is something they should consider.
It can provide a viable alternative to using a bank deposit.
“The whole point about the money market fund is that it provides an alternative or additional tool for treasurers, financial directors and financial accountants of pension schemes,” he adds.
Money market funds that are based in Europe are also covered by the UCITS regulation.
The rules state that a fund cannot invest in more that 5% of fund assets in a single name.
Amundi deputy head of euro fixed income and credit Thierry Darmon believes the analysis and caution is what makes money market funds a good choice.
“What we seek intensively is not performance at any price, but security of placement and security of investment,” says Darmon.
The Amundi Group has around €125bn (£112bn) in cash products and is looking to launch a sterling fund at the end of this year or the start of the next.
Another emerging theme is that scheme cash is being taken away from custodians so it can be re-invested.
Aviva Investors manager of liquidity funds Matthew Tatnell believes schemes no longer want to leave their cash with a custodian as they “don’t get a high enough return for it because yields have fallen.”
This point is also echoed by BlackRock’s Stockley, who adds: “Cash was swept into a custody managed cash arrangement. This was on-balance sheet and the net interest earned was very low. The investment was not broadly diversified and was exposed to a single counterparty.”
However, BNP Paribas Securities Services head of asset owners Dietmar Roessler believes there are still many benefits to leaving cash with a custodian.
He says custodians offer a level of choice and information that money managers cannot compete with.
“As the market becomes more fragmented investment decisions become more complex, clients need information, for example on their margin calls, on a daily or weekly basis,” he says.
“This complicates the decision of saying ‘I’ll just leave my cash in a money market fund’ cash managers just can’t supply this holistic information.”
While the methods that schemes use to manage their cash vary, there is one area where attitudes converge.
There is still a real aversion to risk in many schemes and cash is still pouring into money market funds or being left with custodians.
“Over the last 12 months we expected to see significant outflows in money market funds in Europe,” says Darmon, “but this has happened on a much lesser extent than expected. A further improvement of macroeconomics in Europe could incite corporates to withdraw their holdings in money market funds in order to invest in the real economy.”
However, there is a very real chance that conditions could get a lot worse over the next 12 months.
The threat of Greece defaulting will have a huge effect on the rest of Europe, including the UK.
This means there is a real possibility that appetite for risk may remain unchanged. It could be that ‘cash is king’ for a long time yet.
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