Investment Strategies

How Can Your Cash Work Harder?

7/1/2024

Jerome Schneider

Investors hold cash for a variety of reasons, but having the bulk of cash in traditional instruments may not be the best option across all the reasons for holding cash. A liquidity tiering strategy can help investors gauge how much they may need in their portfolios based on their goals and objectives – and how much they should considering allocating to potentially higher-returning short duration strategies.

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Schneider: Text on screen: Jerome Schneider, Head of Short-Term Portfolio Management

Trillions of dollars are sitting in bank deposits, which are ready to be deployed in a variety of capacities. Investors should be considering ways to optimize these cash allocations.

Although nominal rates are higher today, and yes, T-bills are some of the highest yields we've seen in almost a generation.

Text on screen: Investors can adopt active approaches to balance capital appreciation, capital preservation, and liquidity management

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The reality is, that we think there's more active approaches which investors can ultimately take, which balances the triumvirate of capital appreciation, capital preservation, as well as liquidity management.

All it takes is investors to rationalize exactly what liquidity they need today versus the intermediate future. And in doing so, they can powerfully encompass the opportunities we see at the front end of the yield curve here at PIMCO.

FULL PAGE GRAPHIC TITLE: Tiered framework for liquidity management

The chart shows a hypothetical cash portfolio illustration with money market as the first tier for liquidity management, which is used for immediate liquidity needs. The portfolio’s value decreases as cash is withdrawn.

First off, investors should be considering their immediate liquidity needs. We would consider those a tier one liquidity allocation, what liquidity is needed over the course of the next few days, maybe the next few weeks. Perhaps trades settling into their accounts.

Perhaps it's paying for a short term obligation in their everyday life, but these should be met with being in basic and traditional money market type of funds or instruments.

FULL PAGE GRAPHIC TITLE: Tiered framework for liquidity management

The chart shows a hypothetical cash portfolio illustration with money market as the first tier for liquidity management, which used for an investor’s immediate liquidity needs. The size of the portfolio decreases as cash is withdrawn.

Appearing below it, conservative ultrashort & ultrashort strategies are shown as the second tier, where investors need to consider time horizons and risk/return goals.

The second tier of liquidity, which is really meant for more intermediate terms over the next few weeks, the next few months, maybe even the next few quarters, is really focused on those structural opportunities to focus on diversified portfolios of assets, perhaps including high quality corporates asset-backed securities, as well as securitized product helps to bring together a high quality portfolio that produces more income than you would traditionally find in a money market fund.

But more importantly, the segmentation of cash to that longer term horizon allows investors to really profit and think about ways to monetize that liquidity horizon, which is longer.

FULL PAGE GRAPHIC TITLE: Tiered framework for liquidity management

The chart shows a hypothetical cash portfolio illustration with money market as the first tier for liquidity management, which is used for immediate liquidity. The size of the portfolio decreases as cash is withdrawn. Appearing below it, conservative ultrashort & ultrashort strategies are shown as the second tier, where investors need to consider time horizons and risk/return goals. Lastly, appearing at the bottom is low duration strategies as the third tier.

From that construct, you need to think about the third element of liquidity management, which is that third tier of liquidity. What is the liquidity needed over the next few years?

And in doing so, you can earn and focus on that additional term premium, slightly out the curve perhaps over the next one, two or three years that your capital preservation focus might not necessarily be in focus today, but could effectively adapt to over the immediate future.

As the Federal Reserve continues to evolve their policy measures, both with regard to growth and also with regard to inflation, longer term, we think these type of evergreen solutions to liquidity management, capital preservation plus total return provide a formidable landscape for investors to earn more total return than they typically have over longer cycles in money market funds.

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