Pooling the cash building block optimises returns for retirement funds
With interest rates at the lowest levels in around 40 years and cash returns below inflation, the cash holdings on many funds are well below their benchmark weighting of approximately 10% of local assets. However, in a low returns environment, it is crucial that the cash investment in a retirement fund is optimally invested by using pooled cash vehicles in order to maximise the risk adjusted returns, says Sean Segar (pictured), Head of Product at Nedgroup Investments Cash Solutions…
Although the role of the cash component of a retirement fund is to provide diversification and liquidity to the fund, retirement funds should be strategic in the way in which they invest their cash
For the benefit of liquidity cash must be accessible. However, this immediately creates a challenge for the trustees, as liquid or accessible cash does not deliver the high yields that cash invested for a certain fixed term will.
Cash fixed for say six months will deliver a higher return than cash on call, but it would then be “locked up” for that 6 month period and the fund could incur penalties should they require the cash before the term is up.
While many retirement funds prefer to make use of their own segregated portfolios with tailored investment mandates and scrip registered in their own names, they should rather pool the cash building block that all retirement funds hold.
It is possible to use pooled cash vehicles that offer yield of the fixed term cash, but still offer liquidity.
The Collective Investments Schemes Control Act, enables thousands of investors to pool their assets into a highly regulated single investment vehicle in which they own units. These units are priced daily and offer daily liquidity to investors. Within the fund the specialist cash portfolio manager is able to spread the investments between a mixture of longer dated assets and cash on call.
The result is that the fund can have an average weighted term to maturity of up to 120 days for money market funds, and even longer for income funds. With the fund’s longer duration come higher yields. However the fund will always retain a certain component on call and this is what enables the fund to offer daily liquidity. For the convenience of investors many income funds distribute interest on a monthly basis.
Using money market or income unit trusts as the cash building block for retirement funds enables the funds to utilise their scale and buying power to achieve better rates when investing for the fund. When investing via unit trusts continuous shopping around for rates and re-investment of maturing assets all takes place within the fund and is reflected in the daily unit price making it a convenient way for retirement funds to obtain their cash exposure.
Finally the scale of money market and income funds results in fees being typically more competitive than segregated cash portfolios.
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