In the past, strategies for managing excess cash were straightforward:
- Deposit cash in a bank;
- Invest funds in a regulated money market fund;
- Purchase short-term government securities like Treasury bills;
- Or put cash under your mattress.
However, times have changed the dynamic as chronically low nominal yields of around 0% and recent regulatory changes mean investors need to reevaluate how they manage their cash. Investors face challenges in their ongoing effort to secure attractive returns while preserving capital they’ll need for important outlays, like payroll or making tuition payments.
In the current environment, investors – particularly those in the U.S. – must consider that there may be obstacles in managing excess cash efficiently. They are:
- Banks may not want your money and may now turn away select customer deposits. In fact, J.P. Morgan Chase & Co. recently announced that it will look to reduce more than $100 billion of deposits from its balance sheet. Alternatively, others have suggested that they may charge clients a fee to maintain their balances to offset higher regulatory costs.
- Money market reform is here. Regulatory changes may lead to limited access to money market funds that strike a $1 NAV, combined with withdrawal limitations, and fees for withdrawals during times on market stress. [See Money Market Reform: Reflections on This Critical Inflection Point for Cash Liquidity Investing.]
- Demand/supply imbalance. Increasing demand for Treasury bills and government securities will compress yields and make them challenging to purchase directly.
The results will be: 1) prolonged low yields for money market type assets even after the Fed starts to hike rates and 2) curtailed access to investment strategies that preserve principal and provide daily liquidity without threat of gates or redemption fees.
Bottom line: Investors need to rethink their cash investing paradigm. Having a partner (investment manager) who understands the facets and tools of actively managing excess cash and liquidity may potentially lead to a more effective cash management blueprint balancing liquidity with the potential for higher returns.