Cash and enhanced cash have always been regarded as secure destinations for government departments and agencies looking to park funds in a statutorily compliant environment, but as the outlook for international equities soured in mid 2001, they also became a destination for fund managers looking to give clients a safe haven in uncertain times.
Now some managers are arguing that the benefits of an enhanced cash exposure extend well beyond the benefits inherent in low risk moderate returns.
The broad acceptance that enhanced cash offers more than just security is reflected in the number of fund managers who have taken the asset class into the retail sector, the latest being Credit Suisse Asset Management (CSAM) which launched a retail and wholesale cash enhanced trust in late July.
The objective of the new CSAM product epitomises that of most enhanced cash products “to outperform the UBS Australian Bank Bill Index (before fees and tax) and achieve investment returns of 0.50 per cent above pure cash investment returns”.
Macquarie Funds Management explains at least some of the continuing attraction of enhanced cash by pointing out that cash investments have evolved significantly over the past five years to become a much more diverse asset class.
A research paper developed by Macquarie earlier this year notes that the typical investments of today’s cash funds are very different to the typical investments held by a cash fund five years ago, with cash portfolios now holding a much greater proportion of securities with credit and liquidity risk.
The Macquarie research underlines the fact that while interest rate positioning remains a significant area of value-adding for portfolio managers, changes to the cash market have made a much wider range of securities available.
The evolution in cash as an asset class was also reflected in the move by Mercer Human Resource Consulting late last year to argue for a reclassification of cash products on the basis that many products had become generically labelled with the word ‘cash’ when, in fact, they had little to do with cash.
Of the continued popularity of enhanced cash, Perennial Investment head of fixed interest Glenn Feben says: “There will always be money that will favour defensive strategies.”
Feben cites the fact that some entities such as local government and government departments and agencies are statutorily obliged to place their funds in cash-type investments and, because this still represents the bulk of money in cash investments, it is important to maintain the highest possible rating.
“Local government is one of our target markets and by maintaining a AA rating, we ensure they can use our fund,” he says.
However, Feben notes that the success of Perennial’s fixed interest team — it has twice been rated Fixed Interest Manager of the Year by Morningstar — has been based upon a mixed focus on interest rate positioning and security selection.
He says while there may have been some increased interest in enhanced cash generated by the decline in international equities two years ago, those looking at getting involved need to understand the dynamics and the time-frames.
“You need to consider a longer-term horizon because the nature of enhanced cash — where you’re looking to outperform the Bank Bill Index — is unlikely to meet its investment objective in much under 12 months,” Feben says.
CSAM investment manager Ben Alexander says his firm has traditionally taken the enhanced cash product to the wholesale arena, and that its recent move to launch a pooled fund is aimed at allowing smaller investors to participate.
“We believe it has a high level of safety if the world turns nasty,” he says.
The continuing positive sentiment towards enhanced cash products is reflected in Alexander’s assessment of the global economy. “We’re reasonably comfortable with global recovery and the performance of the Australian economy,” he says. “However, the US economy represents an area worth watching given that the US Federal Reserve has been expressing concern about deflation.”
Alexander says CSAM recently made a tactical move from fixed interest into inflation-linked bonds which, while obscure, “represent a good option and a relatively cheap way of protecting against inflation and have higher liquidity than property trusts”.
Macquarie Funds Management head of cash and fixed interest Wayne Fitzgibbon says at least some of the attraction of enhanced cash products is that they provide diversity and represent good value as long as the portfolio managers understand the liquidity risks. “Its all a question of understanding what you’re buying,” he says.
