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Allocators Ignored Cash for Years. They Can’t Anymore.
Managing cash is no longer on the “back burner,” says Global Endowment Management co-founder Stephanie Lynch.
Following the collapse of Silicon Valley Bank and Signature Bank, the regional banking crisis is prompting some allocators to reconsider how they’re managing cash allocations.
For years, asset owners’ attention was focused on building up their private investment books and reaping the rewards of a lengthy equity bull market.
The regional banking crisis has them turning their attention to a once-boring piece of the asset allocation puzzle: How they manage the most liquid parts of their portfolio. Now allocators are having to answer questions such as how much money to keep in cash versus allocating to money market funds and whether to sell off illiquid assets to preserve liquidity.
“Our smaller nonprofit organizations had put the cash management piece on the back burner,” said Stephanie Lynch, co-founder and managing partner at Global Endowment Management, an outsourced chief investment officer provider managing about $11 billion in assets.
Speaking at the SALT iConnections Conference in New York on Thursday, she added that the fall of Silicon Valley Bank “catalyzed” these organizations to consider the effect cash management can have on their operations.
“A lot of folks got complacent,” Lynch said. “They stopped sweeping money out of their checking accounts and into market money funds.”
This is especially concerning considering that SVB, Signature Bank, and First Republic might not be the last of the regional banks to go down. Steven Meier, chief investment officer at the New York City Retirement System, said that what happened with regional banks was “not a crisis but a disruption” — but he believes there could still be problems to come.
“I’m not so sure we’ve seen the last of the bank challenges,” Meier said. “I hope we have, but I’m a little more skeptical.”
The impending debt ceiling crisis could also negatively affect institutional allocators. According to Meier, allocators should do their due diligence on the types of cash vehicles in their portfolios. For instance, money market funds that consist solely of U.S. Treasuries could face liquidity and headline risk if the U.S. government doesn’t reach a debt ceiling deal by June 1, according to Fitch Ratings.
With this backdrop in mind, Lynch suggests that clients use sweep vehicles, which automatically move cash beyond a certain threshold — in GEM’s case, above the $250,000 FDIC insurance limit — into a money market fund.
For major pension funds, though, it may not be so easy.
Elizabeth Burton, managing director and client investment strategist at Goldman Sachs Asset Management, said that pension funds can’t keep as much cash or money market funds on hand as they may want.
“When you’re watching pundits, it’s frustrating that they say stay overweight in cash,” Burton said. “It’s very hard for pension funds to be overweight cash.” This is because of asset allocation targets that have been preset by pension boards or trustees.
“That’s why we’re hearing portable alpha come back,” she added. “I haven’t heard that in ten years.”