Cash at an Inflection Point By Goldman Sachs

Kathleen Hughes

In recent years, when central banks were embarking on quantitative easing, investors approached cash as an asset class afterthought given the rock-bottom yields. But the end of QE – and the prospect of rate volatility – has reignited investors’ interest. We sat down with Goldman Sachs’ Kathleen Hughes and Christina Kopec to discuss how clients are investing in cash – and why they’re focused on more than just yield.

Kathleen, as global head of the firm’s Liquidity Client Business, what are some of clients’ top concerns?

Kathleen Hughes: With the recent turn in dovishness by central banks – and with interest rates likely to stay lower for longer in Europe and drop in the US — clients are rethinking their approach to cash. Investors, for example, are shifting a portion of their overnight cash holdings from money market funds to funds with slightly longer durations to lock in higher yields in anticipation of a rate cut. For our part, we’ve seen clients extend the duration of their cash holdings and pursue a slightly longer “barbell” strategy, where they essentially hold a portion of their cash in liquid money market funds and another portion in short-term bond strategies, with duration averaging two years. Previously, we had seen more interest in ultrashort bond strategies, with slightly shorter durations, typically six to 12 months.

Christina Kopec: In addition, the overall yield curve – the gap between shorter- and longer-term interest rates — has flattened and even inverted this year, which has increased focus on the short end of the curve where there has been a tremendous amount of movement. Some investors are moving slightly out the curve due less to a rates view, but more for the credit premium that still exists, which can add return even as rates fall or offset price drops if the curve steepens again. And that said, the amount of spread risk you’re taking is fairly limited given short final maturities.

Market watchers expect the Federal Reserve to cut rates at its meeting later this week. How are investors thinking about returns on their cash?

Kathleen Hughes: Investors are being more dynamic in how they’re managing their cash. They’re not just letting cash sit idly, but are actively managing their cash to seek returns. Last year, for example, returns on cash beat the returns on nearly every asset class, according to GSAM’s analysis of Bloomberg data. But it’s not just about yield. We’ve also seen an uptick in companies looking to manage their cash through an environmental, social and governance lens, especially for tech-focused companies, start-ups and airlines. That’s driven by a broader awareness that shareholders, employees and the broader public are judging companies by how “green” they are. There is also growing focus from clients on doing business with women, minority and veteran-owned broker-dealers.

Christina Kopec: Cash is an easy place to start with ESG. Whether you’re holding your cash in a separately managed account — where you can be explicit about your investment criteria — or a mutual fund, we’ve seen more ESG-focused cash strategies. We’re also seeing product innovation in yield-oriented strategies for institutional and retail investors. Prime institutional money-market funds, which invest in short-term corporate debt, used to be one of the preferred investment vehicles for short-term cash. But a series of regulatory reforms in 2016 — including abandoning a fixed $1 share price and allowing prime funds to impose fees and redemption gates to prevent possible panic selling – made them less popular with corporate treasurers. But the search for yield has spurred some investors to move back into prime funds which are offering slightly higher yields than their counterparts, government money market funds, which maintained their stable net asset values.

Christina, as global head of Liquidity Solutions Product Strategy, can you talk about what you’re seeing in terms of product innovation in the space? 

Christina Kopec: Technology is reshaping the cash space just as it’s affecting every other sector. Clients are demanding more transparency into their portfolios and are relying on technology to help them manage their cash at a time when they’re also dealing with smaller treasury staffs, cost constraints and outdated technologies. For our part, given the increasingly competitive market and strong client demand, we made the strategic decision several years ago to invest in our infrastructure to build out next-generation platform capabilities for our liquidity business. With the push of a button, for example, clients will be able to look across their cash holdings – regardless of the investment manager. The technology will enable clients to execute, trade and analyze their cash more efficiently and cost effectively.


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