Navigating Cash Markets by Exploring Separately Managed Accounts
by Britta Hion, Director, Head of International Corporate Cash Sales, BlackRock
Managing cash in separately managed accounts (SMA) should be considered by institutional investors as a real option where the benefits of customisation can be realised. Separate accounts can be as unique as the company itself and are completely driven by the objectives and risk tolerances of each mandate. Working with an external manager can provide significant value through a process of consultative dialogue combined with the depth of trading, risk management, credit research, and portfolio management resources the manager brings to the table.
Designing an investment mandate
In contrast to a commingled vehicle such as a money market fund (MMF) where the investment objective of the fund is typically described in the prospectus and changes are relatively unusual, SMA investors are able to define their own Investment Policy Statement (IPS) which in effect becomes the roadmap telling an external asset manager how they want their assets to be invested.
In consultation with their portfolio manager the investor will carefully design the IPS, balancing its guidelines and objectives against current and anticipated market conditions. When drafting an IPS, both clarity and flexibility are important. Clear definition in an IPS allows for the development of a mandate that reflects the nuances of the client’s operating model and investment preferences. Flexibility within an IPS allows the asset manager to leverage his or her insights and market knowledge while making investment decisions to achieve the stated objectives of the portfolio. As a fiduciary, the manager is able to assist the investor to ensure due diligence and decisions regarding the IPS are informed and thorough.
The components of a mandate that can be tailored to achieve a given strategy can take the following forms:
Effective forecasting of liquidity needs allows for the best opportunity to achieve excess returns within a cash portfolio. It is therefore important to segregate a company’s cash in order to determine the potential cash available to invest within a segregated account.
In fairly simplistic terms, a company’s cash can fall into three distinct categories:
- Operating cash, working capital required to meet daily needs of the business.
- Core cash, which is generally earmarked for unknown future needs of the company.
- Strategic cash, the stable balance sheet assets not intended for specific expenditures.
While still conservative by nature, strategic cash — which typically has a longer investment horizon than operating cash or core cash — might have more of a total return objective which is ideal for placing in a separate account.