Separately Managed Accounts: Enhance the Returns on Your Excess Cash
by Jim Fuell, Managing Director, Head of Global Liquidity, EMEA, J.P. Morgan Asset Management
Separately managed accounts can provide an attractive alternative for treasurers looking to generate higher yields on their excess cash than are available from money market funds. In this article, Jim Fuell discusses how these accounts can be tailored to meet specific risk and return objectives, giving treasurers not only the potential to earn more on their cash, but to exercise greater control over what they invest in and their investment horizon.
Broaden your investment horizon
While treasurers in the US have been using separately managed accounts for some years, only recently has their popularity grown in Europe. During the credit crisis, the priorities for many European treasurers were to preserve capital and ensure significant liquidity to meet business needs. However, today, many companies are flush with cash and do not have the same restrictive liquidity requirements. The protracted period of low interest rates and exceptionally low money market fund yields has further encouraged companies to broaden their search for additional yield, while still remaining relatively risk averse.
Separately managed accounts invest in individual securities on behalf of a corporation, insurance company, pension fund or various other institutional investors. As separate accounts are tailored to meet an investor’s risk appetite, yield target and liquidity needs, the expected investment return can be larger when compared to other short-term investments such as money market funds or bank deposits. Conventionally, aiming for higher returns requires investors to assume additional risk, therefore making separate accounts suitable for cash balances that are not needed for at least six months. The cash amount should also be higher compared to a money market fund investment to ensure adequate diversification is achieved in the underlying securities.
Customisation and control
The biggest benefit of a separate account is the ability to customise the investment guidelines to meet a specific objective. For example, restrictions on the types of securities to be purchased, the maximum allocation per issuer and the minimum issuer rating can all be set depending on differing return targets and appetites for risk. As such, separate accounts can provide an attractive alternative for treasurers looking for a greater level of control over their investments.
Exhibit 2 illustrates sample portfolios that meet different objectives. The first portfolio, for example, has a mix of money market funds, commercial paper and certificates of deposit, agency debt and time deposits, and offers a tailored solution for an investor whose primary objective is liquidity and for whom principal preservation is a top priority. The second portfolio, which includes a greater allocation to corporate bonds, may suit investors looking for a balance between liquidity and return. The third portfolio, allocated across commercial and residential mortgage-backed securities, and corporate bonds may be more suitable for an investor whose primary objective is total investment return, who has a time horizon of at least 18 months and is comfortable with a moderate degree of volatility over short time periods.