Asset Managers Hustle to Offer Better-Yielding Cash Funds

With rates pointing up, Northern Trust, BlackRock, and others aim for liquidity-laden institutional clients.

Cash is no longer trash, with short-term interest rates heading upward. And that spells opportunity for asset managers.

The Federal Reserve, embarking on an inflation-fighting tightening regimen, expects its benchmark federal funds rate to be near 1.9% by year-end, up from near zero recently. And the Fed expects to keep on raising rates next year.

So various asset managers are putting resources into cash management for institutional clients, with the goal of actually reaping decent (albeit hardly astronomical) returns for a change. And at the same time, the managers seek to maintain a cash stash’s historical use, as a buffer against foul fortune and ready firepower for sudden breaks, such as an acquisition.

Bank money market accounts, previously paying a pittance, now can generate as much as 0.2% for a minimum $100,000, per, with much higher rates enroute. “Investors are asking how we can be more productive with our cash,” says Peter Yi, director of short-duration fixed income at Northern Trust Asset Management.

NTAM, along with other asset managers such as BlackRock and Fidelity Investments, are re-tooling their cash management strategies to attract more business for this rejuvenated asset class. NTAM has $364 billion in cash under management.

No doubt, the opportunity is rife. Companies now have a record amount of cash and short-term investments on their books, more than $2 trillion at nonfinancial S&P 500 companies at last count, with Apple the champ, at $202 billion. Cash also is a strong presence among institutional investors, most notably the South Dakota Investment Council and the Minnesota State Board of Investment.

In NTAM’s case, there’s a framework that divides a cash pile into three segments, with the one at the upper end aimed at generating the most return. This may be invested in ultra-short-duration products, such as short-term investment-grade corporate bonds, which uses active management to magnify yield.

This segment, which NTAM labels as “strategic, has durations generally ranging from six months to a year and can yield up to 2%. It makes up 10% of the invested money in the strategy.

The middle-ranked tier of holdings (also comprising 10% and called the “reserve” segment) is focused on the likes of corporate commercial paper. Nonfinancial paper, with a 30-day maturity, yields on average 0.85%, according to the Federal Reserve.

The third and largest (an 80% portion) segment is the most liquid so it could be drawn upon first in a pinch. This batch, known as “operational,” is in  money market mutual funds, now churning out as much as 0.25%. They can be cashed in at any time and are not federally insured up to a certain point.

All these cash funds can be tailored to a client’s needs. As BlackRock puts it in a promotion piece, “we embrace each client’s risk tolerances, specific guidelines, and liquidity needs in the development of a separate account strategy.”

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