Safety First: Investment Managers Reduce Risk, Shorten Duration

# Cash and Working Capital

# Risk Management

Cash investment managers are shying away from risk and heading toward safety and liquidity.

The vast majority of members at recent NeuGroup meeting of cash investment managers expressed very little desire to increase the risk or duration of their portfolios to boost yield. Indeed, their priorities—in order—may be best expressed as SLY: safety, liquidity, yield.

The inverted curve. One key factor in this low-risk stance was the inverted or flat shape of the yield curve at the time of the meeting. “We’ve liquidated all long-term investments, all treasuries and corporate bonds, because of the curve,” one member said.

Changing stripes. Another member whose company once owned emerging market debt has derisked and the portfolio is now “very conservatively managed,” she said. It’s largely allocated to bank deposits, government and prime money market funds, commercial paper (CP), some asset-backed CP, mortgage-backed securities and munis. All of it is fairly short duration.

Investment-grade reality check. Before the meeting, one member wrote:

“Our major point of interest related to the balance sheet is liquidity. There have a been a number of research pieces floating around suggesting that many corporate BBB bonds are actually BB. During a downturn, those bonds will trade with reduced liquidity. We’re scrubbing our portfolio to identify any concerns of that nature.”

Exceptions to the rule. A few members are willing to venture out the risk curve a bit and invest in high yield corporate debt. But with plenty of due diligence: One member in this camp said that his group “spends a lot of time on credit,” allocating the portfolio to the right geographies and striving to “optimize relative to risk and liquidity.”

The pendulum swing. The only constant, of course, is change. So don’t be surprised if some cash investment managers are singing a slightly different tune at the group’s next meeting about their appetite for risk.

One of the members said her team is already asking, “Did we get too conservative?” At some point in the future, she said, there is a “high likelihood we’ll take more risk.”