Schneider: B-Side of Cash
PIMCO Portfolio Manager Jerome Schneider posted commentary recently called "The B Side of Capital Preservation." He writes, "Vinyl single records have two sides: The A-side is always the well-known hit song by the musician, and the other, called the "B-side," is often a lesser known (or unknown) work. When it comes to cash management, the hit song on the A-side -- "Capital Preservation Is King" -- has been played over and over since the financial crisis. Amid episodes of stress and illiquidity, continuing central bank action and changing regulatory frameworks, investors sought refuge through three traditional avenues to capital preservation: investing cash with depository banks, buying U.S. Treasury bills directly and buying shares in regulated 2a-7 money market funds. Until now, these strategies mostly succeeded in preserving capital. However, regulatory and market forces are changing the landscape, and these traditional schemes have become less appealing or simply less available. In addition, many have failed to preserve purchasing power: Their near-zero returns have trailed even recent modest levels of inflation. As monetary stimulus in the U.S. winds down, global investors need to consider turning the record over to the B-side and listening to the new tune for cash management: "Purchasing Power Preservation." Of the three traditional strategies, regulated money market funds have been the vehicle of choice for investors looking to manage liquidity while preserving capital. Over the past few years, investors have even forgone attractive returns, with money funds yielding a mere 0.01% at the end of June, according to Crane's Money Fund Index. With bond yields low overall and inflation expectations benign, the opportunity cost of this strategy has been small over the past five years. But things are changing." Schneider concludes, "We suggest investors begin to listen closely to capital preservation's "B-side." We are on the brink of a New Normal for liquidity management and conscientious capital preservation. In our view, all investors -- retail and institutional -- can benefit from an active approach that not only takes into account changes to portfolio and market liquidity but also aims to offer enough capital return to protect purchasing power.... Ahead of the Fed's rate actions and the implementation of the Securities and Exchange Commission money market fund reform in 2016, we believe now is the time for investors to consider active approaches for capital preservation and look beyond money market funds."
