Capital Advisors Group posted a brief entitled, "Optimizing Separate Account WAM in a Rising Rate Environment." Author Lance Pan says, "For institutional cash investors unsure of separately managed accounts in a rising interest rate environment, our scenario analysis suggests that a laddered portfolio of agency and corporate securities with a modest WAM could outperform the government money market fund proxy with negligible unrealized loss concerns." The piece explains, "In the two years since the Federal Reserve started raising short-term interest rates, the psyche of the fixed income investor has been oscillating between loving higher rates and worrying about getting too much of them.... [T]he simmering anxiety about the downside of higher rates -- namely unrealized losses -- has given pause to some cash investors who otherwise may have wanted to take advantage of higher income potential. As a manager of institutional separately managed accounts (SMAs), we often counsel investors on the impact of unrealized losses in a portfolio of cash equivalent and short-term securities in a rising rate environment.... To address maximizing return potential and minimizing unrealized losses, we used a scenario analysis of several sample portfolios to show that, even in a rising interest rate environment, it may still pay to extend WAM in an SMA beyond that of typical government money market funds ("MMF"s)." CAG adds, "For institutional cash investors unsure of the SMA approach in a rising interest rate environment, our scenario analysis suggests that despite, or because of, a rising rate environment, a laddered portfolio of agency and corporate securities of modest WAM could outperform the government money market fund alternative on income returns with negligible unrealized loss concerns. For accounts that do not accept credit exposures, agency portfolios may sufficiently defend themselves against two to four rate hikes in a 12-month period if today's yield curve to RRP relationship holds constant. A similarly structured credit portfolio may deliver even higher outperformance against the government money market fund alternative.... The challenge for the institutional cash investor is to find a balance between progressively higher expected returns as well as expected unrealized losses with each interest rate hike. Note that if an account liquidates part of the portfolio to satisfy an unplanned cash need, the unrealized losses would turn into real losses. Thus, liquidity planning is a relevant factor."

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