BlackRock's Ellen Bockius spoke during a breakout session at the giant fund manager's recent "Future Forum" event, in a talk entitled, "Fortifying portfolios for the next crisis." The segment briefly touched on cash, Prime MMFs and SMAs. The description explains, "The current crisis has provided real-time tests of portfolio construction and market liquidity. We'll examine the lessons learned, with an eye on fortifying portfolios for continued volatility." Bockius explains, "There are valid reasons why corporations had to rush to liquefy balance sheets to obtain the peace of mind that they need when their future is uncertain. They need to know that they can sustain operations and pay their employees and their suppliers. They've also seen health care companies draw down credit lines or issue debt to support their overall enterprise, health insurers sitting on more cash than they've had in the past, driven by higher liquidity buffers and lack of payouts for elective procedures. We've seen universities grappling with uncertainty challenging their revenues, leading them to increase cash balances. For pensions, we've seen increased allocations to cash to take advantage of market dislocations. These are all prudent actions to be taking. However, it's really important to remember increasing cash allocations isn't a risk-free decision. The important questions to be asking in order to future proof portfolios are: How much cash do I need? What tolerance do I have for principal volatility? How important is yield to me? And maybe, should I consider ESG factors? These answers are different for every single client." She continues, "And they're highly situational and depend on a number of factors.... But one thing is consistent across all clients, cash investing must be an active decision. And like I said, just because it's cash, it doesn't mean it's riskless. A passive strategy today gives you zero, [but] reaching for yield can create challenges for the cash investor.... The question that I'm getting a lot right now is, with interest rates tethered to zero, 'What do I do in order to obtain yield in my cash allocation?' And this is a global phenomenon. It's an environment that we are likely to be in for quite some time. Chairman Powell has said recently that the Fed isn't even thinking about thinking about raising rates. So how do I future proof my cash allocations?" Bockius adds, "The most obvious answer is separately managed accounts for institutions. In addition to the customization from an investment perspective, a key advantage of SMAs in this market is the ability to take advantage of the front-end yield curve, and earn incremental yield on the portion of cash that doesn't need to be accessed on a daily basis. These advantages are greater today than they have been in the past. And as we hit a zero-rate interest rate environment, a story we've all seen before, the cost of holding liquidity will be high, and removing the requirement for daily liquidity of portfolios is a significant advantage. Remember, money market funds in the US must hold weekly levels of liquidity over 30 percent. That's not a requirement for separate accounts, it's dependent solely on the institution's liquidity needs. So, in today's environment, SMA clients can pick up an additional 30 to 50 basis points just on that 30 to 40 percent of money that's not sitting in overnights and Treasuries. Another option for clients to consider is Prime money market funds. Currently, Prime funds are averaging over 20 basis points over Government money market funds. Prime funds saw significant outflows in March. But we are seeing clients come back and it's driven by the principal stability they've exhibited, and the higher relative yield." Finally, she tells us, "So, the punchline here, in order to fortify your cash allocations for the future, pay attention. And this is a PSA not just for institutions, but for individual investors alike. Uninvested cash or inactive cash can create a real drag on portfolios in this interest rate environment. Know and understand your liquidity needs to play an active strategy based on those assumptions, and look for other opportunities to deploy the excess."

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