Wells Podcast on Increasing Yield
Wells Fargo Asset Management recently released a Podcast entitled, "Income Generator: Increasing return for cash investors." (They also just published their latest Portfolio Manager Commentary.) The description tells us, "Today's podcast features a discussion about what fixed-income investors with lots of cash on hand can do to increase their return potential. In today's low-yield world, we'll be talking about how extending maturity and taking more credit risk can be used. To discuss, we're talking with Michael Rodgers, Senior Portfolio Specialist at Wells Fargo Asset Management (WFAM)." Host Laurie King asks, "So the question for cash investors -- or what they've been asking -- is what can they do to earn more than 1 basis point, which is what, say, a government money market fund is offering?" Rodgers answers, "Money market mutual funds are one of the primary vehicles cash investors use to manage their short-term cash. Following the implementation of money market fund reform in October 2016, government money market funds became the preferred choice for institutional cash investors, as they are not subject to liquidity fees and redemption gates and maintain a constant NAV versus a floating rate NAV for prime funds. In early March of this year, institutional government money market fund balances exploded as investors fled to cash as the pandemic spread globally and our economy began to shut down. In fact, government money market funds breached the $3 trillion level by the end of April. Following the Fed's aggressive response in cutting the Fed Funds target rate to a range of 0 to 25 basis points, investors in Treasury and government money market funds, in many cases, find themselves once again earning a paltry 1 basis point. It's our view that as investors think about increasing returns on their cash investments, it's important to understand the two components of total return in fixed income, which are price return and income return. Income return is and always has been the largest driver of total return in high-quality short-duration fixed-income." He explains, "To increase return on cash, investors should be considering high-quality sources of income while achieving the primary objectives of capital preservation and liquidity. There are two primary levers investors can pull to increase returns. One is extending maturities further out the yield curve or taking more credit risk within investment grade. Or they can do both depending on their appetite for risk and liquidity. Pulling one or both of these levers serves to increase income in portfolios, increasing the overall total return for investors." King also asks, "Is there a more holistic or structural approach to take to optimize a cash portfolio?" Rodgers explains, "As cash investors seek to increase returns, we typically see them navigate this challenge by tiering their cash portfolios into liquidity buckets, depending on their cash flow needs. For example, operating funds needed to run their business on a daily basis are typically either invested in money market funds or held on deposit at their operating bank. Working capital and strategic cash, which are often defined as those funds not needed within the next six months to 12 months, can be invested beyond the money market fund spectrum. By investing further out on the yield curve, these cash investors may be able to capture additional return opportunities that complement their operating cash investments. The investment vehicles appropriate for working capital and strategic cash buckets may include ultra-short-term bond funds, short-term bond funds, or a customized separately managed account. Ultra short and short-term bond funds can be a great way for investors who lack the scale to fully diversify an institutional portfolio to pull the two levers we discussed earlier. Those investors with sizable cash balances may want to consider a separately managed account that can be specifically customized to their risk tolerance and liquidity needs and has lower fees generally than a money market fund or a bond fund, which can also be additive to total return."
