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Investment Management

With MMF Rules Looming, More Turning to SMAs

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September 27, 2016

Separately managed accounts are gaining popularity because they offer yield, customization and transparency.

Accounting with BenjaminsAlthough there has been a lot of resignation, doom and gloom ahead of new rules for money market funds, the SEC regulations could actually be a good thing as corporate cash managers will now pay much more attention to where their cash is invested and start putting into the right duration buckets.

Make no mistake, the loss of prime funds as a place to park short-term cash will have a big impact on cash management, and aside from bank deposits and government funds, there’s no decent replacement. But if you analyze the corporate portfolio a little more closely, do you really need to be parking all that cash in MMFs? Wouldn’t some of it be better used further out the yield curve? Or into vehicles that might not be daily cash, but close enough; and where you could get better returns?

That’s one takeaway from a recent sit-down with Jerry Klein, director and partner at Treasury Partners, at a recent Cash & Liquidity conference held in New York City. Mr. Klein, who heads up the company’s corporate cash management and money market portal platforms, said the rules are forcing companies to rethink cash.

“I think companies are generally going back to what they did more of pre-2008, which is segmenting their cash,” Mr. Klein said in a Q&A discussion. To that end they are identifying buckets of cash that are in overnight and other short-term investments and then identifying the pools of cash where they can extend maturities. This ultimately “could offer potentially higher returns and more diversification,” he said.

And separately managed accounts can do just that. With prime funds, which in a couple weeks will have thrust upon them a variable net asset value, redemption fees and gates, corporate cash managers had very little control over what was inside the portfolio. Aside from following rule 2a-7, MMF managers could put companies in whatever assets they wanted. But with an SMA, Mr. Klein pointed out, corporate cash managers can gain more control than in an MMF.

“They can define a specific investment policy and perhaps even go beyond that,” Mr. Klein said adding that managers can “stipulate the maturity structure of the portfolio, the concentration levels and the minimum credit rating, as well as sector allocations.”

In order to get to a point where they are comfortable taking a chunk of cash and putting it into an SMA, companies need to have a good cash forecasting program which gives them the ability to get view of future cash needs, Mr. Klein added. “We see a wide variety of companies use separately managed accounts. I think the common denominator typically is their ability to forecast future cash needs.”

And what kind of assets are going into SMAs? Mr. Klein says it all depends on what’s allowed in the company’s investment policy. But over the years, companies have been widening their policies to allow for slightly more risk. “Most corporate investment policies include treasuries agencies and high-grade corporate bonds,” he said. “And we see some that also include municipal bonds and then a very small percentage that include mortgage-back and asset-backed securities.”

The SEC’s rules kick in on October 14, 2016, and many companies have been waiting until the last minute in order to pick up a little more yield. But cash has been flowing steadily out of prime funds and into government funds, which will maintain a fixed net asset value. There has also been a surge into European prime money market funds, as companies take advantage of zero and negative rates in that region. Nonetheless, SMAs are gaining traction as companies look for control, yield, and safety.

“They're not an alternative to prime funds, but I think they can be part of the puzzle of where to place cash,” Mr. Klein said. That is, “they're probably not a suitable replacement for the cash a company keeps in a prime fund with the expectation of moving in and out on a daily basis. But they are a good fit is for companies who have cash in prime funds that they don't need to access as frequently or might not be expecting to use in the near term.”

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