One treasury team hopes to add diversification and reduce overlap by giving external asset managers more flexibility.
A member of NeuGroup for Cash Investments wants to change his company’s investment policy so that the same asset-mix mandate that now covers every separately managed account (SMA) is instead applied to the combined portfolio of six SMAs. “This would create more flexibility for us to partner with our group of SMAs and allow each of them to focus on a certain target duration or tier,” the member said at a recent peer group meeting.
- “This would allow managers to focus on different areas of expertise,” including municipal, corporate and asset-backed securities, he added. And that would reduce overlap between portfolios that currently hold securities from the same issuers, the result, in part, of just one mandate applying to every SMA.
- “We think that we could diversify our portfolio, get each of the managers focusing in the right area and likely, over time, produce some excess returns on the portfolio,” the member said.
Flexing and tightening. As part of the investment policy update, the member wants to increase the maximum final maturity of any security held by a SMA from 36 to 60 months and extend the maximum weighted average duration of a manager’s portfolio from 12 to 24 months.
- In a follow-up interview, he said the changes are not designed to significantly increase the average duration of the combined SMA portfolio; rather, they will enable more nimble management of each manager’s mandate.
- Spreading his hands far apart, he explained, “Your policy guidelines are way out here. For each of our managers, we’re setting them a little bit narrower; and we can allow them to flex that out or tighten up, depending on the market, the business and other factors.”
- He acknowledged this will mean more work. “We’ll have to set the parameters and work closer with each of our managers—but we feel we’re already doing that. We have great communication, weekly calls, with all of them.”
Overall duration. The cash investment manager also seeks to have the updated policy provide clarity on the average duration target for the company’s entire cash portfolio, including bank demand deposits, time deposits, money market funds and assets held by SMAs. The existing policy, as noted above, sets a maximum average duration on SMAs, but not the overall portfolio.
- “I think there comes a point where you need to look at your entire portfolio as a whole,” the member said. “Not that it has to give you an exact amount, but at least something to kind of give you guidelines, which we don’t have right now.
- “I think there should be some framework there. Memorializing some sort of overall duration target—there could be some value there.”
Extending duration. SMAs account for about 25% of the company’s total cash investments and have had an average duration between nine and 12 months this year, he said. The average duration of the company’s entire cash portfolio—calculated by the member but not required in the investment policy—is about three months, reflecting the shorter duration of the more liquid assets that comprise 75% of total cash.
- A slide in his presentation compared the member’s SMA duration and returns to those of peers as compiled by a relationship bank. In the past year, the company had outperformed most peers. “My point here is the short duration on our portfolio, roughly three months, hasn’t hurt us,” he said. “But we believe that needs to be addressed for us to keep up our competitive returns going forward.”
- In other words, the company needs the flexibility to extend duration—another reason the member wants to allow some managers in some cases to have an average maximum duration of two years.
- “If SMA duration is capped at one year, it may be hard to increase overall duration,” he said. “So the flexibility we’d achieve with a policy amendment would allow some managers to extend and move that overall number upwards.”
