Cash has come back, shoring up portfolios with liquidity that can be siphoned towards emerging investment opportunities or used to beat bonds by sitting safely in bank bills. SIMON MUMME looks at how some cash managers have either profited or been upended by widespread credit problems.

The global liquidity freeze has rattled even the traditionally stable cash vessels held within institutional investors’ portfolios. Simultaneously, the credit marketplace has become a venue in which sellers of liquidity rule. As some cash managers, and their clients, became more aggressive in their attempts to outperform the UBS Australian 90 day bank bill index, they blended larger amounts of longer-duration, fixed income assets among bank bills with shorter investment maturities. As a result, “what people call cash is really a spectrum of different styles,” Michael Korber, head of credit at Perpetual, says.

As sellers panicked about widening spreads and valuations deteriorated, these riskier debt components weakened enhanced cash, and aggressive cash funds.

The latest quarterly Mercer surveys found that in the three months ending with December 2007, the median cash return among Australian managers was 1.8 per cent against the index return of 1.7 per cent, while the median enhanced cash return was 1.4 and the median aggressive cash return was 0.7 per cent.

The outperformance of cash over credit should continue for the foreseeable future, Korber says. This is due to two factors: high underlying interest rates set by the Reserve Bank of Australia (RBA), and widening credit spreads driven by the credit crunch. Boutique fixed income manager Kapstream has parked up to one third of its capital into “cold cash,” Nick Maroutsos, Kapstream director, says. “The RBA is paying you to stay on the sidelines.”

He says the boutique, whose clients include AustralianSuper and the Catholic Superannuation and Retirement Fund, has roughly split the remainder of its capital between short-dated floating rate securities and short-dated corporate bonds. “We’re trying to get the cash rate plus a little bit more.” Korber says that the structure of the credit market has changed significantly.

Leveraged buyers of credit, such as structured investment vehicles (SIVs), which continuously issued short-term paper to finance their investments in longer term, less liquid, asset-backed securities, have either folded or become forced sellers of the rapidly depreciating assets they bought. Reliant on plenty of liquidity, their operations seized up when the credit crunch deepened. “They needed you to invest in them to roll their paper,” Subash Pillai, GSJBW Asset Management head of cash and fixed interest, says. The sellers of credit, who were pressured to offer loans on terms that greatly benefited buyers, became more powerful. Pillai says this shift in power was great. “For the last few years asset-backed paper issuers ran the market. This has reversed hugely. Now, I can say, I want asset-backed paper with maturity on this day, and at this price.”

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