Got cash? Park them in these cash management portfolio ideas to attain higher yields

Banks can no longer offer investors a decent rate on their bank deposits. It is no surprise here really, given how the visible slowdown in global economic activity has left a hole in Singapore’s highly open economy.

The ‘openness’ of our economy is also one reason why we do not set our own interest rates. Instead, the Monetary Authority of Singapore (MAS) uses foreign exchange operations to implement monetary policy.

Given that US Dollar is the world’s reserve currency, Singapore’s interest rates are indirectly influenced by the actions of US’s central bank. The Federal Reserve’s rate cut decisions in 2020 not only brought interest rates down in its own economy, but also back home in Singapore.

With lower interest rates, banks are also limited in how much interest they can offer to savers. Across 2020 & 2021, deposit-taking full banks in Singapore (StanChart, DBS, OCBC, UOB, HSBC) announced cuts on the rates offered to their depositors. As a result, money is increasingly migrating out of traditional savings institutions, into alternative cash management solutions that offer marginally higher yields.

In this article, we’ll share ideas on how to formulate and create your very own cash management portfolio that best suits your yield requirement and risk preference.

Asset class and products to consider

When creating a cash management portfolio, firstly, we have to define the products we may use. Keeping in mind our goal of creating a low risk and yet decent yielding fixed income portfolio, we would have to restrict ourselves largely to less risky products such as fixed income funds.

Here on the platform, we use a risk rating scale ranging from 1 – 10 to highlight the level of risk investors may expect from the fund. In this case, fixed income products are rated anywhere from 1 – 4, depending on the fixed income segment the funds’ mandates focus on.

By order of riskiness, investors may create a portfolio using a mix of products comprising of:

·         Money market funds

·         Short duration bond funds

·         Investment grade bond funds

·         High Yield bond funds

Many funds under the above categories offered on the platform. Given the numerous combinations available, it can be quite daunting in selecting your own funds. Our advice would be to keep it as simple as possible. For starters, investors can limit the number of funds to not more than 4 products.

Basic building blocks

Every ship needs an anchor to prevent it from drifting due to the sea currents or winds. Similarly, for a cash management portfolio, its volatility needs to be kept relatively stable, otherwise it would not serve its primary purpose as a low-risk savings vehicle. Based on their characteristics, money market fund and short duration bonds (those with a Risk Rating of 1) have the attributes best suited to act as an anchor for your cash portfolio.

Some funds you may consider as ‘anchors’ can include:

• Nikko AM Shenton Short Term Bond SGD
• LionGlobal New Wealth Series - LionGlobal SGD Enhanced Liquidity A Acc SGD
• Fullerton Short Term Interest Rate C SGD

Under our risk rating methodology, these funds are generally accepted as lower risk when compared to other fixed income funds on the platform. The downside is that these funds offer relatively lower yields. Given the type of credits they invest in, the above funds generally offer stable returns due to their low credit risk and interest rate risk profile.

Yield enhancers

These are the products that will provide that extra ‘oomph’ to your portfolio’s yields. As such, these funds are relatively riskier, since obtaining extra yields, from a funds perspective, is only possible by having greater exposure to interest rate risk or credit risk. Under our risk rating methodology, these funds would like be rated anywhere from Risk rating 2 to 4 as they invest in credits ranging from investment grade to high yield.

Some of the funds you may consider as ‘yield enhancers’ can include:

• LionGlobal Short Duration Bond Cl A Acc SGD
• United SGD Fund Cl A Acc SGD
• United SGD Plus Fund Cl A Acc SGD
• Fullerton Lux Funds - Asian Bonds A Dis SGD-H
• Eastspring Investments - Asian High Yield Bond ASDM SGD-H

How much you would like to include typical yield enhancers into your portfolio ultimately depends on your risk preferences. The range of products is also quite large and there can be significant differences between them. For example, LionGlobal Short Duration Bond Fund is generally less risky than United SGD Plus Fund, while United SGD Plus is less risky than Eastspring Asian High Yield Bond Fund.

Yield enhancers, unlike money market and short duration bond funds (~T+1/2 days), typically take a slightly longer period for investors to liquidate and receive their money (~T+4 days). Investors have to decide for themselves, based on the planned uses of their money, whether the few days difference in liquidity matters, vis-à-vis the yield enhancement these funds provide for their overall portfolio.

SGD-cash portfolio

Now that we have an idea of the types of funds to consider, we simply have to mix and match to create our very own DIY cash management solution. Based on the above, we’ve crafted two portfolios under each investor profile (with a total of 6) of conservative, balanced and aggressive.

Table 1: Six DIY cash management portfolios under three distinct risk profiles

Source: Bloomberg Finance L.P., iFAST compilations
Data as 10 Feb 2020, in total returns (gross dividends) & SGD terms
Past performance is not indicative of future performance
The above data excludes platform fees    

These portfolios are created with the characteristics of what we believe a cash management solution should have, which is, higher yields than bank deposits, and yet without too-high of downside volatility and maximum drawdowns.

For these two metrics, we think a downside risk of not more than 2.5%, and maximum drawdown of not more than -6% (using March 2020’s market drawdown event as a baseline) are the most appropriate savers would be the furthest they would be willing to undertake.

Caveat emptor is advised if investors are selecting the portfolios based on past performance. The risk profiles of these portfolios, from our perspective, were determined by their investment mandates and their respective risk ratings, and not by the individual funds’ historical performance. Furthermore, there is no guarantee their past performance would be repeated.

Also, despite offering lower yields, the conservative portfolios are generally more risk-efficient in generating returns for investors, primarily due to its much lower volatility (both upside and downside) profile as compared to other portfolios.

Aggressive portfolios on the other hand, have greater room to outperform from a total returns basis, given their higher yields as a result of higher duration and credit risks. In return, investors will have to accept higher volatility and greater risk of capital loss.

Want other combinations?

If you would like to have a hand at creating your own unique portfolios, here are some of the details of the above funds to help you along with your journey. 

Table 2: Fixed income funds latest positioning

Source: Latest fund fact sheets, Bloomberg, Morningstar, iFAST compilations
Data as of 10 January 2020, excludes platform fees

Given the wide array of funds available on the platform, the above funds are certainly not the only ones investors may choose from. Nevertheless, we believe these funds are a good starting point in helping investors think about how they can help investors create a SGD-centric portfolio with cash management-like qualities. If you’d like, you may also take one step further to create a USD or even AUD centric type of cash management portfolio via hedged share classes. To explore further, use our Fund Selector tool to discover funds that offer such share classes.

Things to take note

While cash management portfolios offer investors an opportunity to generate higher yields on their idle cash, there are some things you should note.  The main difference between fixed deposits and cash management portfolios is that the risk no longer sits with one entity (i.e. the deposit taking bank), but with hundreds of credit issuers within Singapore and the rest of the Asia ex Japan region.

Also, unlike deposit accounts from full bank, cash management portfolios are not covered under the deposit insurance scheme administered by the Singapore Deposit Insurance Corporation (SDIC), which covers retail deposits of up to SGD$75,000. Investors will not be entitled to compensation should permanent capital losses materialise in the event of systemic market failure.