Holding too much USD and need a relatively low risk haven? Park those dollars here.

• Fidelity Enhanced Reserve A-ACC-USD offers investors relatively stable and decent yields without too high of volatility
• Its shorter settlement cycle and focus on ensuring high liquidity makes it an ideal product to generate yields on your idle USD
• The fund’s historically low volatility and drawdowns also mean that the fund can be a good place to park monies in without significant risk of permanent capital loss
• Using the fund as a core product holding, we highlight three portfolios investors can DIY themselves that provide yields of anywhere from 1% to 1.8%
• We recommend investors to limit their options to short duration bond funds to reduce portfolio volatility. Money market funds that offer lower yields than its expense ratio should also be avoided.

In a previous article (Got cash? Park them in these cash management portfolio ideas to attain higher yields), we offered a glimpse as to how anybody can simply DIY their very own SGD cash management solution here at iFAST. In the current globalized world, however, it is highly likely that many investors hold their wealth in currencies aside from their local currency, for diversification and future non-local currency expenses such as travelling, overseas education, and such.

Today, as a follow-up, we’ll share with you how you can create your own USD-denominated cash plus portfolio. But before we get there, here’s one core product that investors may want to get familiar with first.

Fidelity Enhanced Reserve Fund

Liquidity, Stability, and Yield are the three main pillars of the fund. Strategically in that order, the fund seeks to provide investors with decent yields at relatively low risk levels. The strategic allocation of the fund is kept in the following proportions: 30% in cash-like instruments (Liquidity), 50% in investment-grade credits (Stability), and 20% into high yield credits (Yield).

Credit quality wise, the average credit rating of the portfolio is expected to be maintained at investment grade, with the amount of high yield capped at 50% (to allow for flexibility; in practice high yield allocation should be within range of 15-30%).

At the issuer level, the minimum credit rating could be as low as B-. Nonetheless, the fund manager will typically favour bonds with high liquidity and stability characteristics before considering their yields. Most importantly, with Fidelity Enhanced Reserve A-ACC-USD, investors can access their cash more quickly due to the shorter settlement date of the fund (T+1) relative to other funds.

In summary, the fund aims to fill the gap for those who wish to remain invested whilst awaiting for better opportunities in the market. Alternatively, this would also be highly attractive for investors who wish to get some yields out of their spare cash, and yet do not want to lock their money up in fixed deposits.

Liquidity

Liquidity is the most important feature of the fund. To ensure liquidity, the fund adopts a multi-layered approach. The fund’s first layer of defense is basically to hold a large cash and cash-equivalent buffer.

The second layer comes from constructing the portfolio that is shorter duration in nature, so that aside from receiving interest income, the fund would also be receiving cash redemptions of the bonds upon maturity on a regular and rolling basis.

The last layer of defense for liquidity would be an overdraft facility with no limit. Theoretically, the fund could borrow however much it needs from a bank to meet redemptions.

Finally, a gating provision is also put in place to avoid and mitigate the most dramatic redemption scenario of which the fund manager is unable to fulfil on a short term notice. This is to ensure the redemption process is kept at an orderly process, and that the fund manager can liquidate its holdings at most favourable prices.

Low volatility and drawdowns

The fund was incepted on 26 March 2018, and since then, markets have undergone quite a fair bit of volatility. Over the last three years, its historical annualized volatility stands at 1.8%, while its historical maximum drawdown, from peak to trough, was -3.8%. By these metrics alone, one can deduce that the fund experiences little fluctuations on a day-to-day basis, which is ideal as a cash management vehicle.

Chart 1: Drawdown-tested; Fidelity Enhanced Reserve offers resiliency 

Chart 2: …and stability in the face of recent market volatility

Food for thought: Cash portfolio ideas

As a standalone product, Fidelity Enhanced Reserve Fund is probably sufficient for some investors, judging by its historical track record. Nevertheless, investors may still have some reservations about parking all their cash in one investment product. Which brings us back to the point of using the fund as a core idea, alongside other suitable products, in building our cash plus portfolios.

Having scoured through the hundreds of unique fixed income products available on the platform, here are some possible portfolios you may construct for yourselves:

Table 1: Generate decent yields on your spare cash with relatively low risks, 1% to 1.8% p.a. at a time

Source: Bloomberg Finance L.P., iFAST compilations. Data as 14 Apr 2020, in total returns (gross dividends) & USD terms. 

Disclaimer: Moderate portfolio does not have historical performance as the USD-H share class for LionGlobal Short Duration Bond is newly incepted. Past performance is likely not indicative of future performance.

The risk profiles of these portfolios are determined by the underlying funds’ investment mandates, as well as the platform’s risk rating methodology. The portfolios are consistent with our assumption of higher yields begetting higher risks. All in all, with the above portfolios, investors can generate an estimated yields of anywhere from 1% to 1.8% depending on their preferences.

Certainly, one does not have to prescriptively follow these specific combinations. After all, everybody probably has their own unique yield requirements.

But there’s a rule of thumb you should probably follow – the riskier your portfolio gets in terms of yields, it’s more likely that you’ll want to increase the number of underlying products to diversify away strategy and idiosyncratic risks related to each fund manager and product respectively.

There are more options out there, but do your own due diligence

The number of combinations are aplenty, but there are instances where holding cash may be better than investing in certain type of funds such as USD denominated cash funds, since these products may actually be negative carry products after taking into account expense ratios in totality.

USD cash funds that only invest in money market securities will find it difficult to offer investors compelling yields given that interest rates worldwide are artificially kept at the zero bound, and hence, we recommend investors to avoid such products for now.

Still, for the adventurous and intrepid investors who wish to include riskier products beyond this list, you would want to keep your options limited to short duration bond funds, and keep the investment value relatively proportionally small to limit volatility.

Table 2: Try your hand at creating your own cash management solution with these funds

Source: Latest fund fact sheets, Bloomberg, Morningstar, iFAST compilations Data as of end February 2021. The above data excludes platform fees.