- With today’s high level of inflation, holding tons of cash simply in bank accounts would mean that the real value of your savings are being eroded quickly.
- A cash management portfolio serves as an alternative to traditional bank deposits, with higher yields whilst still providing investors with a good amount of liquidity.
- With a plethora of products available on the market, investors can formulate a portfolio that is tailor-made to fit unique yield requirements.
- We have constructed model cash management portfolios that can serve as a starting point for investors. Across three distinct risk profiles (Conservative, Moderate, Aggressive), the portfolios are able to offer a net yield of up to 2.1%.
You would probably have stashed cash in bank accounts – be it for short-term and/or long-term needs – and for the past two years, with interest rates remaining at historic lows, the return on this investment would have been pitiful.
While the Federal Reserve will soon start hiking rates, it will take a period of time before we see an increase in interest rates on bank deposits. Besides, with today’s high level of inflation, holding tons of cash simply in bank accounts would mean that the real value of your savings are being eroded quickly.
Thus, investors who are holding excess cash should consider instruments that can provide higher interest rates. One way to achieve this is to create your very own cash management portfolio.
What is a DIY cash management portfolio?
A cash management portfolio serves as an alternative to traditional bank deposits, with higher yields whilst still providing investors with a good amount of liquidity. Such portfolios typically invest in fixed income funds, such as money market funds and short-duration bond funds, which are on the lower end of the risk spectrum.
While cash management solutions are not difficult to find nowadays thanks to robo-advisers, there may be an annual management fee. Thus, crafting your own cash management portfolio can help to save on such fees. Moreover, a do-it-yourself (DIY) cash management portfolio gives you greater flexibility. Most cash management solutions offered by robo-advisers provide a yield of up to 1.2%. With a DIY cash management portfolio, you can choose exactly what to invest in based on your risk profile and desired yield – the decision is yours.
The difference, however, is that unlike deposit accounts from banks, cash management portfolios are not covered under the deposit insurance scheme administered by the Singapore Deposit Insurance Corporation (SDIC).
Customise your own portfolio
There are a plethora of products which can serve as building blocks for your own cash management portfolio. Furthermore, the funds can come in accumulation or distribution share classes, providing investors with the option to either receive a payout, or reinvest the income received back into the fund to generate additional capital growth.
When it comes to building your own cash management portfolio, you can categorise your funds into “anchors” and “yield enhancers”.
- Step 1: Choose an anchor
Anchors refer to lower risk funds, which tend to generate reasonable returns at relatively lower volatility, and hence can serve as a stabiliser for your portfolio. We think that short duration funds with a platform risk rating of 1 fits this criteria best.
Table 1: Anchors
|
Name |
Platform Risk Rating |
Net Yield |
Return |
Volatility |
Payout |
Reinvest |
|
LionGlobal New Wealth Series – LionGlobal SGD Enhanced Liquidity |
1 |
1.0% |
1.6% |
0.3% |
N.A. |
|
|
Nikko AM Shenton Short Term Bond SGD |
1 |
1.1% |
1.6% |
1.3% |
N.A. |
|
|
Net yield does not include platform fees for fixed income UTs Return and volatility are based on 3-year annualised figures, unless otherwise stated Source: Bloomberg Finance L.P., iFAST Compilations Data as of 15 March 2022 |
||||||
- Step 2: Add yield enhancers
On the other hand, yield enhancers refer to funds with exposure to higher credit risk. As the name suggests, they can provide higher yields for your portfolio. We think such funds can be those with a platform risk rating of 2 to 3, and here are some that we have shortlisted.
Table 2: Yield enhancers
|
Name |
Platform Risk Rating |
Net Yield |
Return |
Volatility |
Payout |
Reinvest |
|
United SGD Fund |
2 |
1.6% |
1.6% |
1.5% |
||
|
LionGlobal Short Duration Bond |
2 |
2.0% |
2.7% |
1.5% |
||
|
ICBC CSOP FTSE Chinese Government Bond Index ETF (SGX:CYC) |
3 |
2.5% |
9.1%* |
3.5%* |
N.A. |
|
|
United SGD Plus Fund |
3 |
2.9% |
-0.5% |
4.9% |
||
|
Fullerton Lux – Asian Bonds SGD |
3 |
3.3% |
2.3% |
6.7% |
N.A. |
|
|
Net yield does not include platform fees for fixed income UTs Return and volatility are based on 3-year annualised figures, unless otherwise stated *Based on 1-year figures Source: Bloomberg Finance L.P., iFAST Compilations Data as of 15 March 2022 |
||||||
- Step 3: Mix and match
Depending on your risk profile and desired yield, mix and match the funds to form the portfolio. As the risk of the portfolio increases, we suggest have a greater variety of underlying products for diversification purposes. There are also idiosyncratic risks relating to each fund manager, hence investors should ideally want to diversify across different fund managers too.
Check out our model portfolios
A year ago, we first introduced some model cash management portfolios which aim to serve as a starting point for investors. Since then, a lot has changed in the bond market (e.g. the Evergrande saga, rate hikes). To ensure that the portfolios remain current and relevant for investors, we have made some changes. Here’s what you can expect:
- A model portfolio under three distinct risk profiles (Conservative, Moderate, Aggressive)
Choose a model portfolio that fits your risk profile. For investors looking for higher yields, moving up the risk ladder is in order. The risk profiles of the portfolios are determined by the risk ratings of their underlying funds.
- Inclusion of ETFs
We have included fixed income ETFs into our model portfolios. Unlike fixed income funds, ETFs are able to provide dedicated exposure to a specific bond segment that we like (e.g. Chinese government bonds).
Table 3 below shows our revamped model portfolios. These portfolios are created with the characteristics of what we believe a cash management solution should have – higher yields than bank deposits, while keeping downside volatility as well as maximum drawdown low.
For a Conservative portfolio, the majority of the fund allocation (e.g. 80%) is in “anchors”, with our preferred fund being the LionGlobal Enhanced Liquidity Fund. It invests in a broadly diversified portfolio of high quality debt instruments, and has demonstrated lower volatility as compared to peers. Thereafter, we added the United SGD Fund – a slightly riskier fund as compared to “anchors”, in order to enhance the yield of the portfolio.
For a Moderate portfolio, we seek to have a 50/50 allocation between “anchors” and “yield enhancers”. As compared to the Conservative portfolio, an additional yield enhancer was selected in order to increase diversification. We chose the ICBC CSOP FTSE Chinese Government Bond ETF (SGX:CYC), as we believe Chinese government bonds will remain as reliable safe haven assets amidst the volatility in global bonds.
(Related article: Why it is still a good time to consider Chinese government bonds)
Lastly, for an Aggressive portfolio, we added another yield enhancer. The Fullerton Lux Asian Bond Fund, which invests in debt securities issued by corporates and governments in the Asian region, was included so as to increase diversification and provide opportunities for outperformance on a total return basis. An equal weightage has been given to all funds in this portfolio.
Table 3: Model cash management portfolio under three risk profiles
|
Risk Profile |
Conservative |
Moderate |
Aggressive |
|
Fund Allocation |
80% anchors 20% yield enhancers |
50% anchors 50% yield enhancers |
25% anchors 75% yield enhancers |
|
Product Recommendations |
▪ 80% LionGlobal Enhanced Liquidity Fund |
▪ 50% LionGlobal Enhanced Liquidity Fund |
▪ 25% LionGlobal Enhanced Liquidity Fund ▪ 25% United SGD Fund |
|
1-year Total Return |
0.5% |
2.4% |
0.1% |
|
1-year Volatility |
0.2% |
1.0% |
1.8% |
|
Return / Volatility |
2.5 |
2.4 |
0.1 |
|
3-year Annualised Return |
1.6% |
N.A.* |
N.A.* |
|
3-year Annualised Volatility |
0.5% |
N.A.* |
N.A.* |
|
Historical Max Drawdown |
-0.3% (April 2020) |
-0.3% (February 2022) |
-0.7% (February 2022) |
|
Net Yield** |
1.2% |
1.6% |
2.1% |
|
Average Risk Rating |
1.2 |
1.6 |
2.0 |
|
*ICBC CSOP FTSE Chinese Government Bond ETF was only listed since September 2020 **Does not include platform fees Source: Bloomberg Finance L.P., iFAST Compilations Data as of 15 March 2022 |
|||
The yields offered by the portfolios generally compare well against other cash parking facilities (Figure 1).
Among the three model portfolios, the Conservative portfolio is most risk-efficient as it can deliver modest returns at a much lower volatility, despite having a lower yield. The Aggressive portfolio, on the other hand, has greater room to outperform on a total return basis, due to higher credit risks. In return, investors will have to accept higher volatility and greater risk of capital loss. For the best of both worlds, consider the Moderate portfolio, which seeks to balance between returns and volatility.
Figure 1: Cash management portfolios can give you higher yields
Make your idle cash work harder for you
All in all, cash management portfolios present investors with an opportunity to generate higher yields on their idle cash. The number of combinations are aplenty, and a DIY cash management portfolio certainly provides the extra flexibility to tailor it to your own unique yield requirements.
Moving forward, to ensure that the cash management portfolios remain current and relevant for investors, we will be providing a quarterly update on this series. Investors who want ideas on a USD-denominated cash management portfolio should also stay tuned.
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