DIY Cash Management Portfolios: Receive higher yields as interest rates continue to climb

• A cash management portfolio serves as an alternative to traditional bank deposits, with higher yields and a good amount of liquidity. To help investors get started on a DIY cash management portfolio, we have shared some model portfolios earlier this year.

• The Conservative portfolios were the key standouts. Having chalked up a gain of 0.2% and 2.1% respectively in 2Q22, the SGD-denominated and USD-denominated portfolios generated higher returns than benchmarks such as interest rates on bank saving deposits.

• To better navigate through the challenging environment faced by bond markets, we also share some changes made to the model portfolios.

• As rates continue to rise, we expect yields of the portfolios to climb further moving forward. In the meantime, our model portfolios continue to provide yields of up to 2.3% (for SGD) and 2.8% (for USD).

The year thus far has been a challenging one for investors. Both equities and bonds were sold off intensely amidst the environment of surging inflation and rising interest rates. Nonetheless, in light of recessionary fears, bonds extended its outperformance over equities.

Even with the slump in global risk sentiment, we believe that it is not ideal for investors to hold too much cash. 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.

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. 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. The best part that comes along with crafting a do-it-yourself (DIY) cash management portfolio is the flexibility. Choose exactly what to invest in based on your risk profile and desired yield – the decision is yours.

How did our model portfolios perform in 2Q22?

To help investors get started, we have shared some model portfolios earlier this year. The portfolios were created with the characteristics of what we believe a cash management solution should have – higher yields than bank deposits, while staying invested in fixed income funds that are on the lower end of the risk spectrum.

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Fast forward to the second quarter of the year, the Conservative portfolios have recorded positive returns. Having chalked up a gain of 0.2% and 2.1% respectively during the period, the SGD-denominated and USD-denominated portfolios generated higher returns than benchmarks such as interest rates on bank saving deposits.

Meanwhile, the Moderate and Aggressive portfolios did not perform that well, as both turned in negative returns for the quarter. The key detractor was their Chinese government bonds (CGBs) exposure (25%), in the form of the ICBC CSOP FTE Chinese Government Bond ETF (SGX:CYC / SGX:CYB).

China’s dovish monetary policy stance has placed a downward pressure on RMB, and the returns of CGBs were further dampened by their lack of yield advantage following the rapid rise in US rates. It is also worth mentioning that RMB has weakened dramatically against USD during the period, resulting in the wider losses in CYB ETF (-5.7%) as compared to the CYC ETF (-3.3%). Unlike most unit trusts, ETFs are not hedged against currency movements.

Moreover, with a relatively longer duration, the Aggressive portfolio is more sensitive to the rising rate environment, resulting in its wider decline. This is especially so for the SGD-denominated portfolio which had a duration of 3.1 years.

Table 1: Performance summary

Risk Profile	Conservative	Moderate	Aggressive
SGD-denominated Portfolios
2Q22 Total Return	0.2%	-0.7%	-2.0%
Duration (years)	0.8	2.1	3.1
USD-denominated Portfolios
2Q22 Total Return	2.1%	-0.02%	-0.3%
Duration (years)	1.1	2.2	2.5
Source: iFAST Compilations Data as of 30 June 2022

Positioning for the road ahead

Looking ahead, we believe that bond markets are likely to be weighed down by uncertainties including faster-than-expected rate hikes and downside risks to economic growth. Therefore, we made some changes to the model portfolios so as to better navigate through the challenging environment.

SGD-denominated portfolios

We opted to remove the ICBC CSOP FTSE Chinese Government Bond ETF (SGX:CYC) which were in the Moderate and Aggressive portfolios. While CGBs can provide long-term portfolio diversification benefits, we currently favour the rest of the Asian investment grade (IG) universe due to their higher yields. The Aggressive portfolio will retain its Asian IG exposure through the Fullerton Lux Funds - Asian Bonds SGD-H.

Following this, we added the LionGlobal Short Duration Bond Fund SGD into the Moderate and Aggressive portfolios. Considering the macro headwinds, the fund is staying defensive by sticking to shorter-dated high quality credits. It has a duration of 2.1 years, with significant exposure to Singapore-centric bonds which we expect to hold up well on the back of healthy credit metrics.

Overall, the duration exposure of the Moderate and Aggressive portfolios have been shorten to 1.2 years and 2.2 years respectively. No changes were made to the Conservative portfolio, which holds an ultra-short duration of 0.8 years.

Table 2: Model SGD cash management portfolios

Risk Profile	Conservative	Moderate	Aggressive
Product Recommendations	80% LionGlobal SGD Enhanced Liquidity 20% United SGD Fund	50% LionGlobal SGD Enhanced Liquidity 25% United SGD Fund 25% LionGlobal Short Duration Bond Fund SGD	25% LionGlobal SGD Enhanced Liquidity 25% United SGD Fund 25% Fullerton Lux Funds - Asian Bonds SGD-H 25% LionGlobal Short Duration Bond Fund SGD
3-year Annualised Return	1.6%	1.4%	0.6%
3-year Annualised Volatility	0.4%	1.0%	2.7%
Return / Volatility	3.7	1.5	0.2
Historical Max Drawdown	-0.3% (March 2020)	-1.1% (March 2020)	-3.5% (March 2020)
Net Yield*	1.5%	1.8%	2.3%
Duration (years)	0.8	1.2	2.2
Risk Rating	1.2	1.5	2.0
*Does not include platform fee Source: iFAST Compilations Data as of 27 July 2022

USD-denominated portfolios

Likewise, we removed the ICBC CSOP FTSE Chinese Government Bond ETF (SGX:CYB) from the Moderate and Aggressive portfolios as we turn less positive on CGBs.

We replaced the CGB exposure with a position in global short duration fixed income securities, through the Fidelity Global Short Duration Bond Income Fund. The fund currently has a duration of 1.5 years, with a sizable exposure to global investment grade bonds where we think yields are turning more compelling. Moreover, even as global growth conditions continue to deteriorate, investment grade bonds are expected to deliver a resilient performance.

Overall, the Conservative and Moderate portfolios holds an ultra-short duration of 0.3 and 0.8 years. The Aggressive portfolio takes on a slightly longer duration exposure, but only at 1.2 years.

Table 3: Model USD cash management portfolios

Risk Profile	Conservative	Moderate	Aggressive
Product Recommendations	80% Nikko AM Shenton Short Term Bond USD-H 20% Fidelity Enhanced Reserve Fund USD	50% Nikko AM Shenton Short Term Bond USD-H 25% Fidelity Enhanced Reserve Fund USD 25% Fidelity Global Short Duration Income USD	25% Nikko AM Shenton Short Term Bond USD-H 25% Fidelity Enhanced Reserve Fund USD 25% United SGD Plus Fund USD-H 25% Fidelity Global Short Duration Income USD
3-year Annualised Return	0.7%	0.01%	-0.9%
3-year Annualised Volatility	1.8%	3.4%	4.3%
Return / Volatility	0.4	0.0	-0.2
Historical Max Drawdown	-2.7% (March 2020)	-4.8% (March 2020)	-6.1% (March 2020)
Net Yield*	2.0%	2.4%	2.8%
Duration	0.3	0.8	1.2
Risk Rating	2.2	2.5	2.8
*Does not include platform fee Source: iFAST Compilations Data as of 27 July 2022

Final thoughts

Among the SGD-denominated and USD-denominated 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 during a risk-on environment, due to its higher credit risks. In return, investors will have to accept higher volatility and greater risk of capital loss. For the best of both worlds, investors can consider the Moderate portfolio, which seeks to balance between returns and volatility.

The US Federal Reserve is expected to keep up with rate hikes throughout the rest of the year. The rising rate environment enables the underlying funds in the portfolios, particularly those of short duration, to reinvest into higher yielding bonds. As such, we expect yields of the portfolios to climb further moving forward.

In the meantime, our model portfolios continue to provide yields that compare well against other cash parking facilities (Figure 1).

Figure 1: DIY cash management portfolios can give you higher yields

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.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.