- Want to earn higher yields on your idle cash? You can get the best yields by putting together a cash management portfolio based on the funds available on our platform.
- 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.
- We put together model portfolios for different risk profiles (Conservative, Moderate, and Aggressive) that offer yields ranging from 4.5% to 5.4%.
- Investors holding excess cash in USD can also find ways to earn higher yields. We share some ideas that can provide you with yields ranging from 5.2% to 6.0%.
As bond funds reposition themselves to take advantage of the rising rate environment, we think that there are now ample opportunities for investors to earn higher yields on their idle cash. In view of this, we share how investors can get the best yields by putting together a cash management portfolio based on the funds available on our platform.
3 steps to construct your own cash management portfolio
A cash management portfolio serves as an alternative to traditional bank deposits, with higher yields (due to higher risk) and a good amount of liquidity. 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.
Investors on the hunt for higher yields by way of a DIY cash management portfolio can consider a simple three-step approach as shown below.
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 bond funds with a platform risk rating of 1 fits this criteria best.
Table 1: Anchors
|
Fund |
Duration (years) |
Yield to Maturity |
Average Credit Rating |
Currency |
|
Nikko AM Shenton Short Term Bond |
1.1 |
4.9% |
A- |
SGD / USD |
|
LionGlobal SGD Enhanced Liquidity |
0.5 |
2.4% |
A |
SGD |
|
Source: iFAST Compilations Data as of 30 September 2022 |
||||
2. Add yield enhancer(s)
Yield enhancers refer to funds with exposure to higher credit risk. As the name suggests, they can provide higher yields for your portfolio – such funds can be those with a platform risk rating of 2 to 3. We would also like to caution against high yield bond funds as they are too volatile and take on significant credit risk, thus affecting their ability to play an effective role in a low-risk cash management portfolio.
Table 2: Yield enhancers
|
Fund |
Duration (years) |
Yield to Maturity |
Average Credit Rating |
Currency |
|
Fidelity Enhanced Reserve |
1.2 |
8.6% |
A- |
SGD / USD |
|
Fidelity Global Short Duration Income |
1.4 |
7.3% |
BBB |
USD |
|
United SGD Plus Fund |
1.9 |
6.6% |
BBB- |
SGD / USD |
|
United SGD Fund |
1.4 |
5.3% |
BBB+ |
SGD / USD |
|
HGIF – Global Short Duration Bond |
1.6 |
5.1% |
A- |
SGD / USD |
|
LionGlobal Short Duration Bond |
2.0 |
5.0% |
BBB |
SGD / USD |
|
Source: iFAST Compilations Data as of 30 September 2022 |
||||
3. Mix and match
Depending on your risk profile and desired yield, mix and match the funds to form a portfolio. A conservative investor should allocate the majority of the portfolio into lower risk funds, which we defined as an “anchor”. Meanwhile, investors who want to undertake more risk could allocate more of their capital into funds with higher credit risk, which we defined as a “yield enhancer”.
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 you should diversify across different fund managers.
Model portfolios that give you the best yields
Based on the viable funds highlighted above, we put together model portfolios for different risk profiles (Conservative, Moderate, and Aggressive) that offer yields that can beat out traditional cash parking facilities, while keeping downside risk low. The suggested allocation is shown in Table 3 below.
Table 3: Model SGD cash management portfolios
|
Risk Profile |
Conservative |
Moderate |
Aggressive |
|
Product Recommendations |
80% Nikko AM Shenton Short Term Bond 20% United SGD Fund |
50% Nikko AM Shenton Short Term Bond 25% United SGD Fund 25% LionGlobal Short Duration Bond |
25% Nikko AM Shenton Short Term Bond 25% United SGD Fund 25% LionGlobal Short Duration Bond 25% Fidelity Enhanced Reserve |
|
3-year Annualised Return |
0.2% |
-0.1% |
-0.7% |
|
3-year Annualised Volatility |
1.6% |
1.9% |
2.4% |
|
Return / Volatility |
0.1 |
0.0 |
-0.3 |
|
Max Drawdown |
-2.9% |
-4.1% |
-5.5% |
|
Net Yield* |
4.5% |
4.5% |
5.4% |
|
Duration (years) |
1.2 |
1.4 |
1.4 |
|
Risk Rating |
1.2 |
1.5 |
2.0 |
|
*Inclusive of fund-level fees, but excludes platform fee Source: iFAST Compilations Data as of 30 September 2022 |
|||
For a Conservative portfolio, the majority of the allocation is in an “anchor” – the Nikko AM Shenton Short Term Bond Fund. It replaces our previous choice, LionGlobal SGD Enhanced Liquidity, due to the significantly higher yields. As shared in our previous article, the Nikko AM Shenton Short Term Bond Fund offers a relatively attractive yield, and its risk management characteristics also makes it ideal as a cash parking facility. Meanwhile, the United SGD Fund – with its higher yield – acts as a “yield enhancer”.
Although the aforementioned funds have produced negative returns year-to-date due to mark-to-market losses, we believe that they could perform better moving forward as their underlying bonds approach par value upon maturity. Overall, the Conservative portfolio is expected to generate a net yield of 4.5%. Its duration exposure is low (at 1.2 years), with a maximum drawdown of -2.9%.
(Related article: 3 recommended funds that can give you higher rates than fixed deposits)
For a Moderate portfolio, we seek to have a 50/50 allocation between the “anchor” and “yield enhancers”. For diversification purposes, another “yield enhancer” was added, with it being the LionGlobal Short Duration Bond. The fund targets investors who wish to earn a higher yield than fixed deposits and money market funds by taking on slightly higher credit risk. Overall, this portfolio allocation is expected to generate a net yield of 4.5%.
Given the Conservative portfolio’s ability to generate a similar level of yield as the Moderate portfolio and at lower volatility, we believe investors should opt for the less risky portfolio instead.
For an Aggressive portfolio, we again reduced the allocation towards the “anchor” and added a “yield enhancer”. We chose the Fidelity Enhanced Reserve, which replaces our previous choice Fullerton Lux Funds - Asian Bonds. While we still hold a favourable view on Asian IG, we think that the Fidelity Enhanced Reserve is a better choice for a cash management portfolio due to its low volatility characteristics. The fund invests in short-dated, high quality bonds, providing its portfolio with more stability. Overall, the Aggressive portfolio is expected to generate a net yield of 5.4%.
What we have shared above is suitable for cash management portfolios of SGD denomination. Investors holding excess cash in USD can also find ways to earn higher yields. Since our last update, the underlying funds within our model USD-denominated cash management portfolios are unchanged, providing yields ranging from 5.2% to 6.0% (Table 4).
Table 4: Model USD cash management portfolios
|
Risk Profile |
Conservative |
Moderate |
Aggressive |
|
Product Recommendations |
80% Nikko AM Shenton Short Term Bond 20% Fidelity Enhanced Reserve |
50% Nikko AM Shenton Short Term Bond 25% Fidelity Enhanced Reserve 25% Fidelity Global Short Duration Income |
25% Nikko AM Shenton Short Term Bond 25% Fidelity Enhanced Reserve 25% Fidelity Global Short Duration Income 25% United SGD Plus Fund |
|
3-year Annualised Return |
-0.3% |
-0.7% |
-1.7% |
|
3-year Annualised Volatility |
2.0% |
3.1% |
4.0% |
|
Return / Volatility |
-0.2 |
-0.2 |
-0.4 |
|
Max Drawdown |
-3.9% |
-5.2% |
-7.1% |
|
Net Yield* |
5.2% |
5.8% |
6.0% |
|
Duration (years) |
1.1 |
1.2 |
1.4 |
|
Risk Rating |
2.2 |
2.5 |
2.8 |
|
*Inclusive of fund-level fees, but excludes platform fee Source: iFAST Compilations Data as of 30 September 2022 |
|||
The fund choices are largely similar to the SGD rendition. The exceptions are the Fidelity Global Short Duration Income A-MDIST-USD (only available in USD share class) which seeks to deliver income whilst maintaining an average duration of investments that does not exceed three years, and the United SGD Plus Fund which is slightly riskier than the United SGD Fund due to its allocation to higher-yielding credits.
Final thoughts
All in all, our model portfolios stack up well compared to traditional cash parking facilities like bank fixed deposits (Figure 1). In the rising rate environment, the portfolios may experience losses due to mark-to-market impact, nevertheless, the same impact would cause their yields to rise even sharply. Amidst growing probability of a recession, we also expect the model portfolios to hold up relatively well as they are invested in high-quality credits.
Figure 1: DIY cash management portfolios can give you higher yields
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