DIY Cash Management: Park your cash in these funds to attain higher yields

• We believe that investors with idle cash can search for better returns. Consider a cash management portfolio, which serves as an alternative to traditional bank deposits.

• In three simple steps, create a DIY cash management portfolio that is suited towards your risk profile and desired yield.

• We have also put together model portfolios for different risk profiles (Conservative, Moderate, and Aggressive) that offer yields ranging from 4.7% to 5.7% on SGD cash.

• 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 5.4% to 6.2%.

We believe that the global financial markets will remain volatile in 2023. While it would certainly be handy to hold on to some cash which can be deployed into markets should areas of opportunities arise, parking them in bank accounts may not be the most ideal.

We believe that investors can search for better returns so as to allow your idle cash to work harder. Consider a cash management portfolio, which serves as an alternative to traditional bank deposits, offering higher yields whilst still providing investors with a decent amount of liquidity. Such portfolios typically invest in fixed income funds which are on the lower end of the risk spectrum, such as money market funds and short duration bond funds.

2023 could be a better year for fixed income. With the bulk of rate hikes likely behind us, today’s bond yields are at their highest since the global financial crisis. This provides investors with the potential to receive more attractive total returns over time, even if near-term market volatility persists.

(Related article: Stocks are no longer the only option – here’s why fixed income is coming back to focus)

3 steps to construct your own cash management portfolio

Cash management solutions are not difficult to find nowadays, and may provide an appealing yield of as high as near 5%. Nonetheless, crafting your own cash management portfolio gives you greater flexibility. Based on the plethora of funds available on our platform, a DIY cash management portfolio can be tailored to suit your risk profile and desired yield.

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 are funds of lower risk. They 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 fit this criteria best.

Table 1: Anchors

Fund	Duration (years)	Yield to Maturity	Expense Ratio	Average Credit Rating	Currency
Nikko AM Shenton Short Term Bond	1.0	5.1%	0.4%	A-	SGD / USD
LionGlobal SGD Enhanced Liquidity	0.5	2.8%	0.5%	A+	SGD
Source: iFAST Compilations Data as of 31 December 2022

2.       Add yield enhancer(s)

Yield enhancers are funds with exposure to higher credit risk. As the name suggests, they can potentially provide higher yields for your portfolio. We would also like to caution investors 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. We believe that funds with a platform risk rating of 2 to 3 fit this criteria best.

Table 2: Yield enhancers

Fund	Duration (years)	Yield to Maturity	Expense Ratio	Average Credit Rating	Currency
Fidelity Enhanced Reserve	0.5	8.9%	0.6%	A	SGD / USD
Fidelity Global Short Duration Income	1.5	7.2%	0.8%	BBB	USD
Maybank Enhanced Income Fund	0.9	5.5%	0.3%	A-/BBB+	SGD / USD
LionGlobal Short Duration Bond	1.8	5.4%	0.6%	BBB+	SGD / USD
United SGD Fund	1.2	5.6%	0.7%	BBB+	SGD / USD
Source: iFAST Compilations Data as of 31 December 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 “anchors”. Meanwhile, investors who want to undertake more risk could allocate more of their capital into funds with higher credit risk, which we defined as “yield enhancers”.

As the risk of the portfolio increases, we suggest having a greater variety of underlying products for diversification purposes. There are also idiosyncratic risks relating to each fund manager, therefore you may want to diversify across different fund managers too.

Check out these model portfolios

Based on the viable funds highlighted above, we have also put together model portfolios for different risk profiles (Conservative, Moderate, and Aggressive). It is also worth noting that the underlying funds in Conservative and Moderate portfolios are included under the CPF Investment Scheme.

Since our last update, the underlying funds remain unchanged.

For a Conservative portfolio, 80% of the allocation is in an “anchor” – the Nikko AM Shenton Short Term Bond Fund. The fund is diversified across different markets, with an average credit quality of A-. It is also seeking to enhance the yield via duration extension (overall portfolio duration will be kept within three years). Besides, the fund has shown a fairly low maximum drawdown of -3.1% since inception, and such solid risk management makes it ideal as a cash parking facility.

Meanwhile, 20% of the portfolio goes into the United SGD Fund (the “yield enhancer”). The fund provides room for outperformance on a total return basis, as it takes on higher credit risk. Overall, this portfolio allocation is expected to generate a net yield of 4.7%.

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 4.8%.

Given the Conservative portfolio’s ability to generate a similar level of yield as the Moderate portfolio and at lower volatility (3-year annualised volatility of 1.9% vs 2.2%), we believe investors should opt for the less risky portfolio at the current juncture.

For an Aggressive portfolio, we added a “yield enhancer”. We chose the Fidelity Enhanced Reserve, which invests in short-dated, high quality bonds, enabling its portfolio to generate high yields at a low volatility. With a total of four funds in the portfolio, each of them are given equal weights. Overall, this portfolio allocation is expected to generate a net yield of 5.7%.

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	0.3%	0.3%	-0.1%
3-year Annualised Volatility	1.9%	2.2%	2.8%
Return / Volatility	0.2	0.1	0.0
Max Drawdown	-3.3%	-4.5%	-6.3%
Net Yield*	4.7%	4.8%	5.7%
Duration (years)	1.1	1.3	1.2
Risk Rating	1.2	1.5	2.0
*Inclusive of fund-level fees, but excludes platform fee Source: iFAST Compilations Data as of 31 December 2022

(Related article: DIY Cash Management: More opportunities to earn higher yields)

Holding idle cash in USD?

The model portfolios that we have shared above are suitable for cash management portfolios of SGD denomination. Investors holding excess cash in USD can also find ways to earn higher yields, as shown in Table 4 below.

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% Maybank Enhanced Income
3-year Annualised Return	-0.3%	-0.8%	-0.9%
3-year Annualised Volatility	2.2%	2.9%	3.6%
Return / Volatility	-0.1	-0.3	-0.3
Max Drawdown	-4.6%	-6.1%	-6.2%
Net Yield*	5.4%	6.0%	6.2%
Duration (years)	0.9	1.0	1.0
Risk Rating	2.2	2.5	2.5
*Inclusive of fund-level fees, but excludes platform fee Source: iFAST Compilations Data as of 31 December 2022

Since our last update, we made one change to the USD Aggressive portfolio. We have removed the United SGD Plus Fund, whose yield has turned relatively unattractive compared to funds of lower credit risk.

The fund also has a 9% exposure to the United Asian High Yield Bond Fund, which saw a short-term rebound following sweeping measures implemented by Chinese authorities to ease stress in the property sector. In recent months, however, we have taken on a more defensive stance on Asian high yield bonds. We believe that its underlying fundamentals have deteriorated immensely and permanently amidst the confidence crisis in China’s housing market. As such, we see this as an opportune time to remove funds with relatively higher exposure to Asian high yield bonds in our DIY Cash Management portfolios.

The allocation has been replaced with the Maybank Enhanced Income. It seeks to preserve capital and maintain a high degree of liquidity by investing in money market instruments and debt securities of less than three years maturity, while looking to provide a return which is comparable to short-term time deposits. While the fund does have some exposure to Chinese property developers, the exposure is kept within the relatively stable investment grade issuers.

Final thoughts

Overall, our model portfolios stack up well compared to traditional cash parking facilities like bank fixed deposits (Figure 1). While some of the portfolios have posted negative returns in 2022 due to the mark-to-market impact during the rising interest rate environment, we expect them to produce some upside as the bonds in the underlying funds approach par value upon maturity.

Moreover, against the prevailing macroeconomic conditions marked by high inflation and slowing economic growth, we believe that the portfolios would hold up relatively well due to their exposure to short-dated, high-quality credits.

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