Plenty of love for cash and liquidity

By

10/11/2017

Future Fund director of portfolio design and quant analysis, Sam Killmier, says cash is the “unloved sibling” of asset classes and deserves more consideration in portfolio construction.

“I think cash is still the unloved sibling …and I think more time should be spent on it,” Killmier told the 2017 Investment Magazine Fixed Income, Cash and Currency Forum, held in Healesville, Victoria, in July.

He made the comment during a panel showcasing how different institutional investors think about the role of fixed income and cash in their portfolio construction.

Killmier told the crowd he decided to talk about cash, rather than fixed income, because of the sovereign wealth fund’s higher than average allocation to it and his love for the deceptively simple asset class.

“We have quite a lot of cash – at least in our headline asset allocation – so I wanted to talk about the reasons for that, and maybe dispel some of the myths around that,” he said.

The Future Fund manages a total of $159.5 billion across five different funds. At the time he was speaking, reporting showed the Future Fund holding 20.4 per cent of its total assets in cash. As at September 30, this had dropped slightly, to 18.9 per cent. Data from SuperRatings shows the average allocation to cash among local superannuation funds at September 30 was 6.9 per cent.

Killmier concedes the Future Fund’s allocation to cash “looks like a large number”. He explains the strategy thus: “Cash does provide low risk, zero risk premium economic exposure, which is something we want to use in environments where we don’t think we’re being adequately rewarded.”

Fixed income’s role

Killmier’s fellow panelists focused on the fixed income component of their portfolios, rather than cash.

Andrew Pech, a portfolio manager and economist in the investment strategy team at QSuper, said a heavy allocation to long-duration bonds set the $49 billion super fund’s investment strategy apart from the pack.

The reason QSuper stands out among super funds is because it follows a “parity-inspired philosophy across our multi-asset portfolio…Our fixed-income portfolio predominantly consists of long-duration sovereign bonds,” Pech said. “Why? Because we’re trying to match up the volume of our fixed-income portfolio with that of our equities.”

Morningstar Investment Management head of multi-asset income Brad Bugg said the global funds management firm took a multi-faceted approach to the use of fixed income in portfolio construction.

Bugg outlined the four objectives his team applies to fixed income.

“There are four distinct things we’re looking for,” he said. “We want to deliver an income; we want it to be a diversifier; and we want it to help preserve capital in periods of stress. But we must also be liquid as well, because when you do get those big drawdowns, we want to have the ability to liquidate those fixed-income assets and redeploy them to more attractive parts of the market.”

Killmier echoed Bugg’s sentiments on the importance of liquidity in fixed-income portfolios. The Future Fund thinks about liquidity on three levels, he said.

“First, make sure you hold enough liquidity, or have flexibility to always survive something very severe – probably more severe than you’ve ever seen – because you need to position for things that aren’t in your data set. We try to do that. We run daily tests on our liquidity position.”

The next two levels are to try to avoid harm – not needing to sell things to meet liquidity requirements – and “to be able to take advantage of opportunities”, he said.