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In contrast to the better known asset classes, such as equities and bonds, the development of cash as an asset class of importance is a relatively new phenomenon. How can you maximise the overall yield on cash balances while maintaining a high degree of both liquidity and security? The discretionary cash management service developed by Leopold Joseph for corporate and institutional investors with at least £1m to invest was designed as a solution to just these conundrums.
Let’s start with our basic investment policies. To protect the security of clients’ assets, all funds are placed with institutions that have a minimum Moody’s Aa3 credit rating at the time the deposit is made.Furthermore, the principle of diversification is applied rigorously to larger portfolios, as it would be imprudent to lend the entire fund to only one counterparty.
Using the skills developed in managing the bank’s own balance sheet of close to £500m we can not only understand the needs of investors but can also deliver the balanced, secure, yet higher yielding portfolios that are required. Funds are always placed in deposits or certificates of deposit (CDs) in the money markets with maturities of up to one year. By using CDs, which are inter-bank instruments and not usually available to non-banks, funds can be invested at higher rates for longer periods whilst providing clients with the option of immediate access. This allows the client to capitalise on yield curve changes and differences, short term opportunities and money market anomalies. It is surprising how often special situations arise and constant monitoring of the money markets enables the identification of these precious yield enhancing opportunities. For example, it may be possible that the three- month rate offers exceptional value compared with the one-month rate.
Funds are typically placed with the help of a number of money brokers, which allows us to identify whether a particular bank has a strong short-term interest to borrow funds. The particular investment strategy used is tailored to each client’s specific requirements and is always geared very much towards the protection of capital. Liquidity is preserved by keeping part of the cash invested short term (including timing maturities to match future needs for cash, such as paying for imports or meeting the payroll) and by using CDs that can be sold back in the money markets at any time.
The style of management is an active one and clients’ portfolios are reviewed at least daily. An appropriate benchmark (such as one-month Libid) against which performance can be monitored is agreed with the client at the outset.
With corporate and institutional investors increasingly concerned about the returns on their surplus cash, a discretionary cash management service is the most cost-effective solution for running cash portfolios more aggressively in today’s increasingly volatile markets.
Paul Thornhill is a manager at Leopold Joseph in London

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