No longer plain cooking

Dutch pension fund giant PGGM does not hold cash as a strategic asset class. However the fund holds a substantial cash position, says Marc Nuijten, head of treasury and overlay management at the Dutch pension fund.
“This is partly due to the fact that the fund has an allocation to commodities, and an allocation to a new investment class, which is named ‘portfolio of strategies’.
“Both these activities use derivatives like futures and return swaps. To prevent leverage in these portfolios, a cash position is allocated to them.”
As well as this, PGGM’s fixed income and equities portfolios can hold cash positions for a specific time, says Nuijten. “Also, our collateral management process that was implemented last year, using cash as collateral, has a large effect on the total cash position to be managed by the treasury. From all of these different sources of cash, we probably have an average cash position of about E4-6bn, which is substantial.”
Quite a high proportion of that is structural for the coming years. Most of it is managed internally by the treasury of PGGM. “Our objective for cash management is to achieve capital preservation. Given that condition we try to deliver a reasonable return, providing liquidity when needed.”
At this moment PGGM uses several different types of instruments to manage its large cash balances. This includes money market funds, deposits, overnight call investments and cash management mandates, says Nuijten.
“The combination of these instruments provide enough flexibility for a short time horizon,” he says. In order to manage cash as efficiently as possible, PGGM splits it into three different categories, each with its own liquidity profile.
“Given the amount of cash that can be marked as structural, we are looking for new cash investments where we can add to returns, without taken extra market of credit risk,” he says. PGGM believes there is room to make improvements in the way it invests at least some of its structural cash. For example, where E1bn is considered to be a structural cash position for the coming years, it can be invested with a longer horizon (up to five years) in less liquid money market structures, providing the fund with an extra liquidity premium.
“We think collecting liquidity premiums makes it possible to deliver extra performance,” he says. The fund is looking for options at the moment. “We are fairly open for any type of structure you can use to implement an investment like this. As long as there’s a structure where we don’t leverage market and credit risk.
“If a pension fund, from a strategic point of view, allocates to cash, you still want to optimise that as much as possible,” he says. Even in the current environment of low interest rates, adding a couple of basis points to cash returns is still significant when such large cash volumes are involved.
“From an absolute perspective at the moment, cash may not be interesting, but from a relative point of view, it still is worthwhile to look for additional returns,” says Nuijten.

In Austria, the APK Pensionskasse holds cash among its assets in order to give it room for manoeuvre.
“We don’t have a strategic cash allocation, because at money market rates of 2%, the money is better invested elsewhere,” says Günther Schiendl, head of investments at APK.
But, he says, if the fund takes a view that equity and bond markets are likely to follow no clear trend in the near future, but instead simply go sideways with volatility, it tends to build cash so that this can be used for opportunistic and/or tactical transactions.
“The purpose is to be more flexible to exploit, for example, extreme market movements,” he says. “If we expect the market to follow clear trends again, these budgets will be closed.”
More generally, in its cash management, as a mu-employer scheme plan, APK has a detailed cash flow profile for each plan. “We thus know at which dates which amount of money will be flowing in or out of the plan,” says Schiendl. “We tend to invest new cash along the strategic asset allocation and tactical bands. For temporary cash holdings we tend to hold money market funds, but sometimes we also use deposits.”
At APK, says Schiendl, cash should be seen as being residual, and therefore ideally be zero, the exception being where it is used for opportunistic transactions.
“Anyway, there is not so much difference between money market funds, and the impact on the plan’s performance is very limited anyway,” he says. Where money market funds are used, it is best, the fund finds, to use the straightforward funds rather than those with enhancements.
The Irish National Pensions Reserve Fund has very little cash in its 80/20 equities/bonds asset structure.
“It is only a very small amount that recognises that there will be some frictional cash in the portfolio all the time,” says Eugene O’Callaghan, head of the investment manager programme at the National Treasury Management Agency (NTMA), which manages the reserve fund.
And since the NPRF is attached to the government, then what cash there is at the E10bn fund is held with the Central Bank of Ireland. In this way, the fund receives the Euro Overnight Index Average rate for the cash balances it holds.
In the current economic environment, says O’Callaghan, there is not much scope for better rates on money. In order to chase higher returns for its cash, there are two options open to the fund, he says,
“We could invest out a bit, three months or six months,” he says. “But we have decided not to, because the bulk of our cash needs to be readily available.” Alternatively, the fund could choose to take on extra credit risk for the sake of higher returns, by keeping money with smaller banks that are paying a little bit more for it. But the logistics of this would require changes to be made at the fund.
“We would need approved counterparty limits in place, which we don’t have.”
O’Callaghan says that the NTMA has not gone to great lengths to find higher-yielding forms of cash investment. “We haven’t done a huge amount of work to decide,” he says. But then, there is not enough incentive at the moment to use the resources in this way.
“It’s been considered that the value of spending time and efforts is greater than the value to be gained,” he says. The advantage of being more aggressive in the pursuit of cash returns would not be great given current low market rates, while resources are much better spent on bonds.

Germany’s industry-wide pension fund for the chemicals sector, Chemie Pensionsfonds, has times when it holds a very high cash position, though it is not held strategically.
“Cash is normally the rest of the positions that are not invested,” says Norman Gehrke, board member for the fund. “We have strategic allocations for bonds and equities, and if we want to hedge it we normally have to sell it because normal futures hedging is too expensive for us.” When the fund takes a bearish view, assets are parked in cash.
The cash position rises to as much as 85% of total assets on some days, says Gehrke, though the average cash position across the year is 20%.
Cash, when it arises within the fund, is usually held in the fund’s clearing accounts. “Because it’s normally only for a few days, you have no opportunity to undertake real cash management,” he says, because the cash is needed again so soon.
Gehrke is also responsible for a pension union solely for employees of the HVB group. This fund holds 10% cash, and this is held for slightly longer than the cash in the Chemie fund. Instruments used here include term deposits and commercial paper. The transaction costs on money market funds are too high, he says.
The situation with the Chemie fund is quite a difficult one, he says. The fund only has around E5m in assets as yet, and bigger funds investing in equities would use futures. “They have a fixed liquidity quota, but we use a clearing account for hedging,” he says. Hedging E1m is difficult to do, and expensive.
“We make some deals in exchange traded funds,” he says. “Some things are not possible for smaller pension funds.”

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