All pension funds have cash assets, and in the past it was often a case of simply asking the custodian to place such funds on deposit. Now, however, fund managers and trustees are offered an array of instruments that not only provide a better income than that offered by the custodian, but which also involve the active management of this asset class. More added value comes in the shape of the time freed up for the administrators, who would otherwise be checking day-to-day rates and returns.
By their very nature, however, pension funds are complicated clients because of the access they need to their cash. So how should they run their cash holdings?
Klaus Kirschenhoffer of the Wacker Chemicals Pension Fund in Munich says his scheme’s approach to cash management is dictated by the cash-flow within the fund itself. “We have to calculate our monthly outgoings, which covers everything from actual pensions to the rent on the offices. Hopefully this is covered by interest from the first part of our cash investment. We calculate that around 2–3% of our fund is cash, representing around DM6m (e3.1m). Around half of this is managed on a day-to-day basis on fixed rate deposit with our custodian bank. The remainder is invested in short-term notes of between one to six months, and commercial paper.”
The fund has steered clear of out-sourcing, but this may be about to change. “We have been following the performance of some of the euro-denominated cash funds managed by German banks. The returns seem excellent and we may well move to place our cash with them in the near future. However, these are relatively new vehicles on the market, and we would prefer to watch how they perform for a little longer.”
Some funds are concerned that their cash holdings should reflect the fund’s general investment strategy. “We would look for such investment to fit in with our general portfolio and our need for investment in different sectors,” says Sten Kottemeier of the AMF scheme in Stockholm. With overall holdings of Skr200bn (e23bn) even the 1% cash element of the fund is a substantial asset.
As well as the day-to-day costs of the scheme Kottemeier points out the need for cash in other areas, “We need liquidity in our cash holding, just as we need liquidity in other areas of investment. Indeed, it is the other holdings which often dictate this. When we need to change allocations we cannot always exchange like for like, and so the balance must be taken up by using cash resources in the short term.”
AMF manages the cash in-house, and invests primarily on the Swedish money market and on deposit with the fund’s custodian bank. “Our cash investment is mainly in Sweden, although we do have a small portion in overseas holdings,” says Kottemeier. “Basically these holdings are influenced by our overall view of the market.”
Stockholm-based consultant Sverker Lindstrom at Lindstrom & Partners confirms much of what Kottemeier says. “Most Scandinavian funds only hold cash to help the liquidity of their equity portfolios, and we advise clients that this should not amount to more than 3% of the mandate. It is true that these funds do not actively manage these holdings, believing as they do, that there is enough risk in their equity investment.” He believes it is very difficult to break down this conservative approach. “The custodian banks will buy short-term t-bills, and overnight positions. One can hardly describe this as ‘active management’. Moving to a more pro-active position on this cash is probably something we should be talking to our clients about.” He believes, however, that any product would have to be very aggressively marketed to persuade funds to change their investment strategy.
On Irish fund manager gave a different view of cash holdings, saying that his funds aim was to be as fully invested as possible. “We see any cash within our portfolio as simply being held awaiting investment. As it happens, we have more cash inflow than outgoings at the moment and the excess is predominantly converted into euros and placed on term deposit for anything from three to six months, with one of a number of clearing banks we use in Dublin and London.” He adds that investing in cash funds could be a “drag on our performance” pointing out that in the medium term equity investment is preferable.
This is a particularly short-term view of cash assets, but not uncommon within the industry as a whole, as is confirmed by Jesper Jacobsen at the Danish Lawyers and Economists Fund, which holds assets valued at Dkr17bn (e2.3bn).
“Basically we try to minimise the surplus cash we have, and it would be up to our bond department to invest on the domestic money market to maximise our income.” He does not consider time deposits to be an efficient investment. “Compared with short-term bonds they are unattractive, and one can be caught short or penalised if cash is required urgently. Any surplus cash, which would be a small amount in our case, is simply held over in the fund’s daily current account.”
Deutsche Shell is in the process of harmonising the management of its European pension funds, and so Daniel Caflish in the Zurich office is able to take an overview. “Our funds are in a different position to many others in that they are purely investment vehicles. The companies within the group actually pay the pensions, and so we are able to ensure that any cash within the mandates is held for strategic reasons only.”
Given the move to bring all the funds under one roof, what can be seen as outsourcing in-house, it is surprising to learn that treatment of these cash reserves remains conservative. “It should represent no more than 5% of the mandate, and ideally much less,” says Caflish. “In most cases this is simply held on deposit, usually with the custodian, and at the moment we have no plans to change this strategy once we have completed the restructuring.”
In Geneva, at the CERN pension fund Christian Cuénod is happy to leave any cash in the hands of the fund’s global custodian. “It is difficult for us to manage this cash, as basically it is what is left over from our dealings within the portfolio. The custodian ensures we have no cash overnight, and we are happy with the situation. I must add we have never been approached about moving funds to an actively managed, outsourced account.”
There is little doubt that across Europe there is a very conservative approach to cash management. The time is ripe for funds to revisit and rethink the area.