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Expert Opinions

The challenges of cash management

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What are the main cash management challenges your clients currently face?
Insurers, pension fund managers and CFOs or corporate treasurers of major European groups are the main categories of clients I meet with. And the same question comes up time and time again: is it possible to find positive returns on high-quality, short-dated assets? And if so, what level of volatility is involved?

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What are the main cash management challenges your clients currently face?
Insurers, pension fund managers and CFOs or corporate treasurers of major European groups are the main categories of clients I meet with. And the same question comes up time and time again: is it possible to find positive returns on high-quality, short-dated assets? And if so, what level of volatility is involved?
With the ECB set to halt its QE programme from year-end 2018, we know that its first interest rate hike is unlikely to come before late 2019. The deposit rate looks set to be at zero out until the second half of 2020. So we need to provide treasurers and also institutional investors with an investment solution during this transition phase.
That means we need to address two major issues:

- The negative returns on high-quality assets
- The fact that the performance of traditional money-market funds is set to decline with the money-market reforms.

What cash management solutions can they adopt?
In this environment characterised by both record low interest rates and the beginning of a cycle of monetary tightening in Europe, investors have every reason to adopt strategies that invest in investment grade, plain vanilla liquid assets. In exchange for a modest amount of volatility, that enables them to earn a zero, if not positive return over short- to medium-term maturities using their stable cash holdings.
This type of strategy capitalises on Lyxor’s recognized expertise in active fixed-income investing, using a risk-based approach, which has gathered er €17 billion in assets in four years. It is well-placed to meet the needs of our clients: coping with a hike in low interest rates while allowing for a change in monetary policy.

Why invest in such a strategy now?
- Credit spreads have widened significantly (we are now back at early 2016 levels)
- Yields to maturity on these strategies are positive net of costs with a 1-year maturity
- Investment grade fixed-income vehicles, which are thus of a very high quality, combine:

  • Liquidity, so the portfolio can be adjusted should the need arise
  • The financial soundness of very high-quality assets that carry a very low risk of default
  • A yield to maturity of zero on short- to medium-term maturities in return for accepting a low level of volatility

And so this type of solution is well-suited to the needs of our institutional