The Vanishing Yield on Cash and How to Get it Back

Has anyone noticed that yield has left the stadium! “Did you say playoffs”, “playoffs” is like saying “Did you say 1 basis point”, “1 basis point”? Seriously, it’s time Wall Street started offering solutions that can put yield back into the coffers of their clientele. Think about this for a moment, your current cash Money Market Fund (MMF), and or alternative investment vehicles own a portfolio of securities that yield 8 to 15 basis points, comes with a fee structure that if not waived nets you a negative return, or best case 1 basis point if waived. Wouldn’t you prefer to see your short term liquidity option portfolio earn 20 or more basis points in today’s market without changing your risk profile? Is there a better and safer way for cash-rich institutions to overcome the vanishing act of yield and achieve such results? At Goldman Landow Capital (GLC), we believe the answer is a resounding YES! In fact, we have successfully developed a solution for all our clients, current and new, and it’s called U.S. Treasury Liquidity Pool or Zero Fee Separately Managed Account (Z-Fee SMA). 

When developing the Z-Fee SMA our focus was on providing a safe and liquid solution for cash owners to replace their negligible MMF returns with a strategy that has all the advantages of MMF’s, none of the disadvantages of MMF’s, and can provide the type of returns that will excite the investor base. The Z-Fee SMA checks every box which institutional investors should be concerned about when deciding on where to place their cash, such as safety, liquidity, return, and the lowest fee structure possible. Z-Fee SMA’s are constructed in coordination with our clients target Weighted Average Maturity (WAM), comprised of a portfolio of U.S. Treasury Securities, all coupled with the GLC U.S. Treasury Spread Lock IORP program (The GLC U.S. Treasury Spread Lock Program is subject to a possible 0-5 day maximum maturity differential. See www.goldmanlandowcapital.com). The GLC U.S. Treasury Spread Lock IORP Program adds an additional guaranteed return component above the risk-free rate of return on the Z-Fee SMA portfolio. If you are in the camp that the MMF landscape will not improve anytime soon, and believe interest rates will continue to have a gravitational pull towards zero percent then we view the GLC Z-Fee SMA as an alternative investment for cash holders to consider as well as current Beneficial Owners of U.S. Treasuries. It is important to note, investors can manage the Z-Fee SMA WAM inhouse with or without GLC guidance, or through a third party.    

As stated in the opening paragraph MMF returns have vanished and investors have nothing to show for this asset class in terms of return. Even prior to recent money market reforms, market participants have been searching for alternative short-term investment vehicles to supplant their MMF allocations. The solutions to date have been seen in the growth of Private Liquidity Funds, Short Duration Bond Funds, and Short Term ETF’s. Data recently released by the SEC in their “Private Funds Statistic” report(1) shows overall Liquidity Funds assets increased to as much as $585 billion in 2020 Q1. According to the Office of Financial Research as of November 2020, Taxable and Tax-Exempt MMF assets were just shy of $5 trillion (2). 

Little publicly available information is known regarding Private Liquidity Funds as they are unregistered investment vehicles. What risks are the Funds’ assets subjected to, and how does the Funds’ performance compare to Rule 2a-7 MMF’s are important questions to have answered. Even though some of the Private Liquidity Funds investment strategies mirror those of Rule 2a-7 MMF’s they have the flexibility to differ in certain ways such as credit quality, maturity limits, diversification, and minimum liquidity mandates. Yes, in some instances, investors have a say in what can or cannot be acceptable investments in these funds but reaching for yield could have consequences as the risks are greater when comparing Private Liquidity Funds to Rule 2a-7 MMF’s. Because of the recent closing of or shifting of some Prime MMF’s to Government MMF’s(3) (4) astute investors are beginning to consider Private Liquidity Funds and SMA accounts for the first time. 

GLC’s market-tested U.S. Treasury Alpha PLUS strategy(5) has given birth to numerous uses for institutional investors where the common theme is to help investors earn greater returns without sacrificing safety, liquidity, or adding any additional risk factors. The Z-Fee SMA follows this mandate and we hope investors seize the opportunity to generate higher returns without introducing leverage or risk. Illustrated below is a newly constructed Z-Fee SMA portfolio based on the close of business on December 18, 2020. 

 In conclusion, performance speaks for itself as 21 basis points return, is better than zero or 1 basis point returns. We hope investors consider learning more about how GLC can work for you to improve portfolio performance with any of GLC’s U.S. Treasury based strategies. To set up a consultation call regarding our Treasury Strategy platform, please reach out to your Goldman Landow Relationship Manager or call 516-223-3932. 

(1) https://www.sec.gov/divisions/investment/private-funds-statistics/private-funds-statistics-2020-q1.pdf Division of Investment Management Analytics Office, Private Funds Statistics, First Calendar Quarter 2020

(2)https://www.financialresearch.gov/money-market-funds/us-mmfs-investments-by-fund-category/ Office of Financial Research, U.S. MMFs' investments by fund category

(3) https://www.cnbc.com/2020/08/27/vanguard-shifting-money-market-fund-to-safer-us-backed-investments.html Vanguard shifting prime money market fund to safer U.S.-backed investments

(4) https://whbl.com/2020/05/20/northern-trust-shutting-fund-in-latest-prime-money-market-stress/ Northern Trust shutting fund in latest prime money market stress

(5) https://cranedata.com/archives/daily-links/2018/10 Semper U.S. Treasury Money Market Fund Making a Difference for Investors by Mike Krasner 

Disclaimer

The information contained herein is highly confidential and is being delivered to a limited number of sophisticated prospective institutional investors in order to assist them in determining whether they have an interest in the type of transaction described herein and is solely for their internal use. It has been prepared solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. No representation or warranty is given with respect to the accuracy or completeness of the information, or that any future offer of securities will conform to the terms hereof. All associated persons, and its representatives and affiliated disclaim any and all liability relating to this information, including without limitation any express or implied representations or warranties for, statements contained in, and omissions from, this information.

The information and opinions expressed are based on sources we believe to be reliable, but we do not represent that they are accurate or complete. Any information is given in good faith but is subject to change without notice. No liability is accepted by Goldman Landow Capital, LLC, or Fox Chase Capital Partners, LLC, employees, or associated companies for any direct or consequential loss arising from this document. Fox Chase Capital Partners, LLC, is a member of FINRA, SIPC and registered with the SEC.