Cash management solutions, a safe haven?
So far in 2022, most risk assets have had a tough time. With the S&P 500 in correction territory (falling more than 10% from peak and flirting with a bear market before staging a pretty remarkable recovery recently), the tech-heavy Nasdaq close to 20% and a rout in crypto markets, many investors have turned to cash management solutions as a safe haven to ride out the volatility.
Comparing Syfe Cash+ with others, how have cash management solutions fared?
Syfe Cash+ is on track to deliver stable returns over time and achieve the projected yield target of 3.3%. Besides offering quick withdrawals with no fees and no lock-ups, Syfe’s Cash+ portfolio has never had a week of negative returns in the 2022 year to date.
On the other hand, cash management solutions such as Endowus Cash Smart Ultra which advertise much higher projected yields have experienced drawdowns of more than 2%.
Investors would have noticed the disconnect between projected yields and realised returns too. Our first instinct when comparing products is to look at their advertised projected yields. While that’s important, we also need to look under the hood to understand how these solutions are built. This is important as cash management solutions should be a port in the storm. Investors who park their assets in such a product would reasonably expect reduced volatility. We have found that the majority of our clients have short-term cash management needs, and most prefer stable returns with almost no volatility.
If advertised projected yields should not be the only basis for assessing a cash solution, how should investors decide then?
How to evaluate a cash management product?
Typically, the most common fund types used in cash management offerings are:
The duration and credit risk of each fund type influences the overall riskiness and expected returns of the cash management offering.
Here’s what we mean:
A short duration fund can provide a higher return as compared to an enhanced liquidity fund, but investors should be prepared to see more ups and downs in their portfolio value. Over a longer time horizon, short duration bond funds have generated higher returns as compared to money market and enhanced liquidity funds. As shown above, short duration funds (despite what their name suggests) have higher duration (sensitivity to interest rates) and credit risk as compared to enhanced liquidity funds.
They typically hold short-term government and corporate bonds (relatively higher default risk) while enhanced liquidity funds hold mostly high quality debt instruments (relatively lower default risk).
In the current environment of rising interest rates and falling bond prices, funds with reduced sensitivity to rates and shorter time to maturity are more defensive than those with a longer maturity and higher credit risk.
Why is this the case?
As interest rates increase, the coupon of recently issued bonds will trend higher over time. This means that a bond with more than 2 years left to maturity will be less attractive than a similar bond that was just issued.
Looking at the underlying funds of peers that also offer cash management solutions:
As a short duration fund carries more risk than an enhanced liquidity fund, cash management products like Grab Earn+, Endowus Cash Smart Enhanced and Endowus Cash Smart Ultra that hold a significant allocation to short duration funds (in grey) will be riskier than others that hold enhanced liquidity and money market funds.
How does Syfe Cash+ work?
Syfe Cash+ is made up of two fund types: a money market fund and an enhanced liquidity fund. This re-optimised allocation prioritises stability of returns, with lower duration and credit risk.
Syfe Cash+ has gained consistently on a monthly basis and was on track to achieve the previously projected returns. For instance, before the increase in projected yield to 3.3%, Cash+ met the previously advertised yield of 1.9%, having generated annualised returns of 1.96% as of 25 September 2022.
With interest rates rising, we expect Syfe Cash+ to continue serving as shelter from volatility while still offering flexibility and earning projected returns of 3.3% annually.
Fed rate hikes and cash management solutions
Cash management solutions with a higher allocation to short duration funds may continue to experience more volatility as markets navigate higher interest rates.
Syfe Cash+ is well positioned going into a higher-rate environment. Returns have been stable even as equity and bond markets sold off recently as the Fed embarks on quantitative tightening to rein in inflation. The duration of the Syfe Cash+ is around 6 months. As these underlying bonds mature, proceeds will be reinvested into higher yielding bonds relatively quickly. Gains will be passed onto the investor in time to come.
Syfe Cash+ will be revising the projected yield as interest rates continue to rise. We will share the updated projected yield when that is ready.
Is Syfe Cash+ right for you?
Syfe Cash+ is a very low risk investment that gives you higher yield than what you can get from traditional bank deposits. Whether you’re building up your emergency fund, saving for an upcoming big purchase, or setting aside funds for a dollar-cost averaging strategy into Syfe’s investment portfolios, Cash+ is the smarter home for your hard-earned money.
You can easily make a deposit or a same-day withdrawal through Syfe’s platform as many times as you prefer. Transfers are free and unlimited and there are no lock-up periods to worry about. What’s more, you’ll earn the projected return of 3.3% per annum on any amount of cash you deposit.
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