Cash & Liquidity Management

Tough times are the right time to think about ultra-short duration strategies

Published: Oct 2017
J.P. Morgan Asset Management Thought for the Month – building stronger liquidity strategies – let's solve it.

October 2017

In today’s volatile, low-yield world, where corporate treasurers are working harder than ever to generate the returns they need from short-term cash, ultra-short-duration strategies may represent an increasingly attractive proposition.

The current environment is driving a tangible shift in the way clients think about their investment strategy, with investors with a longer investment horizon and a higher tolerance for volatility increasingly segmenting a portion of their more stable cash balances in pursuit of additional returns. Fund options for cash that fit this profile tend to sit outside of traditional money market funds and are typically managed in a variable net asset value (VNAV) structure, where the focus is on total rate of return.

Restrained rate rises for now

In the short term, we expect to see relatively restrained rate rises, but we still believe that the current thesis of low relative rates remains intact. Against this kind of backdrop, ultra-short-duration strategies can look even more attractive when looking at the potential incremental return vs. cash alternatives, which are essentially locked to base rates.

Responding to the short-term cash challenge

Our range of funds that apply our innovative ultra-short-duration Managed Reserves strategy in various jurisdictions, respond to the challenges facing corporate treasurers, such as our sterling-denominated fund, launched last summer. Investing primarily in short-term investment-grade sterling debt securities, the fund is specially designed for investors with longer investment horizons who are looking for a higher level of return than money market funds can deliver, while still aiming to preserve principal over a longer time horizon.

All the funds in the strategy come with a maximum portfolio duration of one year (with a three-year final maturity limit) vs. 60 days weighted average maturity (WAM) (with a 13-month final maturity limit) for our AAA rated funds. What’s more, the sterling-denominated fund has the flexibility to invest down as far as BBB (as opposed to A) and is structured as a VNAV vehicle and is therefore marked-to-market.

Targeting enhanced returns in a low-rate world

A low-rate environment doesn’t mean you can’t make money. In a world where the neutral rate is far lower than historical levels, an ultra-short duration strategy structure can give investors greater potential to benefit from enhanced returns. In addition, strategies that aim to beat the return of liquidity funds by 20-40bps may appear to be setting their sights low in a “normal” environment. The current low-yield environment is far from normal, but if it’s here to stay – for now, at least – these low-volatility, incremental returns undoubtedly have the potential to make a big difference to corporate treasurers.

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