Despite the financial turmoil at the end of 2008 and throughout much of 2009, confidence in stock markets had rallied in the last few months. However, continued low interest rates, the tightening of Chinese monetary policy, uncertainty about the speed of the economic recovery and Barack Obama’s proposed banking reforms have again raised concerns and knocked confidence for many investors.
Given the fragile nature of the recovery and the large amount of excess capacity built up during the global recession, the earliest the central banks of major developed economies will start to increase interest rates is in the second half of 2010. However, there is a very good chance that rates will stay on hold throughout the year.
Within this current environment of historically low official bank rates and with the central banks continuing to provide vast amounts of liquidity via the various liquidity support facilities, short-term rates linked to wholesale money markets have looked uncompetitive when compared with other managed cash account alternatives. As a consequence, clients have been faced with a challenge to balance their short-term risk and return objectives with the need to identify the opportunities to invest over the longer term to achieve better returns.
Before deciding how to appropriately invest in liquidity solutions, it is important to evaluate your own liquidity profile. So how do you go about doing this?
"Products are designed to reflect varying liquidity needs that take into account time horizon, diversification, cash flow requirements and expected rate of return" said Jon Daly, Head of Treasury at Coutts. "It's therefore important to assess your own objectives," he added.
Establishing this will give you your liquidity profile which usually comprises primary liquidity, or cash needed for immediate access; secondary liquidity or anticipated expenditure in the short term; and core liquidity, the amount to be held in the mid to long term. The graph below illustrates how your liquidity profile may be broken down into these three categories; with the example provided here assuming the profile of a client with £5m of cash assets. These principles can of course be applied to cash holdings of smaller or larger amounts.
With varying features such as on or off balance sheet, instant access to fixed term products and income versus capital gains tax treatment, there are a wide range of products available in the market to meet the differing liquidity needs of investors currently re-evaluating their portfolio.
With a primary and secondary time horizon, there are a range of options including instant access and notice accounts, which offer competitive headline rates when compared to the official base rate and provide near-term access for day-to-day liquidity requirements.
As part of a core liquidity profile, there are opportunities to invest in the medium to longer term through structured products, which offer highly customised risk-adjusted exposure to conventional assets and developed markets, or provide diversification by investing in difficult to access assets and markets, for example currencies and residential property.
The experience over the past two years has led to clients being more cautious about taking on more risk whilst still looking to achieve the potential for better than cash returns, particularly those looking to maximise income from their cash holdings. Working with the investment research team, Coutts provides access to a range of core and thematic customised investment strategies, which aim to provide clients with the opportunity to diversify their exposure by holding a range of strategies covering different markets and asset classes which mature at varying times.
By way of example, the table below outlines some of the products on offer in the market depending on a client's particular profile.
|
Liquidity |
Investment horizon |
Strategy or product |
Wealth purpose |
|
Primary |
0-3 months |
- Money Market Deposits - Liquidity Funds |
Wealth preservation |
|
Secondary |
3-12 months |
- Customised Deposits - UK Treasury Bills - 90 Day Notice Account |
Wealth preservation |
|
Core |
12+ months |
- Structured products - Capital Secure Plan - Customised Notes - Long-term bonds |
Wealth preservation or enhancement |
(For more information on how Coutts views our clients' wealth, and how we help them build a wealth strategy, please read What makes the Coutts approach unique?)
With the prospect of official rates remaining at their historic lows for the coming months, it is important, in terms of both wealth preservation and enhancement, that investors find a balance. We continue to recommend that clients review their overall liquidity requirements to provide for an optimal profile of balancing near-term liquidity requirements together with identifying the opportunity to achieve the potential for higher returns through a diversified range of core liquidity investments.
Jon Daly, Head of Coutts UK Treasury Services
Related publications
