CASH FLOW MANAGEMENT

THE CHALLENGE

How can I improve portfolio liquidity and cash flow management?

In a lower for longer environment, with considerably lower yields compared to the historical average, pension funds and insurers are increasingly becoming cash flow negative. The ability to meet liabilities is being challenged.

THE ACTION

Liquid beta sleeves, constructed using ETF building blocks, help investors avoid holding excess cash, and enable them to stay invested and closer to their strategic asset allocation (SAA) without compromising on liquidity.

Option 1 - Money market fund

Money market fund

Option 2 - 5 ETFs designed to replicate the SAA below

5 ETFs designed to replicate the SAA

Total Expense Ratio: 16 bps - Resulting Tracking Error to SAA: 1.1%

Source: BlackRock, as at May 2020.
For illustrative purpose only.

THE OUTCOME

The client replaced a portion of their cash with a combination of ETFs, which were designed to closely replicate their strategic asset allocation (SAA).

By keeping the portfolio in line with the SAA, the portfolio was able to reduce cash drag.

WHY INDEXING?

Understanding that not all liquidity was needed on a T+0 basis, the client was able to take on additional risk to help reduce the funding gap.

Case studies are for illustrative purposes only; they are not meant as a guarantee of any future results or experience, and should not be interpreted as advice or a recommendation.

Risk: Diversification and asset allocation may not fully protect you from market risk.

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