Liquidity management, capital preservation and yield enhancement are the three main functions of cash strategies. In volatile markets, the weight of each component takes on new meaning, with significant implications for investors’ ability to meet their goals.

Takeaways

• The prolonged era of ultra-low interest rates marginalised cash strategies. However, elevated uncertainty highlighted by the post-tariff market sell-off has restored the role of cash in enhancing portfolio resilience and responsiveness.
• Cash remains crucial for liquidity management, capital preservation, and yield enhancement, but how different investor types prioritise these three functions varies according to investor mandate and risk tolerance.
• The renewed focus on cash strategies reflects a shift in investor priorities away from yield maximisation towards durability under market stress.

For much of the past two decades, cash strategies were largely relegated to the sidelines in a yield-seeking environment marked by ultra-low interest rates and accommodating monetary policies. Yet since global market uncertainty has resurfaced with a vengeance in April following US President Trump’s ‘Liberation Day’ tariff announcements, cash strategies have assumed renewed significance, enabling portfolio resilience and responsiveness.

While the fundamental functions of cash within an investment portfolio - liquidity management, capital preservation and yield enhancement - remain the same, the role of each component takes on new meaning when market uncertainty dominates through heightened geopolitical, inflation and interest rate uncertainty.

Cash is in the eye of the investor

While all investors seek to benefit from cash’s role to provide liquidity, capital preservation and yield, their priorities are not the same across all investor types (see Figure 1). Understanding these distinctions can help optimise outcomes. For example, corporate treasurers tend to prioritise liquidity. Cash is used for daily ongoing operations to support working capital, acting as a buffer against issues such as supply chain disruptions, and tactical responses to any external shocks. For this group, efficient cash management helps ensure operational continuity, service debt and meet requirements such as payroll. Safety and quick availability are crucial.

Figure 1: Priority emphasis for holding cash, by investor types

Other investors such as pension funds will likely emphasise capital preservation since their liabilities profile tends to be longer duration, often extending over decades. It may also be used as part of a broader investment portfolio to aid diversification. Therefore, the primary concern is maintaining funding ratios and avoiding losses that could undermine their ability to pay future benefits. As such, liquidity is also important at certain junctions, such as during rebalancing, payout periods or asset allocation changes. Within the investment portfolio, cash can also provide ballast to help stabilise the portfolio and take advantage of opportunities during market downturns. However, it is not a day-to-day concern as is the case with corporate treasurers.

The complexity of cash’s role increases further when it comes to insurers. Their cash obligations are contractual, depending on products on offer, and more unpredictable compared to pension funds. Meanwhile, insurers operate under strict regulatory regimes such as Solvency II, placing heavy constraints on asset choices via capital requirements, which are generally based on the risk profile of their liabilities relative to their investments.

For this group, cash strategies serve both the liquidity and capital preservation functions, aligning not only with investment goals but also capital requirements. Liquidity is needed to meet cash flow obligations, such as new claims, while capital preservation is needed to meet capital requirements. Relative to corporate treasurers, insurers are more concerned about yield since this helps them meet the financial obligations linked to their products, especially if they offer those with guaranteed returns.

Still for other investors such as family offices, cash’s role may change more drastically over time. For this group, priorities may reflect personal goals, blending a combination of strategic agility, investment values and market sentiment.

For some family offices, liquidity may play a more important role in the current environment as they require a ‘safe haven’ or as a buffer allowing these investors to fund opportunistic investments. In contrast, those with generational planning may see capital preservation as cash’s vital role. While historically less yield-driven, this group - like many others - is also re-evaluating the low-risk income potential that cash offers to meet their obligations.

Functionally resilient

Investors’ renewed emphasis on the strategic functions of cash within their portfolio represents a rebalancing of priorities in a regime change. First, cash enables access to capital without having to sell longer-term assets in potentially unfavourable conditions. This liquidity tends to be more highly prized as investors navigate volatility.

Second, cash strategies are invested in ultra-short or short duration, high-quality assets such as time deposits, certificates of deposits or commercial paper, which are relatively low risk. Cash has the ability to preserve capital during market dislocations. This function becomes more significant when correlation between asset classes converge during downturns. It serves as a hedge, mitigating drawdown in the portfolio.

Third, yield is expected to remain attractive for longer from a risk-adjusted return perspective as interest rates remain elevated; in managing the trade-off between inflation and economic growth, central banks have been slower than expected to cut interest rates. Once elusive in the near-zero interest rate environment, cash strategies have been delivering low-risk income potential and are expected to continue to do so as inflation risk is rising due to recent tariffs, further eroding central banks’ ability to ease monetary policies.

Macroeconomic uncertainty underpinned by geopolitical instability, interest rate unpredictability and increasing market stress have shifted investors’ mindset from yield maximisation to capital resilience, helping to re-assert the role of cash in portfolio construction.

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