Cash is a hot topic right now – equity markets are volatile, and investors are nervous. We know that attempts to time the markets don’t generally lead to strong returns over the long-term, so cash solutions can be a good route to phasing money into investments during volatile periods.
A ‘pound cost averaging’ approach helps to smooth risk on entering the market and can provide a healthy yield too.
The PIM Sterling Solution is Parmenion’s answer to cash-like investing.
A cash like solution can be used for different advice challenges. In retirement, it allows funds to remain within the tax wrapper while being de-risked to meet the client’s need. Equally, it allows for a bucketing approach to investing, matching client pots to spending needs or different time horizons.
In today’s markets, nerves about making the jump into investing are understandable. Investing in a money market solution, on an investment platform, makes the process of putting the cash to work in an investment focused solution at the right time smooth and seamless – whether that’s investing all in one go or through phasing.
And whilst yields move up and down, it currently offers 5.2% as of August 2023. This is comparable to instant access bank accounts1 and longer dated fixed term deposits2 (as of the date of this article). But unlike fixed term deposits, the money in the Sterling Solution would typically be available for reinvestment within a 1-day settlement period.
During the financial crisis of 2008-09, so-called money market funds didn’t offer the same security as cash, so it’s not surprising their credibility is often questioned. However, regulation has moved on dramatically and the types of investment that managed liquidity funds are allowed to invest in today are far more secure.
As with any investment, the more return you want, the more risk you need to take. Our focus with Sterling is to make sure that the funds we invest in are extremely liquid, so we take less risk. Whilst there’s never a guarantee, your clients can have greater confidence that they’ll get their investment back.
That’s why both funds within the solution currently follow the regulatory framework for a Low Volatility Net Asset Value (LVNAV). This gives confidence that Net Asset Value should go up in all but the most extreme circumstances.
The 3 main money market fund types
- Public Debt Constant Net Asset Value (CNAV) - this sticks to a fixed unit price and represents Short-Term Money Market Funds
- Low Volatility Net Asset Value (LVNAV) – this is another Short-Term Money Market Fund and will stay at a constant price, as long as its asset values don’t deviate by more than 0.2%
- Variable Net Asset Value (VNAV) – this runs on a mark-to-market pricing so will experience more fluctuations
All money market funds have strict investment criteria and regulatory requirements for diversification and liquidity of the underlying investment. For the LVNAVs we’re currently invested in those requirements are particularly strict:
- At least 10% of the fund must have daily liquid assets.
- At least 30% of the fund must be maturing within 1 week.
- Weighted average maturity (WAM) of the fund must be no more than 60 days.
- Weighted average life (WAL) of the fund must be no more than 120 days.
- Fund is rated AAA by Fitch credit rating.
By investing in funds that meet these investment restrictions, it helps make sure we meet the liquidity requirements and risk profile of the solution.
Don’t lose sight of the bigger picture
There’s no question about the appeal of cash right now. It’s offering the strongest yield for nearly 20 years3 and there’s lots of market uncertainty to boot. However, in our view, looking past near-term volatility, the outlook for a multi asset portfolio is attractive, with the defensive asset classes offering the best outlook for returns in years. This is also reflected in our capital market assumptions (CMAs) for the next 10 years.
That said, we know how nervous your clients might be feeling right now. Our Sterling solution can help you address their near term concerns, while you remain in control of the assets, with quick and seamless access to a standard investment portfolio at the click of a button.
- moneysavingexpert.com/savings/savings-accounts-best-interest/#easyaccess (accessed on 30/08/23)
- moneysupermarket.com/savings/goals/ (accessed on 30/08/23)
- bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate (accessed on 30/08/23)
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.
Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.