Strategic cash opportunity for pension trustees

Pension fund trustees have an ideal opportunity to demonstrate their prudence, enhance their investment portfolio returns and reduce overall risk simply by increasing the cash weighting within a portfolio mainly at the expense of bonds.

The cash call comes from STANLIB, the country's largest unit trust company and a leader in the active management of cash and fixed-interest products.

Significantly increased cash allocations within a pension fund's investment portfolio need not be a knee-jerk reaction to current volatility. Prudent upweighting of money market allocations represents astute exploitation of a strategic opportunity, says Patrick Mamathuba, CIO at STANLIB.

"It's time to review asset allocation strategy as the money market has become an extremely attractive asset class on a risk-adjusted basis," he/she adds.

"Cash is generally regarded as the lowest risk asset class, yet it currently generates higher yields than bonds and other fixed-interest alternatives. Yields on cash are close to 10.5% on 3 month paper and almost 11% ON 1 year paper, for relatively low risk at a time of equity uncertainty.

"Upweighting of cash while ensuring inflation-beating returns would find favour with most retirement fund members and certainly makes sense in view of the comments about reasonable risk and return expectations in the recent Financial Services Board document on the Good Governance of Retirement Funds."

The repro rate is currently at 10%. STANLIB expects the rate to remain unchanged for the rest of 2007, but the risk is to the upside. CPIX hit 6.4% in June and STANLIB believes it will peak at 6.9% for the year. Consumer credit demand may moderate, in STANLIBs view, but corporate credit demand can be expected to remain robust on the back of increased fixed investment spending.

Mamathuba says all of these factors support the risk-adjusted case for stronger strategic allocations into the money market.

"At the current stage of the economic cycle the money market should not be viewed principally as a temporary parking place for spare cash," says Mamathuba "We believe there is a strong case for strategic upweighting into 2008.

"Movements into The STANLIB Corporate Money Market fund and some of the growth in our segregated cash management portfolios suggest that this view is shared by many clients in the corporate sector. At the moment, however, there is less evidence that retirement funds are carrying out major strategic reviews to upweight their cash holdings. Perhaps they should."