Thought Leadership / Commentary / Hidden Cash In Portfolio Hampers Returns: Where Do You Find It? – Part 1
Posted by Mirador
Written by MICHAEL GAULT
The author, Michael Gault, head of Expert Services at Mirador, the managed services firm in the wealth management industry, has these thoughts about how many ultra-high net worth individuals are unaware of how much liquidity they have across their investment accounts. This “hidden cash” is caused by investors thinking that “cash” refers only to what is deposited into the various banking accounts. The reality is much different and includes many more instances, such as money market funds within investment accounts. Moreover, Gault says, diversified strategies across investment accounts also create lingering instances of ‘cash’ that can be put to better use.
In the first part of the article (the second half will be published later) Gault explores options and what investors and advisors should think about the topic. The editors are pleased to share these views and invite readers to comment. Jump into the conversation! The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com
Most investors have too much cash lying around, which is costing substantial amounts in lost opportunities. For ultra-high net worth investors – those investors with at least $30 million in investible assets – this problem is exponential. This phenomenon exists in spite of how the market is performing. It does not matter if it is soaring, stumbling, or stagnant; all the same, this is a problem.
Historically, UHNW investors have kept a higher percentage of cash in their portfolios when compared with other investors across all asset brackets. This usually is at around 10 to 11 per cent. This over-indexing on cash for the UHNW person is done by design. In uncertain times, there is a benefit to maintaining such high liquidity, which enables UHNW investors to take advantage of lucrative opportunities as they arise. However, due to common misconceptions and oversights, the amount of cash investors actually hold onto versus what they think they’re holding on to varies greatly.
Why?
This discrepancy exists because of what investors perceive cash to be. When investors think of cash, their mind jumps to available funds deposited in checking accounts, savings accounts, or CDs held at their primary financial institutions. In reality, the definition of cash is much broader than what is assumed, creating a whole pool of hidden cash that the UHNW person (and many investors) typically overlook. When thinking of cash, investors and their wealth managers need to also look at cash that exists as idle funds held in zero- or low-interest money market accounts.
Furthermore, the diversified strategies often deployed by UHNW investors across multiple accounts create additional complexities and potential places where hidden cash is overlooked. Cash may linger in these accounts for a variety of reasons, such as:
• Having liquid funds available to take advantage of opportunities presented throughout the market cycle;
• Ensuring that funds are available to cover fees and margin calls without breaking into long-term investments;
• For anticipated large purchase needs (that are often over-estimated); and
• A desire to maintain liquidity for a “rainy day.”
How should investors effectively “find” this cash?
This type of cash is often overlooked by UHNW investors because of the volume of managed accounts and a more direct focus on higher-priority investments. Investors are reasonably more concerned about active gains and losses, and pay less attention to passive accounts that include low or zero-interest accounts, rainy-day funds, and other hidden cash places. Finding hidden cash comes down to optimizing and enhancing reporting practices and eliminating disconnects that happen when there are ”too many cooks in the kitchen.”
To get to the bottom of this matter, managers must first optimize their performance reporting liquidity analysis. This is where modern portfolio reporting technology can be particularly useful by providing a holistic overview of a portfolio, assuring investors and their advisors that future cash requirements can be easily fulfilled, thus promoting peace of mind. Adopting sophisticated reporting tools that help create a clearer picture of the entire portfolio. Once a reliable and consolidated way of reporting is in place, identifying pockets of hidden cash becomes a lot easier. When properly structured, the liquidity report can reveal never-before-seen insights into a client portfolio, including the current cash position across all investment accounts, as well as future liquidity over different time periods. These reports can also offer an accurate and current picture of the portfolio by monitoring asset allocation (including the percentage held in cash) across all accounts in real time.
Once the hidden cash is found, then it’s up to the manager and client what to do next.
