What To Do With Your Clients’ Cash

Michael Madden, Contributing Editor & Research Analyst, Wealth Solutions Report

Orion, Taiko And Helios Execs Share Views On Where To Place Client Cash In A Landscape Of Higher Rates And Recession Fears

The question of how to manage clients’ cash is much easier to answer when the markets have settled on a direction, inflation and interest rates are stable and events of instability don’t lurk just beyond the field of vision. But in the current environment, advisors can’t count on any of those factors.

Clients are asking whether they should place cash in low-risk instruments that only a couple years ago were producing almost no yield. The yield returned, and the stability calmed their nerves as the banking crisis unfolded and geopolitical instability became the norm.

Where does cash go now?

To explore how advisors should respond and proactively manage clients’ cash, we reached out to wealth management executives Chris Shuba, Founder and CEO of Helios; Rusty Vanneman, Chief Investment Officer, Wealth Management at Orion; and Dan Pazar, EVP at Taiko.

We asked each of them: “In light of the high interest rate environment, recessionary concerns and banking turmoil, what should advisors be doing with clients’ cash right now?”

Here are their responses:

Rusty Vanneman, Chief Investment Officer, Wealth Management, Orion

Rusty Vanneman, Chief Investment Officer, Wealth Management, Orion

As always, it depends on each client’s unique situation. That said, most long-term investors have and need exposure to growth-oriented investments, such as stocks, to reach their long-term financial goals. With interest rates higher than they have been, though, particularly with money market yields around 5%, many investors are wondering if they should just buy short-term Treasury bills instead of stocks. For near-term liabilities (in other words, for bills that need to be paid soon), that thinking is on the right track.

For longer-term investors, however, it is useful to remember the building blocks of any investment’s returns are the current yield, growth in that yield and changes in price and valuations. Let’s look at the current situation. The U.S. stock market’s current yield is about 1.5%, but dividend growth is currently approximately 9% per year. For international stocks, the yield is 2.4%, with dividend growth also at around 9%.

Emerging market stocks have even higher yields (3.3%) and dividend growth. There is also a strong historical tendency for stock prices to follow growth over time. As for those short-term rates, there isn’t yield growth and if securities are held to maturity, there isn’t any price appreciation either. Also, once those Treasurys mature, one must reinvest. It’s likely short-term rates won’t be as high then. Bottom line, though interest rates are higher, for longer-term investors, stocks still make the most sense.

Dan Pazar, EVP, Taiko

Dan Pazar, EVP, Taiko

Assuming that cash on hand is strategic and could be used to fund near-term needs, it is difficult to make a case for anything other than money market funds while we currently have an inverted yield curve. Money market funds yield 5% and anywhere from 5% to 6% on a tax equivalent basis in municipal money market funds for those who are in higher tax brackets or higher tax states with minimal risk.

If there is a propensity to take additional risk as part of a larger cash allocation, there are investment grade floating rate funds that are yielding anywhere from 5.5% to 6% using corporate floating rate notes.

In a similar vein, there are a small handful of ETFs that purchase AAA and AA collateralized loan obligation (CLO) bonds that have been steadily gaining traction in the market due to structural protections and near zero historical default rates on the AAA and AA parts of the stack that currently yield anywhere from 6% to 6.5%.

Neither the investment grade floating rate ETF nor the AAA/AA CLO ETFs have “stable” net asset values the way money market funds do. However, they exhibit very low levels of volatility and have minimal interest rate risk in the traditional sense.

While we like certain short-term high-yield bond funds (rated BB and lower), we believe they are too risky to lean into for a cash allocation given the potential for spread widening and downgrades in the current economic and monetary environments.

Chris Shuba, Founder & CEO, Helios

Chris Shuba, Founder & CEO, Helios

The technology rally has brought many investors off the sidelines in recent weeks, but narrow market rallies are often fragile since they are limited to a few companies. Thankfully, June has seen that rally broaden to include other large-caps, as well as mid- and small-caps. Investors face a fork in the road based on their perception of potential risks in the economy and markets.

Risk-on investors see an opportunity to enter lagging sectors, such as financials, as a deep value trade during higher interest rate periods that could be beneficial. However, risk-off investors point to the potential for a hard landing.

Therefore, bonds may be attractive due to higher current interest rates and lower potential volatility, but recent Fed comments point to more rate increases.

Our view is that investors should remain cautiously optimistic that the economy will avoid a hard landing in the near term but maintain a neutral-weight approach to risk exposure until Q2 economic data is understood and the Fed paints a clearer picture of interest rates.

Michael Madden, Contributing Editor & Research Analyst at Wealth Solutions Report, can be reached at mmadden@wealthsolutionsreport.com.

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