PM’s Perspectives are a series of short interviews with senior members of Invesco’s Global Liquidity Portfolio Management Team. Get market views and insights straight from our investors at a firm with more than 40 years of successfully managing global liquidity portfolios.
Q: Liquidity investors sometimes shop for liquidity investments by searching and sorting results by 1-day yield. The highest-yielding cash equivalent often gets the click. What strikes you about this approach?
Justin: I think it’s natural for someone to use a portal to look for the highest yield possible for their assets and conduct a search using 1-day yield.
The problem is that they’re looking at yesterday’s print — which I consider stale information — to make an investment decision. A number of factors could potentially drive the 1-day yield up or down on any given day. For example, a significant swing in cashflows could have a material impact on the 1-day yield depending on the time of day the fund receives the large cash inflow/outflow.
Higher overnight funding rates driven by technical factors can also cause a spike in the 1-day yield. Depending on how a portfolio is constructed, a larger position in overnight securities may lead to a temporary uptick in a fund’s 1-day yield. Also, if a fund has a significant holding in floating rate securities benchmarked to the overnight funding rate, the resets of these securities could also provide a short-term uptick to its 1-day yield.
These are all temporary distortions that will normalize within a short timeframe. By strictly focusing on the portfolio’s daily yield, liquidity investors may not be achieving what they set out to do. In our view, the 7-day yield is a better gauge for comparing the performance of a fund within its peer group. It smooths out any short-term distortions to give a more accurate view of the portfolio’s performance.
Q: Will you talk through a real-life example?
Justin: Let’s say that I’m a corporate treasurer with cash invested in a money market fund. As of the previous business day’s close, that fund provides a net yield of 5.24%.* In my search today, I see another fund with a 1-day yield of 5.25%. Since portals allow me to easily move money between funds, I redeem the cash out of the fund yielding 5.24% and invest in the fund with a 5.25% yield — based upon yesterday’s information.
Now let’s say that some technical factors, like those I noted above, caused a spike in yield. The 5.25% yield as of yesterday’s close might revert to 5.22% as of the close of business today. I’ve now taken my cash out of a higher-yielding portfolio and reinvested it in a fund with a lower yield.
It’s like when you’re driving on the highway in the left lane and notice that the right lane is moving a little bit faster. You switch to the right lane, but soon see that now the left lane is going a little bit faster, so you switch back to the left lane — maybe you’re even a little bit behind where you started. Are you getting to your destination any faster? We believe that staying the course with a fund that has provided consistent top-tier performance relative to its peers may provide an overall better return than searching for the highest yield every day.
Q: Any closing thoughts?
Justin: With money market assets at record highs and shareholder cash flows moving from one fund to another, there are clearly a lot of investors chasing returns versus maintaining a longer-term view. We believe that the 7-day yield provides more reliable insight into a fund’s performance within its peer group than the 1-day yield. Treasurers searching by 7-day yield may make more informed decisions about investing their core cash, which can then reduce cash flow volatility within their portfolios and may ultimately lead to better outcomes.
*This is a hypothetical example for illustrative purposes only and is not intended to show the performance of any Invesco fund for any period of time.
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Justin Mandeville is a Senior Portfolio Manager for the Global Liquidity team at Invesco. He’s responsible for the management of short-term Treasury, agency, and repurchase agreement (repo) securities.
Justin joined Invesco in 2015. He began his career with Vanguard’s client relationship management group before transitioning to Vanguard’s fixed income and money market team.
Justin earned a BS degree in business administration from Pennsylvania State University and an MBA with a concentration in finance from Drexel University.
Invesco has been serving and guiding Treasury professionals efficiently through the global liquidity markets for more than 40 years. We understand the high-stakes decisions you make every day and are committed to helping you achieve the optimum balance of principal preservation, ready liquidity, and competitive yield for your short-term investments.
As of Dec. 31, 2023. Invesco Global Liquidity’s total assets under management are composed of all cash management products, including global institutional, retail, and customized vehicles.
Source: Invesco Ltd. $1.63 trillion. Investment professionals and AUM are as of Feb. 29, 2024, and include all assets under advisement, distributed and overseen by Invesco.
Source: iMoneynet. As of December 31, 2023, Invesco ranked 12th in US institutional money market managers, by AUM.
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There is no guarantee the strategies discussed will perform as intended. The investment techniques and risk analysis used by the portfolio managers may not produce the desired results. All investing includes risk, including the risk of loss.
All data as of Dec. 31, 2023, unless otherwise noted.
The opinions expressed are those of the author(s), are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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