CASH IS KING - Abbot Downing

1 CASH IS KINGS trategies for Utilizing Cash in Your Portfolio3 cash is king : Strategies for Utilizing Cash in Your PortfolioIn this white paper:Introduction 4 Fortress Balance Sheet 4 Excess Cash 5 The Risk of Cash 6 Matching Assets to Liabilities 7 The Current Market Environment 7 Utilizing Cash in Turbulent Markets 8 Underpriced Risk 10 Options for Investors 10 Index and Other Definitions 11 TABLE OF CONTENTS4 cash is king : Strategies for Utilizing Cash in Your PortfolioCASH IS KINGS trategies for Utilizing Cash in Your PortfolioIntroductionCorporate America is doing it, so why shouldn t individual and institutional investors do it too?

2 In this case, it refers to creating a so-called fortress balance sheet. Our interpretation of a fortress balance sheet is one that provides protection and downside risk management by holding excess cash and cash alternatives to retain liquidity. The king of this conjectural fortress is cash often thought of as the core foundation to a strong balance sheet due to the known and consistent outcome it delivers, hence the phrase cash is king . Cash and cash alternatives are oftentimes typecast as a no-risk, no-reward placeholder having little defined value within a portfolio.

3 Beyond the typical allocations within a diversified portfolio, the purpose of holding cash and cash alternatives can range from reducing the swings in total portfolio market value to being able to quickly take advantage of investment opportunities that may present themselves. Therefore, investors should consider this sometimes misunderstood asset class for proper use in meeting their investment objectives and goals. Understanding the inherent risks, potential benefits, and various applications of utilizing this frictionless quick asset is paramount in a market environment ripe with underpriced risk.

4 Global stock and bond markets continue to reach all-time highs and volatility is expected to increase. Holding cash as an offensive tool to take advantage of market dislocations may prove to be a prudent measure and could add nimbleness to an investment Balance SheetToday, corporate America s balance sheets are showing more cash on hand than they have ever shown Chart 1 reveals that the amount of cash on S&P 500 corporate balance sheets (in aggregate) has grown almost eight times since 1995. Over this same 20-year time period, S&P 500 corporate cash as a percentage of respective current assets has almost doubled, signifying an escalation to the most liquid portions of total current assets.

5 Safety might appear to be the foregone conclusion; however, there are other conceivable benefits to companies with heightened levels of available cash. Increased dividend payouts or stock buybacks, as well as the potential for future growth through mergers and acquisitions or research and development, can all add value for is KingThe term cash is king simply refers to the apparent importance of having cash on the books. Although the origin of cash is king is not clear, it was used shortly after the global stock market crash in 1987 by Pehr G.

6 Gyllenhammar, who at the time was Chief Executive Officer of the Swedish car group and cash alternatives are short-term, high quality, and easily accessible funds that are freely convertible to known amounts of In addition to money held in the form of physical currency notes and demand deposit accounts, cash alternatives can take the form of money market holdings, stable value funds, short-term government bonds, Treasury Bills, marketable securities, and commercial paper, all maturing within 90 days or less. Recognizing that all of these ultra-short-term assets are not equal and distinguishing the make-up of your specific cash and cash alternatives is a vital is king : Strategies for Utilizing Cash in Your PortfolioLike their corporate counterparts, individual investors can also benefit from constructing fortress balance sheets by accumulating cash.

7 Dedicating funds to cover future expenditures (such as charitable distributions, tax payments, and other likely expense requirements) can help determine appropriate amounts of cash to stockpile. At Abbot Downing , this latent necessity might be discovered during the goals and risk assessment phase or during ongoing monitoring. Requirements for cash and liquidity should be incorporated into a sound Investment Policy Statement (IPS). Executing this defined investment plan is a crucial building block of portfolio management. As part of the IPS, a formal spending policy can be used to account for recurring and even non-recurring portfolio outflows by assigning extra cash on hand to serve as the first line of defense against impending CashOne has to save before investing.

8 Saving constitutes money set aside to serve an expected future purpose, generally growing slowly over time while taking no meaningful risk. Beyond mere saving, allocating to additional cash reserves can serve as ballast to provide stability for a portfolio and could also prove to be a wise investment decision during times of market uncertainty. The tactical approach of reserving excess cash can also allow the investor to take advantage of any future investment opportunities with minimal portfolio Balance SheetThe term fortress balance sheet has been cited in print since at least 1987 and was popularly used by Morgan Chase s Jamie Dimon to describe his firm s balance sheet during the financial crisis of 1987 to 1988.

9 A fortress balance sheet can be applicable to both corporations and individuals, and refers to one that is perceived to hold ample capital to withstand a downturn in business and economic conditions. There is no exact definition, and as such there may be different opinions, but the concept is merely a reference to offering protection during times of uncertainty and economic : FactSet, 12/31/15 Aggregate Corporation Cash (USD)Cash as Percent of Current Assets (%)2015201020052000199532%30%28%26%24%22 %20%18%16%$ Million$ Million$ Million$ Million$1 Million$800,000$600,000$400,000$200,000 Chart 1: Rising Cash on S&P 500 Corporate Balance SheetsAggregate Corporation CashPercent Cash of Current Assets6 cash is king .

10 Strategies for Utilizing Cash in Your PortfolioModern portfolio theory3 does suggest that although holding cash over the long term will most likely earn a lower expected return than other higher-risk assets, the role of cash as a portfolio volatility dampener should also hold true to form by lowering overall portfolio risk. Another attribute of cash is its theoretical zero-correlation to other risk asset classes ( , stocks, bonds, REITs, commodities, etc.) which can be beneficial in the context of maximizing risk-adjusted returns within the total portfolio (see Table 1).