Managing Cash or Near-Cash

May 10, 2023

Two months ago, on March 10, Silicon Valley Bank, a large US regional bank, failed after depositors withdrew sufficient funds to cause bankruptcy. The bankruptcy of a couple of other banks soon followed. Whenever depositors can cause a bank run, people should be concerned. Alternatives to holding cash or near-cash deposits should be investigated. In recent weeks, there have been many articles recommending or promoting solutions. Although my cash is in a very large, financially sound investment brokerage firm, these developments got me thinking of near-cash alternatives.

During a period of bearishness in the broad market, as witnessed by a declining trend or cycle, I normally hold less than 100% long positions in my portfolio. I usually hold cash in the brokerage account for short periods as I constantly search for buying opportunities. Normally I seek to re-invest that cash, so the cash is okay as long as the anticipated holding period is a few days or weeks. But in the past several months, I have become concerned that the broad market is turning bearish because of economic difficulties in the US and worldwide. So, my cash levels have consistently been between around 25% to 50%. They would be much higher had I been invested in non-resource industries. Resources stocks, which is where I am mostly invested, are beneficiaries of high inflation and low-interest yields. So, I am well invested by sector but also in fundamentally sound companies.

I am now at a point where I believe my high cash position may remain that way for many months, and my cash levels have hurt my portfolio return. YTD through May 9, I earned +14.07% from equities and lost -1.16% on cash and expenses, resulting in a total performance of +10.36%. I could have remained close to 100% fully invested, but I needed to manage risk, which is Job #1 for all investors. So, rather than just holding cash, I decided today to buy the 5-star Morningstar-rated JPMorgan Ultra-Short-Term Income ETF (JPST) for nearly 50% of my cash and keep the rest on standby for purchases of Gold producer company stocks.

The JPMorgan Ultra-Short-Term Income ETF (JPST) had one of the most successful fund launches in the industry and has been a big hit for JPMorgan’s asset management business. The actively managed Fund capitalizes on JPMorgan’s reputation for cash management and does it at a low cost. The JPST Fund invests in short-term investment-grade debt and may be suitable for investors looking for a relatively safe way to eke out a little more yield than they can get from brokerage sweep accounts, money market funds, or long-term Treasuries.

The JPST Fund manager’s expertise is noteworthy, with (a) a JP Morgan portfolio management team with 22 years of average industry experience and (b) support from more than 130 dedicated short-term fixed-income professionals across the globe.

Under normal circumstances, the Fund seeks to achieve its short-term investment income objective while actively managing credit and duration exposure. As of 12/31/22, the duration was 0.29 years. The Fund invests at least 80% of its assets in investment grade, US dollar-denominated short-term fixed, variable, and floating rate debt. As part of its principal investment strategy, it may invest in corporate securities, asset-backed securities, mortgage-backed and mortgage-related securities, and high-quality money market instruments such as commercial paper and certificates of deposit.

The results have been impressive with (a) Top decile returns with top decile risk-adjusted returns since inception and (b) Fees at 0.18% that are competitively priced vs. peers. The JPST Fund (a) captured 96% of the US Aggregate Bond Index’s yield with only 5% of the duration, and (b) had a 28-bps yield advantage over money market funds.

YTD Performance as of May 9, 2023, is +1.61% on assets of $24.86 billion across 594 holdings.

The Dividend Yield as of April 30, 2023, is 4.32%. The 12-month rolling Dividend Yield as of May 9, 2023, is 2.81%.

In a volatile market environment, my decision to invest in JPST and not simply hold cash will likely improve my 2023 return substantially, which is the objective of every active manager.

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