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The Risks of Greed and Fear

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For cash investors, there exists a delicate and sometimes frustrating balance between deciding to stretch for those additional 10 basis points in yield and the urge to recoil to treasuries when isolated liquidity issues arise.

To make wholesale judgments of any asset class or investment sector can result in unfounded generalizations that are rarely based in sound research. The investment process should involve comprehensive due diligence that reveals both good and bad qualities, whether one is in the venture capital, equity, fixed-income or cash management industries. Whether investing in asset backs, corporates, agencies or treasuries, there are often both losses and gains to be had in all sectors.

Without a focus on specific exposures among individual credits one cannot optimize the balance between risk control and return. For example, who among the readers of this newsletter would invest in the auto sector vs. treasuries in a corporate cash portfolio? While the auto sector has been troubled for some time now, Toyota Motors Corp. is one of the strongest global credits available. To choose Treasuries over this credit could cost more than 100 basis points in yield on a 90-day position as of today; certainly a loss that would be unacceptable to take on the sale of a holding. But somehow, taking that same loss up front may be more tolerable.

In corporate cash portfolios, opportunities and risk must to be analyzed on a credit-by-credit basis and guided by a clear understanding of objectives. As found in our Research Spotlight piece this month, auction rate securities were once an asset class that many felt provided a risk/reward profile that made them worth pursuing for additional yield. Unfortunately, recent failures in these securities highlight the need for strong fundamental research and prudence when seeking yield. However, should failures in this asset class prompt investors to lose confidence in credits across the board and commence a massive flight to Treasuries? Perhaps not.

Best Regards,

Ben Campbell
President and CEO

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