Optimizing Separate Account WAM in a Rising Rate Environment

Abstract

• For institutional cash investors unsure of separately managed
  accounts in a rising interest rate environment, our scenario analysis
  suggests that a laddered portfolio of agency and corporate
  securities with a modest WAM could outperform the government
  money market fund proxy with negligible unrealized loss concerns
  in a rising rate environment.
• Both agency and corporate portfolios with maximum maturities of
  up to 12 months may outperform government money market funds
  in up to four interest rate hikes in a 12-month period.
• Moderate spread widening assumptions (10 bps for 1-year
  agencies and 20 bps for 1-year corporate securities) did not
  materially change the outcome.
• Maximum expected unrealized losses were limited to 0.06% or
  less of the portfolio’s value in most scenarios.
• Current financial market volatility significantly altered expected
  interest rate increases, paving the way for a moderately longer
  portfolio WAM.
• The prime-to-government conversion among money market funds
  and fund managers’ defensive positions prior to the reform
  deadline of October 2016 may provide a great opportunity for
  SMA investors running a moderate portfolio WAM.

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