EXPLORING SEPARATE ACCOUNTS

Transcription

1 EXPLORING SEPARATE ACCOUNTS FOR INSTITUTIONAL AND FINANCIAL PROFESSIONAL USE ONLY

2 SEPARATE ACCOUNTS

3 In today s investment environment, where risks remain and meaningful returns on cash are hard to come by, institutional clients face a number of challenges when managing their liquidity and short term investments. Increasing numbers of cash investors in the US market, and more recently in Europe and the UK, are turning to asset managers to run customized investment solutions that fulfill a desire for enhanced yields while maintaining capital preservation. These portfolios allow clients to design a diversified investment solution that meets their specific liquidity, risk and return needs. Working with an external manager offers significant benefits, most notably access to specialized credit, risk and portfolio management resources. But it is the combination of these resources working to achieve your specific investment policy needs that brings the true value. In this paper we take a closer look at when to use a Separate Account, the benefits that come with these strategies using a separate account and the operational considerations they entail. Most importantly, we conclude with some tips on selecting an appropriate manager and the key principles that guide BlackRock s approach to cash management. SEPARATE ACCOUNTS [1]

4 WHY SEPARATE ACCOUNTS? One Size Fits All Doesn t Always Fit. Unlike commingled mutual fund, Separate Accounts are segregated mandates comprised solely of one client s assets. The investment strategy of the account is purely driven by the specific objectives and risk tolerances of the sole owner, often dictated by their investment policy. The sole ownership of the Separate Account allows for enhanced flexibility, as the client has greater control over the adaptation of guidelines in response to changes in their cash management strategy, investment policy or the market. There are several reasons why clients turn to Separate Accounts for their cash management needs: 1. A desire to dictate the liquidity of their investments. Money Market Funds (MMFs) are valuable investment solutions for short term cash investors, but holding cash in an overnight vehicle could be eroding yield when a portion of the investment could be termed out. Investors able to determine their liquidity needs and segment cash into maturity buckets may benefit from investing in a Separate Account. 2. A need for yield beyond Money Market Funds. The current interest rate environment translates into extremely low yields on cash investments and, while interest rates may rise, the cost of liquidity is here to stay. Regulation on short-term funding is putting downward pressure on supply and yields, resulting in an increasing cost of holding liquid, short-term investments. Clients need to adapt their investment strategies to account for this. 3. A specific risk profile. Investment policy statements and risk tolerances vary greatly across clients and can be driven by several factors the level of cash management assets, the nature of cash investments and the culture of the company. In designing a Separate Account the client is assured that their cash investments are compliant with their investment and risk policy. 4. Access to specialized resources, an extension of your treasury team. The daily demands on corporate treasury and complexity of the markets continue to rise, yet staffing levels are under pressure. Employing an external manager can ease the pressure and enhance the quality of the investment management process through direct access to specialized credit, risk and portfolio management resources. A Separate Account benefits from the asset manager s scale and relationships in the market, an active management approach and the segregation of assets. [2] SEPARATE ACCOUNTS

5 Designing an Investment Mandate The basis for devising Separate Account guidelines should be the cash management investment strategy and investment policy, although the latter is often revised with the creation of a Separate Account. It is advisable that the manager and client jointly devise the investment guidelines that will govern the Separate Account, detailing the objectives and the parameters through which the manager may achieve them. The client should be clear about their objectives, expectations and limitations; and in turn the manager should ensure any guidelines are sufficiently flexible for the objectives to be met and ensure the client has considered various angles. Items to consider when devising investment guidelines: ``Key objectives of the portfolio What are the primary drivers behind establishing the Separate Account and what is the client hoping to achieve? ``Target benchmark Agreeing on a target benchmark will ensure the investment goals are well defined and clearly understood. The benchmark provides a means by which the client and the investment manager can measure performance. Benchmarks should reflect the risk tolerances of each mandate and exhibit a high level of comparability with the portfolio s makeup (in terms of type of securities held, asset allocation and duration) in order to effectively convey risk. Benchmarks should be transparent and measurable, thereby comprised of well-defined securities with readily available prices. ``Portfolio duration and spread duration The client needs to factor in the desired duration strategy for the company s cash portfolio. By carefully defining a range of permissible maturities, clients can take advantage of the current and expected shape of the yield curve. Portfolios can be tailored to maintain adequate levels of liquidity while placing more stable cash into longer-dated securities that may improve the overall return. ` ` Cash flow and liquidity needs Effective forecasting of liquidity needs allows for the best opportunity to achieve excess returns within a cash portfolio; a barbell approach can be taken if a given level of short term liquidity is required. SEPARATE ACCOUNTS [3]

6 ``Risk tolerance Moving away from the AAA short-term end of the investment spectrum brings new risk considerations, some of which can be mitigated and others which carry compelling risk-return rewards. Quantifying risk variables can be a difficult task, but tolerances should be clearly determined to ensure expectations are met. Primary types of risk are credit risk, interest rate risk, liquidity risk and spread risk these need to be worked through with the investment manager to define the risk profile as managing these risks is integral to the successful delivery of an optimal Separate Account. ``Average and minimum credit ratings Credit ratings remain a key indicator of perceived asset quality. Clients may wish to apply a floor limit and/or an average level of credit rating to their investments. In a Separate Account, clients have the opportunity to seek exposure to, or shelter from, a specific sector, industry or issuer. Once the investment guidelines are defined, the investment manager can commence the investment process. CATEGORIES OF CASH Operating Cash Core Cash Strategic Cash Investment Horizon 0 6 months 6 12 months months Categories of Cash Regular access to cash Occasional access to a portion of cash Investment Focus Liquidity Low-risk, incremental return Varies; accessibility determined prior to investment Optimization of returns [4] SEPARATE ACCOUNTS

7 Operational Considerations The move away from a standard MMF or bank deposit into the direct ownership of securities can raise operational questions, which need not be prohibitive but should be understood. The primary operational considerations are: ACCOUNTING TREATMENT The direct investor ownership of the securities held within a Separate Account can lead to accounting and tax considerations that differ from the standard cash and cash equivalents treatment of a Constant Net Asset Value (NAV) vehicle. The mark-to-market accounting treatment of Variable NAV assets can vary from client to client depending on their reporting preferences, accounting policies and strategy for the Separate Account. Investment performance can be reported daily, monthly or quarterly and at the portfolio or individual security level. Money market securities can fall into different accounting buckets: cash and cash equivalents, short term investments, held to maturity or available for sale; and realized or unrealized gains and losses can be managed accordingly in line with corporate policy. TAX CONSIDERATIONS When it comes to tax considerations there is no general rule of thumb to follow as each client and their portfolio will have different tax implications. Separate Account clients should be aware of: ``Their domiciles tax laws that may impact the purchase, transfer and sale of securities across different jurisdictions. ``Restrictions or limits on gain/loss budgets. Good investment managers should be familiar with the process and will have appropriate systems that seek to ensure limits are managed appropriately. For detailed tax information it is recommended to contact your tax consultant. CUSTODIAL RELATIONSHIP In moving from a commingled fund to a Separate Account, the client will take direct control of the custodial relationship as well as direct ownership of the securities. In this regard the client has sole influence in the selection of both the investment manager and the custodian, the latter of which will take responsibility for the safekeeping of assets as well as undertaking administrative and transaction services. The investment manager and custodian will require a level of connectivity to ensure the smooth processing of information such as trade instructions, valuations and reconciliations. This connectivity may be in place or require a new set-up, but it is important to ensure there is a commitment to working together to achieve the necessary levels of communication to deliver the desired investor reporting. SEPARATE ACCOUNTS [5]

8 Selecting an Investment Manager Selecting an investment manager to run a Separate Account can be a daunting process, but there are a few key areas that the client should specifically review during the selection process: ``Portfolio management team In selecting an investment manager, full trust is being placed in them to run the portfolio of investments. Take the time to meet the investment manager and ensure their views and experience are credible. Decide what differentiates someone from the pack. ``Credit and risk management resources A strong portfolio management team is only as good as the resources supporting them. The credit process and risk management is fundamental to any successful cash investment strategy. Look for a well-resourced, experienced credit team and an independent risk control function. ``Track record Promising results is easier than delivering them, especially consistently and over different cycles. A manager should have a track record across a set of portfolio strategies that can illustrate their historical success, particularly during challenging periods. ``Management fees You get what you pay for, but scale reduces costs. A Separate Account offers a highly tailored investment solution but the management fees need not exceed your current charges for MMF investments. ``Reporting and client service An investment manager may produce standardized or custom reporting on the Separate Account. Ensure you are satisfied with the level of detail and frequency to ensure transparency at all times. [6] SEPARATE ACCOUNTS

9 THE BLACKROCK DIFFERENCE Managed by Our Experts. Guided by Your Goals. At BlackRock, we work with each client s risk tolerances, specific guidelines and liquidity needs in the development of a Separate Account strategy. 1. With over $286 billion in global liquidity assets under management* we benefit from extensive issuer relationships, giving us excellent access to the market for the benefit of our clients portfolios. 2. The Separate Account portfolio management team has over 16 years average experience. Having weathered a number of financial market environments, we approach our fiduciary duties by understanding our clients, preparing for worst-case scenarios and leveraging a wealth of opportunities and relationships in the market. Our clients have access to the portfolio management team as required should they have any questions on their portfolio. 3. The portfolio management teams facilitate regular, ongoing informal communication among BlackRock s 200+ sector specialists, which include research professionals who cover corporate, sovereign and municipal issuers worldwide, as well as structured products such as asset-backed, mortgage-backed, and commercial mortgage-backed securities. 4. Risk management is a core component of BlackRock s culture we work with clients to ensure their Separate Account meets cash requirements while minimizing risk. 5. BlackRock provides scale and expertise, managing over $47 billion worth of separate accounts globally. 6. Every client has a designated global relationship manager acting as a single entry point into the wider BlackRock and point of contact for your account. At BlackRock, we believe that cash management strategies are as unique as our clients themselves and we work to find the optimal solution to meet your needs. By using a Separate Account, we are able to partner with you to deliver a solution that matches your needs for safety, liquidity and yield. *As of September 30, SEPARATE ACCOUNTS [7]

10 Qualifying Questions To determine the potential benefits of a Separate Account to your business, consider the following questions which can be discussed with your BlackRock Relationship Manager. 1. How are you managing your cash today? What vehicles are you investing in? How far out the yield curve are you investing? 2. What are your key challenges and inefficiencies? What is the primary driving factor for your cash management review? 3. Have you been able to segment your cash into operating, core and strategic cash buckets? a. If yes, what are your key objectives for each segment of cash? Are there existing guidelines that reflect each segment? b. If no, do you have well defined liquidity needs for your cash? 4. Do you have an existing investment policy? a. If so, can the policy be modified and what is required to modify the policy? b. If not, your investment manager can provide guidance around key factors to include. 5. Are you willing to consider potential changes to your operational set-up? For example accounting, tax treatments and reporting requirements? SEPARATE ACCOUNTS

11 Contact Us For more information, or to discuss anything raised in this paper please contact us. Call Visit blackrock.com/cash SEPARATE ACCOUNTS

12 WHY BLACKROCK BlackRock helps people around the world, as well as the world s largest institutions and governments, pursue their investing goals. We offer: } A comprehensive set of innovative solutions, including mutual funds, separately managed accounts, alternatives and ishares ETFs } Global market and investment insights } Sophisticated risk and portfolio analytics We work only for our clients, who have entrusted us with managing $4.5 trillion, earning BlackRock the distinction of being trusted to manage more money than any other investment firm in the world.* * Source: BlackRock. Based on $4.5 trillion in AUM as of 9/30/15. Important information This material is for distribution only to those types of recipients as provided below and should not be relied upon by any other persons. This material is provided for informational purposes only and does not constitute a solicitation in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. This material may contain forward-looking information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of yields or returns, and proposed or expected portfolio composition. Moreover, where certain historical performance information of other investment vehicles or composite accounts managed by BlackRock, Inc. and/or its subsidiaries (together, BlackRock ) has been included in this material and such performance information is presented by way of example only. No representation is made that the performance presented will be achieved, or that every assumption made in achieving, calculating or presenting either the forward-looking information or the historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein by way of example. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of October 31, 2015 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. 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If any funds are mentioned or inferred to in this material, it is possible that some or all of the funds have not been registered with the securities regulator of Brazil, Chile, Colombia, Mexico, Peru or any other securities regulator in any Latin American country, and thus, might not be publicly offered within any such country. The securities regulators of such countries have not confirmed the accuracy of any information contained herein. No information discussed herein can be provided to the general public in Latin America. Although a money market fund seeks to preserve the value of one s investment at $1.00 per share, it is possible to lose money by investing in a money market fund. Investment in a money market fund is not similar to making a bank deposit. This investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or by any bank or governmental agency. 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