The current market environment continues to confound cash investors, who face low yields and limited supply for many short-term securities, along with ongoing regulatory reform affecting money market funds and bank deposits. Complicating these issues are the questions surrounding the longer-term interest rate trajectory at the Federal Reserve (Fed) and a range of uncertainties across the global economy.

Universities investing cash to meet operational needs already face certain unique limitations; these market issues only complicate the decision-making process. Against this backdrop, it is important to construct a concrete investment framework to not only navigate these challenges but also be positioned to take advantage of opportunities.

Challenges with cash investing …

Some themes have shaped the cash investing landscape for years, while others are new and evolving:

  • Low yields: Short maturity (front-end) securities have offered investors minimal yields since the Fed dropped its policy rate to a range of 0%–0.25% in 2009. The result is that money market funds – the default choice for most cash investors – are offering near-zero returns, well below pre-crisis levels.
  • Limited government supply: Front-end securities are seeing supplies dwindle, especially within government space (in part because the U.S. government is issuing less short-term debt). With yields already compressed, a supply-demand mismatch will likely constrain the extent to which yields will rise in line with the gradual rise of the fed funds rate. (Our recent blog post offers a closer look at the changing shape of the front-end yield curve.)
  • Limited availability of bank deposits: Another default cash management option, bank deposits offer modest yields, but given new regulations, many banks are seeking to reduce the level to which they accommodate deposits.
  • Money market reform: Announced in 2014 and going into effect in October 2016, regulatory reform of U.S. money market funds will have investors examining what a floating NAV (net asset value) or potential fees and gates will mean for their portfolios.

… unique to universities

The treasury staff of a university has different needs and limitations relative to many other types of cash investors. While many individuals, for example, can rely on twice-monthly paychecks or monthly interest income when planning expenditures and investments, universities’ cash flows are more cyclical, generally tied to semiannual tuition payments but not with any definitive regularity. Therefore the amount and composition of an operating cash portfolio tends to vary dramatically over the course of the year, and ensuring consistent liquidity is challenging.

Many universities also issue debt, meaning the treasury team is tasked not only with accommodating large inflows, but also with implementing strategies for cash outlays that include interest payments on debt and (ultimately) principal paydowns. Moreover, there may be unanticipated liquidity needs over the course of a given cycle.

Lastly, there may be a question of what to do with an excess cash balance (whether temporary or likely to be permanent). This balance could be a portion of operating capital that serves as a “buffer” beyond the funds needed for daily liquidity, but for which there is no pre-specified outlay. Or these excess cash balances may be earmarked for a known outlay, but one that is several months or even years in the future.

The task facing the university treasury team becomes identifying the right amount of liquidity for a given time period in light of all the variables, while balancing the need to escape near-zero returns in many short-term investments.

Cash tiering approach – the first step is crucial

Although liquidity needs and external factors are always in flux, a strategic framework for managing university operating cash can help treasury teams navigate the shifting landscape. One time-tested framework implemented by universities around the country is a cash tiering methodology.

The basic idea is to differentiate operating cash into tiers based on the timing and liquidity profile, and invest each tier in a corresponding strategy:

  • Tier I represents the most liquid (daily) tier of a cash portfolio, typically held in money market funds, bank deposits or a combination of both.
  • Tier II represents a still-liquid portion of the portfolio, but for less immediate cash needs. Strategies in this space remain focused on capital preservation while incorporating a longer liquidity timeline, often six months to a year.
  • Tier III represents a longer-term portion of the portfolio, typically focused on growth of the cash balance and with an investment horizon of one year or more. Some universities will not have an outlay to this tier depending on their position.

The main focus in developing a cash tiering approach should be on identifying the portion of the overall portfolio needed for Tier I immediate liquidity. The majority of the potential return enhancement involves that initial “step out” from Tier I strategies into other options. Also, this is not a static process: A cash tiering approach may evolve over time along with the portfolio objectives and market environments.

What do cash tiering solutions look like?

Here are three hypothetical scenarios for universities tiering their operating cash.

  • University A held the bulk of its operating cash in highly liquid but low-yielding investments, and was looking for ways to get more yield on its cash balances. A careful assessment to differentiate tiers of needed liquidity and acceptable volatility resulted in a multi-tiered solution to invest a portion of operating cash in a combination of short-term fixed income strategies in different amounts over the tuition cycle.
  • University B wanted slightly higher returns in its daily liquidity (Tier I) cash portfolio than its current investments were providing. A highly liquid strategy that offered return potential above money market funds targeted the dual objectives of liquidity management and investment returns.
  • University C wanted to outsource some of its Tier II liquidity. A fixed income strategy targeting duration of up to 1 year offered the desired capital preservation benefits while significantly enhancing the yield versus Tier I options.

Is now the right time to engage a tiered approach?

At a minimum, a thoughtful exercise around cash tiering can help universities better understand their operating capital needs, regardless of whether they implement a different investment approach. Money market funds and bank deposits continue to offer yields well below historical norms and their inflation-adjusted returns may well be negative in the long run. We believe these trends will continue for some time.

Like many investors, university treasurers may be concerned about the effect rising rates could have on their investment portfolios, including operating cash. A tiered approach may make sense in this environment, and PIMCO’s range of strategies can offer capital preservation even in the face of rising rates. They seek to provide positive yields in several ways:

  • De-emphasizing U.S. Treasury duration, especially in the front end
  • Emphasizing floating rate securities
  • Investing in high quality credit sectors and names, which we believe will benefit from an ongoing economic recovery in the U.S.

Over time, these strategies offer the potential to generate positive returns – even in a low interest rate environment – while remaining focused on providing capital preservation, or “clipping the left tail” of risks.

Many investors are facing continuing challenges related to their cash investments. For universities, these issues are complicated by a unique set of cyclical cash inflows and often uneven outflows. There is no one-size-fits-all approach, but an important first step is to establish a consistent framework that matches the investment objectives and risk tolerances every day, and over the longer term.

The Author

Jason Kezelman

Account Manager

Paul W. Reisz

Fixed Income Strategist

Brian Leach

Fixed Income Strategist



Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Money Markets are not insured or guaranteed by the FDIC or any other government agency and although they seek to preserve the value of your investment at $1.00 per share, it is possible to lose money. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Floating rate loans are not traded on an exchange and are subject to significant credit, valuation and liquidity risk.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the authors but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.