Fund Spy

Cash is Not Always King

Benjamin Joseph, CAIA

Takeaways:

  • Cash is only one facet of liquidity management.
  • Nothing replaces a balanced and diversified portfolio.
  • Liquidity is a multifaceted, protean, abstract concept.

Cash is always helpful to meet redemptions, but it should not be the first—and certainly not the only—variable you look at when evaluating the liquidity of a fund. Indeed, the diversification of a portfolio and its overall investment process will usually prove more useful in assessing liquidity risks. For instance, the high-yield segment of the credit market is often considered illiquid. Instinctively, one might think avoiding the largest funds in that Morningstar Category and opting for one with plenty of cash in the portfolio should help mitigate liquidity risk. Unfortunately, history has proven those instincts insufficient.

Benjamin Joseph, CAIA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.