The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Managing Cash

Managing cash may appear to be simplicity itself, but in fact managing very large amounts of cash—as in very large family portfolios or where cash has been received following a liquidity event—can be complex and, indeed, agonizing. True, the returns that are possible on cash investments, especially net of tax, are piddling. Yet, we are reminded of Henry Kissinger's remark about faculty disputes being so bitter precisely because the stakes are so small: Mismanaging cash investments rarely proves to be a complete disaster, but the failure to eke out a tiny increment of return above some benchmark can cause investors to suffer agonies wholly disproportionate to the actual harm.

Middle-income investors have a simple answer to the problem of investing cash—send it to a money market fund. But if the amounts are very substantial, that is unlikely to be the optimal strategy. In the first place, most money market funds are uninterested in receiving gigantic sums of new money from wealthy investors, especially in a declining-rate environment. The problem of investing all the money can reduce the already-low rates of return on the fund, rendering the money market fund uncompetitive versus its peers. Taking $1 billion in cash from one investor can cost the fund many more billions of dollars as other investors flee the resulting depressed returns: In a declining-rate environment the new money must be invested at current interest rates, which are, by definition, lower than past ...