We often get questions about a problem all asset managers face: a client requests you to sell some of his/her/their securities, to free up cash that they plan to withdraw. Between the time that the cash is created and it’s finally taken by the client, it’s sitting in the account, impacting the portfolio’s return. What options does the manager have? There are a few:
- You can leave the cash there and accept the impact. When reporting to the client, you can explain that the cash diluted the return and that you would have invested it if you could have, but at the client’s request, it was created for them.
- You can move the cash out immediately into a “temporary account.” This account would be on YOUR system (i.e., the custodian doesn’t know about it), and would segregate the cash you raised from the account and any other cash that may be there (i.e., cash you can invest).
- You can move the cash into a different cash “bucket” (or pseudo security), which you would flag as being “unmanaged,” so that it isn’t included in the returns.
Once the cash is created it’s nondiscretionary, is it not? When it was invested it was under your control, but once you create it for the client, you cannot invest it, and so it should arguably be segregated. By moving it into a temporary account, you accomplish this. Also, if you can move it into a different security category and simply give it a different name (“non-discretionary cash”) which you’ve flagged as unmanaged, your return calculation will exclude it.
Some of our clients raise cash for clients who say they’ll take it immediately, only to find that the cash is still there weeks (or months) after it was raised. It’s unfair for the cash to impact the return when the manager can’t invest it. It’s just like any other unmanaged or nondiscretionary asset: it should be excluded from the return. Have some other thoughts? Please share them.