Woodstock Quarterly Newsletter / Q2 2020
At Woodstock, 85% of our assets under management are in portfolios for which the benchmark is an 80% equity and 20% intermediate bond portfolio. We concentrate our attention on high-quality US equities. The process we go through with every client to assess their comfort with their asset allocation strategy partially involves determining their cash needs over the next twelve to twenty-four months. Does the client have enough liquid resources (cash or cash equivalents) to avoid selling stocks in a down market, if not desired for other reasons? On an individual client basis, it is making sure that liquidity is adequate to avoid making a bad long-term investment decision.
On a macro or economy-wide level, the concern is allowing a liquidity crisis to become a solvency crisis. Would liquidity constraints cause companies or institutions to be unable to pay their bills as they come due? The recent federal CARES legislation provides backstops for liquidity of money market mutual funds, which are the vehicles most used by investors for the cash or cash equivalents portion of their portfolios. During the financial crisis in 2008 and 2009 doubts about the solvency of some money market funds forced government backstopping of them to prevent a liquidity crisis for some investors. During that crisis some institutions, see Harvard University, invested the cash portion of their portfolio in what turned out to be illiquid vehicles, forcing the sale of easily marketable investments, stocks, albeit at depressed prices, to be able to pay their bills as they became due.
Investors today, in the midst of this fast-moving medical crisis, have the choice of a money market fund or a checking account at a bank. Investment in either type means that you are merely the creditor of the real owner of the underlying asset or a creditor of the bank. There are a variety of money market funds and a variety of investment vehicles at banks, some guaranteed by the federal government. The higher the interest rate earned, the less liquid the investment might be, as some Goldman Sachs investors found out recently. There are investment vehicles that try to combine the ease of mutual funds with the federal deposit guarantee provided to bank accounts.
Talk to your investment manager about how comfortable you want to be with the cash portion of your portfolio. With interest rates so low on even risky cash investments, the penalty for being more secure is not much.
William H. Darling, Chairman & CEO
Adrian G. Davies, President