Does your inflation-fighting toolkit need a cash ladder

13 July 2022      Matt Sisson, Projects and Membership Manager

Richard Lubbock, Charities Client Director at LGIM, explains how a cash laddering solution can be part of your inflation-fighting toolkit, by moving up and down the risk and return spectrum according to liquidity and timing requirements.


Central banks in developed markets around the world are tightening monetary policy, trying to rein in rampant inflation and prompting volatility among financial markets. Against this complex backdrop, investors are likely to be thinking about their organisation’s cash positions, wanting to ensure sufficient funds are on hand for grant-making and operational expenses.

What’s in your inflation-fighting toolkit?

Just as a good old-fashioned ladder is a staple for DIYers, a cash ladder may be just the right addition to the inflation-fighter’s toolkit. This is a tiered system of investments in strategies such as money market and absolute return bond funds.

We believe an efficient cash-laddering solution, taking into account different return and liquidity requirements, has the potential to improve real returns on cash portfolios whilst seeking to mitigate risk.

Cash laddering may put cash at hand to work by:

  • Increasing the expected return on liquidity portfolios
  • Seeking to safeguard against rate volatility and cash drags
  • Offering the benefits of counterparty and issuer diversification
  • Providing daily liquidity no matter which laddering strategy is employed

By combining a selection of money market and absolute return bond strategies in a cash ladder, we believe it is possible to increase the expected return of a portfolio, while retaining sufficient stability and liquidity for clients who need to keep a pot of money readily available. Money market and absolute return bond strategies seek to provide varying levels of expected return for a given level of risk over different investment horizons

Step by step – the cash ladder explained

Money market and absolute return bond strategies seek to provide varying levels of expected return for a given level of risk over different investment horizons

On the first rung of the cash ladder are money market funds, which seek to offer investors capital stability and daily access to operational cash. They aim to achieve this by actively investing in a diverse pool of ultra-short-term assets issued by governments, high-quality banks and financials. Money market funds are designed for investors looking for low volatility and high liquidity, with a typical investment horizon of 0-6 months. The flexibility, daily access and diversification on offer make money market funds a potentially great alternative to term bank deposits and bank accounts, in our view.

The next rung comprises liquidity plus funds. Like money market funds, liquidity plus funds aim to offer investors capital stability to operational cash, but with the added potential benefit of enhanced potential returns. This is achieved by investing in the same diverse pool of issuance as money market funds but over a slightly longer time horizon, with extended duration limits. Liquidity plus strategies are designed specifically for investors who have expected known cashflows over an investment horizon of 6-12 months. These also offer flexibility and diversification benefits, making liquidity plus strategies an alternative to term bank deposits.

Further up the ladder are absolute return bond and absolute return bond plus strategies. These generally invest in investment grade credit securities and have flexibility to invest smaller amounts in high yield bonds, currencies, emerging market bonds and asset-backed securities to potentially increase the portfolio yield.  

Given the greater exposure to risk assets, emphasis is placed on risk management to minimise drawdown and preserve capital; to this end, interest rate risk is actively managed. We believe these strategies may be suitable for investors looking for additional returns on cash that is not necessarily needed over at least a 12-month horizon.

Diversification can make all the difference

More broadly, we believe diversification through investment solutions like cash ladders is key to achieving more reliable returns while seeking to mitigate risks. Banking with one institution could potentially be risky if that bank defaults on its contractual obligations. Investing in a multi-investor pooled fund, however, spreads out counterparty risk as investment managers trade with multiple counterparties on your behalf.

Investing in funds can also limit issuer risk and provide exposure to underlying instruments that are issued by companies and governments across many sectors and regions. This could reduce the negative impacts on the overall portfolio in case an issuer defaults on its coupon and/or principal repayment. 

Another important aspect of investing in funds is that investment managers can aim to engage with or exclude issuers, in order to achieve environment, social and governance (ESG) outcomes and limit or curtail risks.

Important Information: For professional clients only. Past performance is not a guide to the future. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Assumptions, opinions and estimates are provided for illustrative purposes only. There is no guarantee that any forecasts made will come to pass. Views expressed are of LGIM as at 11 May 2022. The Information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272.

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