We strive to get asset allocation right, but are often far too passive when it comes to the cash portion of their portfolios, and miss out on maximising portfolio returns.

Derek Alton, Head of Client Advisory at BoE Private Clients, South Africa?s biggest private client fund manager with R20-billion under management, says that once investors have decided on a cash weighting for their portfolios, they often think that leaving it in the bank is all they need to do.

Cash can work for you too

"But cash portfolio management is a very dynamic set of choices that can greatly enhance portfolio returns and a cash weighting in a portfolio need not be a passive strategy.

"Cash should sweat for you just as much as other asset classes."

Alton notes that now is a particularity important time for active cash management given that lot of assets seem fully priced in the short term.

"The equity market has had a great run, we all know about the amazing gains in property over the past few years and bonds have also performed well.

Liquidity determines cash instruments

"While it is important to stay invested in these other asset classes as part of a balanced portfolio, it is worth considering your liquidity requirements as they ultimately determine what cash or near cash instruments you should invest in and can greatly augment returns.

"For example a normal cheque account probably pays around two percent interest whereas a fixed deposit for a period of a year pays around six percent and a call deposit about five percent. Money market funds are also yielding approximately 6.4 to 6.8 percent nominal but are taxable."

Alton notes that investors should also consider preference shares ? both listed and unlisted ? with outstanding credit ratings as the yield on these instruments is around 6.8 percent.

Fixed income funds another option

"Another option worth considering is a fixed income fund which invests in government and corporate bonds, Negotiable Certificates of Deposit (NCD?s) and short term deposits. Current yields on these kinds of funds are variable and are around currently a bit higher than money market funds."

Alton points out that the optimal mix of cash investment is clearly a function of each individual?s personal circumstances, liquidity requirements and tax situation.

"Interest earned on cheque accounts, fixed deposits, call deposits and well as managed funds are liable to taxed at the marginal rate whereas dividend income for preference shares is tax free."