Stable Returns in a Volatile Investment Landscape
by Neil Hutchison, Executive Director, J.P. Morgan Asset Management
2016 will be remembered for many reasons, but from a corporate perspective one of this year’s headlines is that corporate cash holdings have increased once again. Moody’s reported in May 2016 that cash holdings amongst US corporations alone had reached $1.7tr, $1.2tr of which is held outside the United States. However, this is a global phenomenon, affecting treasurers of companies headquartered around the world. Higher cash levels make it more difficult for treasurers to find appropriate repositories for cash that meet the company’s investment criteria, on top of the ongoing challenges of low or negative interest rates and significant regulatory change. In this environment, an investment choice that is growing in popularity is step-out investment strategies, allowing treasurers to seek greater returns and diversification on portions of their cash.
Challenging investment conditions
It is not only unprecedented corporate cash levels that should be prompting a re-evaluation of cash investment strategy. Most investors have become accustomed to low and negative interest rates in G10 currencies such as the euro, so sterling was a ‘safe haven’ for many. However, the result of the Brexit referendum has also seen sterling rates pushed down from 0.5 to 0.25%. While we are less likely to see sterling hit negative territory compared with the euro, it is now expected that rates could fall further to 0.15 or 0.1%. For investors in money market funds, this means that once returns on cash are calculated net of fees, they will effectively reach zero. Another consideration is the impact of regulatory change. For example, changes to rules on money market funds in the United States are already resulting in an exodus of cash from prime to government money market funds, but one of the outcomes of this is that credit spreads are widening, creating opportunities for investors.
The treasurer’s response
Treasurers need to consider their response to the changing investment environment carefully. Security of principal remains a key priority, which underpins every investment decision. Similarly, the company needs to maintain same-day or short-term access to liquidity for a certain portion of cash for working capital purposes. For this operating cash, security and liquidity considerations dominates investment decisions, while generating a return on this cash is a secondary priority.
However, for many corporations, there is a portion of ‘strategic’ cash that is not required for immediate use that can be used to work harder for the company. This is not a new concept: ‘cash plus’ investment solutions have existed for many years, but segmenting cash to achieve a better yield was less of a priority when a treasurer could generate 0.65% when investing in a AAA-rated money market fund. As this is no longer the case, treasurers need to be more proactive. First, they should focus on improving their cash flow forecasting process to allow them to segment their cash appropriately. Second, they need to consider their risk appetite and investment objectives when investing cash over a longer time horizon. Typically, treasurers’ main objective is not solely to maximise return, but to minimise volatility of returns. This is the premise behind JPMorgan Asset Management’s range of Managed Reserves Funds, which have already seen considerable interest amongst corporate investors, particularly US corporations, but increasingly European and Asian corporations too. The most recent addition to our Managed Reserves range is our JPMorgan Sterling Managed Reserves Fund, which was launched in August 2016. Like our other Managed Reserves Funds, this is aimed at investors with longer-term investment horizons who are looking for additional returns above AAA-rated money market funds while carefully managing risk.