A Collaborative Approach to Optimising Cash Investment

by Séverine Le Blévennec, Director, EMEA Treasury, Honeywell

Honeywell’s group treasury is headquartered in the United States, with a regional treasury centre (RTC) for EMEA based in Brussels, and a further two people based in the UK, Germany & France. Another RTC manages Asia Pacific, with personnel located in Singapore and Shanghai. The RTC for EMEA manages cash and treasury management activities across 43 countries and more than 300 business entities. An in-house bank is in place, and cash concentration is highly efficient, with 24 cash pools in place across the region. As a result of these activities, there are large amounts of surplus cash managed by the RTC, currently around €2.1bn. Cash investment is therefore a core activity for treasury in Brussels.

Determining cash investment criteria

Our primary investment objective is capital preservation, while maintaining liquidity is an essential secondary requirement. We often need access to large amounts of cash for mergers and acquisitions, capital investment or to fund business activities, so liquidity is very important. Our third objective is yield. Despite the low interest rate environment, we are still obliged to maximise the value of our cash within strict risk guidelines. Our investment policies are determined by an investment committee, which defines a conservative approach to the way that we manage our cash. We use a variety of criteria for selecting suitable investments. For example, we use both credit ratings and credit default swaps to determine global counterparty credit limits. We have systems in place that allow us complete visibility of all our positions, ensuring we can monitor limit utilisation. In addition, we have an effective approach to cash flow forecasting so we have a high degree of confidence in our future cash flow needs.

We needed a rationalised approach to identifying potential funds in which we could invest.

We invest in a range of instruments, including bank deposits, money market funds (MMFs) and government bonds. Bank deposits are typically short-term in order to maintain access to liquidity. However, there is a relatively small number of counterparties that we consider safe enough in which to invest, and each limit is relatively low compared with our total amount of cash. The ability to invest in MMFs is a relatively recent phenomenon for Honeywell at its in-house bank, as while we had Belgian co-ordination centre status, we were not permitted to invest in these instruments. Once this status expired, we were able to consider the use of MMFs. These are now an important repository for our cash but as with bank deposits, we needed to adopt a conservative and well-informed approach to the way that we selected funds.

Navigating the funds landscape

IMMFA (Institutional Money Market Funds Association) defines a Code of Conduct for its members, and this has been very valuable for us as we have a transparent and consistent way of identifying MMFs that meet our investment criteria. Even so, with so many funds available, it is extremely time-consuming to read the fund documentation for each fund, so we needed a rationalised approach to identifying potential funds in which we could invest. We had been part of a study conducted by MyTreasury so we were already aware of the platform and its capabilities, and had had an influence on its development before taking it on. We considered alternative MMF portals, but considered MyTreasury to have superior functionality, usability, and fund availability. In addition, we wanted a direct relationship with fund managers as opposed to transacting on an omnibus basis.

We recognised that using a MMF portal such as MyTreasury would greatly enhance our ability to compare funds, monitor key terms and conduct transactions securely and efficiently. For example, the portal enables us to set up our investment criteria, such as rating, maximum proportion of total fund size etc. so that only appropriate funds are presented on screen. In addition, we can review the composition of each fund to determine what assets each one comprises, and compare key terms such as weighted average maturity (WAM).[[[PAGE]]]

Facilitating a global approach

We first started to use MyTreasury in the Brussels RTC in 2009, but we have since rolled this out globally, such as in the UK for GBP funds, and Asia Pacific for funds in Singapore, Malaysia, Mauritius, Australia and most recently China. We are also now rolling out the portal in the United States. We currently have 56 fund accounts at Honeywell and managing these in a spreadsheet is cumbersome and inefficient. Using MyTreasury has helped us to achieve visibility over all of our fund holdings and negotiate fees with fund managers. Rebates can be recorded in the portal so we can compare fund returns accurately. The ability to negotiate fees based on a global view of investment has been highly beneficial, resulting in rebates amounting to $800,000 each year so far, and growing.

We are also able to manage our total investment limits more accurately. In the past, we had a total limit that we divided by region. Now, every region has the same visibility over limit utilisation and can invest in funds that have available limit headroom, irrespective of the proportion of the limit that a region has already used. This enables us to select the highest yields, and arbitrage funds. Limit breaches as a result of transactional activity are prevented, and if a breach occurs inadvertently due to a change in the size of fund, these events are alerted automatically so that we can take immediate remedial action.

A collaborative partnership

Since we first started using the portal in 2009, we have enjoyed an excellent relationship with MyTreasury. This has included working together to enhance the use of the portal to achieve our overall treasury and investment objectives. For example, in addition to analysing and transacting purchases or redemptions of fund units, we are using MyTreasury to facilitate straight-through processing. For example, in the UK, we had a direct debit arrangement configured with one fund manager so that payments were debited automatically from our account without the need to initiate a payment. We worked with MyTreasury to develop a MT101 messaging solution to automate payments processing with all our UK fund managers.

We have integrated MyTreasury closely into our treasury technology infrastructure, not only for trade details but also interest rates to allow automatic fund accruals to be passed through to the accounting system via the Treasury Management System. We are looking to increase the number of decimal places in this data exchange to facilitate even greater accuracy in our calculations.

Achieving relationship and business performance success

Working with MyTreasury has proved very successful in every respect. As there is no cost to use the portal, it is easy to justify the use of the system to senior management. The benefits have been considerable, both in tangible and intangible ways. For example, returns have been enhanced whilst reducing risk. Operational processes are more efficient, with a material impact on administration, so we can spend more time on proactive decision-making. We have also achieved far greater visibility and control across all stages of the investment cycle. MyTreasury has a collaborative approach to customer developments, and there is no cost for product enhancements as these benefit all customers.[[[PAGE]]]

The longer-term view

In the future, we are intending to extend our use of MyTreasury to deposits for which we currently use a separate portal. It will be more convenient and efficient to leverage a single channel for all of our cash investments and by having complete visibility over all investment options that comply with our investment policy, we will be able to take greater advantage of arbitrage opportunities across instruments. We are also planning to use MyTreasury for short- to medium-term fixed rate funds (1-3 months) for a small proportion of our cash for which immediate access is not required. We are considering investing in funds in India for which we will also use MyTreasury.