Published: October 01, 2013
SunGard recently commissioned a study amongst corporate treasury professionals to understand attitudes to cash investment, including strategic cash holdings, asset allocation, investment policies and transaction execution. This follows similar studies conducted in 2011 and 2012, allowing trends and developments to be monitored over time.
Respondent Profile
The study attracted responses from 161 corporations globally. This included respondents from all regions and industries, with 49% of companies headquartered in North America and a significant number of responses from Europe. Most of these had a centralised approach to treasury management, with 91% of respondent organisations having either a single global treasury centre or regional treasury centres.
The majority of companies involved in this study had already centralised their treasury at a global or regional level. Of those companies, 60% represented a single, global treasury centre, and 31% of companies are adopting a regional treasury approach.
Companies hold cash balances for a variety of reasons. In the short-term, cash is required for working capital financing (noted by 35% of respondents, an increase of 6% on the 2012 study, emphasising the growing importance of working capital management). A large proportion (27%) also hold cash to finance capital investment, fund mergers and acquisitions (M&A), pay down debt and pay dividends to shareholders. In addition, 13% of companies noted that they held surplus cash as a ‘buffer’ against dips in revenue in the future, a fall of 4% on the 2012 study, potentially as a result of a slight increase of confidence in economic recovery.
Thirty-five percent of the companies had not experienced any material change in their cash balances over the past 12 months, while 43% of companies noted an increase, more than a third of which had seen a significant increase. This is consistent with the findings in 2012. Revenue growth, working capital improvements and arrangements to protect the company against future liquidity constraints or to fund future investment were amongst the primary reasons for this. 22% of the respondents reduced cash balances, typically as a result of M&A, capital investment, paying down debt or returning cash to shareholders.[[[PAGE]]]
Treasurers’ primary investment challenges have shifted gradually in recent years. In 2011, these were mostly process-driven, such as improving cash flow forecasting. In 2012, market and regulatory issues emerged as more strongly, including concern about the Eurozone crisis and regulatory developments such as Basel III, changes to money market fund (MMF) legislation and the expiry of the Federal Deposit Insurance Corporation (FDIC) guaranteed non-interest bearing account scheme. In 2013, while many of these issues remain, the most considerable challenge is to find suitable investment instruments, indicated by 94 (58%) of respondents. Unlocking trapped cash held in regulated markets such as China (47%) is also a major consideration.
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Although we saw a greater desire for increased yield in 2012 compared with 2011, the past 12 months have witnessed a renewed conservatism in corporations’ investment approach. While finding new repositories for cash balances is important, treasurers are not prepared to sacrifice security or liquidity of cash for an increased yield. Nearly half (46%) insist on immediate access to all cash, an increase on 4% from last year (figure 2). Continued low interest rates makes the hunt for yield very difficult, however, without sacrificing principal protection, which treasurers are not prepared or mandated to do. With the potential for rising interest rates going forward (although unlikely in the short to medium term), it will be interesting to see whether treasurers’ investment approaches shift towards achieving higher yield by compromising on liquidity for some of their cash.
Asset Allocation
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As figure 3 shows, the most popular investment instruments are bank deposits used by 74% of respondents, with an average of 57% of cash held in deposits, the same result as 2012. Since 2012, the proportion of companies holding cash in short-term MMFs (typically constant net asset value (NAV), AAA-rated MMFs) has risen from 40% to 52% as a result of greater familiarity, continued confidence and ongoing constraints in finding appropriate cash repositories. A similar proportion of treasurers (9%) invested in MMFs with a variable NAV in 2013 as in 2012, but they have increased the proportion of cash held in these instruments from 36%to 44%. This illustrates that while a smaller corporate investor base are comfortable with the slightly less restrictive investment conditions of MMFs compared with constant NAV MMFs, those that choose to do so have a high level of satisfaction in the quality, flexibility and yield that MMFs with a variable NAV offer.
Looking ahead, 20% of respondents indicated that constant NAV MMFs would become more important over the next 12 months. The prospect of increasing interest rates was a particular factor in the increasing priority of a wider range of investment instruments, in addition to the point that many treasurers are challenged to find new repositories for large cash balances discussed earlier.
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Despite the growing attraction of constant NAV MMFs, there remains a sizeable group of corporate investors who are not attracted to MMFs (either constant or variable NAV) at present. This would appear to be surprising bearing in mind the high credit quality, inherent diversification, sophisticated credit analysis, and access to liquidity that these funds offer.
Lack of familiarity with constant NAV MMFs remains a challenge, but in addition, there continue to be concerns about counterparty risk and liquidity, even though high credit quality and immediate access to funds were the primary reasons for the development of these instruments. The 16% of respondents who mentioned ‘other’ reasons for not using MMFs with a constant NAV in this year’s survey represented companies that did not have surplus cash balances and therefore cash investment instruments in general were not applicable to their business; stamp duty in countries such as Switzerland was also noted.
The past twelve months has seen a dramatic reduction in the use of telephone for transacting short-term investments. In 2012, just over half (51%) of cash investment transactions were conducted via telephone; in 2013, this figure has fallen to 30%. There is a general preference for third-party (independent) portals (35%) for investment transactions compared with proprietary bank portals (26%). Companies are increasingly recognising the advantage of bank independence and the ability to transact with multiple counterparties through a single channel. By using an independent portal, treasurers can improve operational efficiency, as they do not need to manage multiple portals or integrate them with internal systems, and they are in a better position to monitor counterparty risk and demonstrate price discovery by obtaining competitive quotes. However, with fewer than 40% of respondents noting that they integrate their dealing portal with their treasury management system (TMS) there remains significant potential to enhance process efficiency and control by achieving higher levels of straight-through processing.[[[PAGE]]]
Although the financial markets remain volatile and uncertain in some areas, there are hints of recovery. Companies are continuing to generate healthy cash flow, which, in many cases, they are accumulating in order to fund strategic investment and M&A as well as working capital financing. Treasurers remain highly conservative in their investment policies and asset allocation, and counterparty risk and liquidity remain priorities. The challenge therefore is finding appropriate receptacles for cash that meet security and liquidity criteria, particularly as counterparty credit limits are often fully utilised.
In conjunction with these problems, the changing regulatory environment continues to pose challenges for corporate investors. Basel III is already resulting in some types of investments becoming more attractive for banks and vice versa, which is one factor in the continued growth of MMFs, particularly constant NAV MMFs. However, proposed regulation in both the United States (US Securities and Exchange Commission’s (SEC) Announcement on Regulatory Reform, 7 June 2013) and Europe (EC MMF Regulation Proposal, 4 September 2013) continues to create uncertainty. Should these reforms be executed in their current form (although unlikely until 2015), we are likely to see new investment funds emerge and/or continued growth in demand for commercial paper, government debt and bank deposits, exacerbating the investment challenges that corporate treasurers already face. It seems unlikely that regulatory reform will prompt a major change of risk appetite amongst corporate investors, but it will be interesting to see how a potential rise in interest rates affect corporate behavior. With issues such as unlocking ‘trapped’ cash in regulated market becoming a higher priority, treasurers are positioned to take greater advantage of higher interest rates should they materialise.
Just as managing risk is an essential aspect of treasurers’ investment strategy, it is also a growing priority from an operational perspective. This is evidenced by the significant decline in telephone-based dealing that we have seen over the past year, and growth in the use of independent dealing portals. The next step for many companies is now to integrate dealing portals with their wider treasury management infrastructure to facilitate greater control and efficiency.
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