- Vince A. Tolve
- SVP, Global Trading, FIS
by Vince A. Tolve, senior vice president, and Michael F. Vogel, vice president, SunGard’s global trading business
For the past four years, SunGard has conducted an in-depth study amongst corporate treasury professionals to explore their attitudes towards cash investment, including strategic cash holdings, asset allocation, investment policies and transaction execution. Uniquely, this allows us to monitor changes in behaviour, viewpoints and priorities in corporate investments.
The study attracted responses from 164 corporations globally, with responses completed during August 2014. This included respondents from all regions and industries, with 48% of respondents located in North America. Most had a centralised approach to treasury management, with 90% of respondent organisations having a single global treasury centre or regional treasury centres, the same proportion as in last year’s report.
Cash balances continuing to increase
Over the past three years, the proportion of companies increasing their cash balances has grown by 6% year over year, from 37% in 2012, 43% in 2013 to 49% in 2014. A third of companies have seen balances grow by 33% or more in 2014 (figure 1).
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However, the reasons for holding this cash are changing as market confidence grows. For example, the proportion of companies holding cash to finance capital investment or merger and acquisition (M&A) activity increased by 6% between 2013 and 2014, which we are already starting to see reflected in increased M&A over the coming months and years. Only 11% of companies are now holding cash as a ‘buffer’ against dips in revenue in the future (figure 2), a fall from 13% last year and 17% in 2012, again suggesting improved market confidence in some regions.
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Respondents noted that in some cases, surplus liquidity took the form of ‘trapped’ cash (i.e., surplus liquidity held in restricted markets that cannot be repatriated easily and/or cost effectively) and, amongst financial institutions in particular, the holding of capital for regulatory reasons. In some countries, such as China, market liberalisation is making it easier for companies to repatriate cash.[[[PAGE]]]
Cash investment challenges
2014 continues the trend we have seen over the past four years for treasurers’ primary investment concerns to shift from operational to more strategic issues. This year, given the consistently high, and in many cases growing cash balances, the lack of suitable repositories for cash was the greatest concern, noted by 63% of respondents, more than half of whom identified this as their number one issue (figure 3).
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Although the lack of credit limits with highly rated banks was noted by far fewer respondents (17%), clearly these issues are closely linked. ‘Trapped’ cash remains a major issue, noted by fewer respondents, a similar proportion to the 2013 study.
Regulatory challenges, concerns over the future of the money market fund (MMF) industry, risk, visibility and operational issues all remain significant, but these appear to be less immediate than the problem of how to invest surplus cash. However, with changes to Rule 2a7 funds in the United States taking effect over the next year, investors in these funds will need to consider how forthcoming changes will impact their investments. Similarly, Basel III in Europe will change the investment landscape considerably, and we expect to this shift to be reflected in this year’s survey.
Evolving cash investment strategies
As it is not the business for most corporations to take risks with shareholders’ money, corporate treasury is typically characterised by a conservative approach to investment. Capital preservation is pivotal to every investment decision, typically followed by liquidity as an equal or very close second consideration, and yield lagging some way behind. As figure 4 illustrates, there are noticeable shifts taking place in corporate investment policies. In particular, the proportion of respondents that need immediate access to all cash (i.e., with 100% of investment in bank accounts, overnight deposits, or MMFs with same-day access to liquidity) has fallen from 46% in 2013 to 33% in 2014 – a substantial change.
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Figure 4 also shows an increase in the number of organisations that are able to compromise on liquidity (although not preservation of capital) for certain segments of their cash (67%). This allows them to invest in instruments with a longer maturity, potentially opening up more investment choices with a higher yield. There are likely to be a number of reasons for this shift, including the ongoing low interest environment particularly in the Eurozone, which is prompting some company boards to re-evaluate their investment strategy. Secondly, many treasurers have invested in more reliable cash flow forecasting so they are better able to segment cash into operating or working capital core cash (short- to medium-term) and strategic cash (medium- to long-term). While security and liquidity remain the most important risk priorities for operating cash, the need for same-day liquidity is less compelling for core and strategic cash. Thirdly, treasurers are becoming increasingly aware of the impact that regulatory change will have on investment opportunities. Of particular note, Basel III will make some (longer-term) deposits more attractive to banks than others, while changes to Rule 2a7 funds in the United States may impact MMF investment. Consequently, treasurers and CFOs are looking ahead to ensure that their investment policy is flexible enough to adapt to ongoing change. Finally, as a result of both the global financial crisis and growing cash balances, treasurers are strengthening investment skills and treasury technology within their departments, so that they are in a better position to manage a wider range of instruments.[[[PAGE]]]
Selecting cash instruments
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Although treasurers are thinking ahead in terms of future investment strategy, they are not yet actively investing in new instruments. Deposits remain the most commonly used instrument, while MMFs remain popular. Variable net asset value (NAV) funds are becoming more popular, reflecting the impact of regulatory change to Rule 2a7 funds in the United States. We would expect this shift to become more pronounced in the coming year as new regulations take effect. 2014 also saw an increase of around 10% in the proportion of investors included in this survey investing in commercial paper, which is potentially an important shift as a growing number of investors seek to move their exposure from financial institutions to corporates.
In most cases, respondents noted that the instruments they used most commonly would have a similar level of importance in the future. However, a sizable proportion noted that commercial paper (23%), deposits (21%), constant NAV MMFs (18%), and separately managed accounts (16%) would become more important. However, this is a mixed picture given that a comparable proportion of respondents thought that constant NAV MMFs and separately managed accounts would become less important. This may also reflect a somewhat confused picture of the changing regulatory environment, both in relation to MMFs (in that Rule 2a7 MMFs will need to have a variable NAV from 2016) and the impact of Basel III on the availability and return on deposits. What is clear is that more education is required on the impact of regulatory change in the coming year to allow treasurers to make more informed decisions on their investment policies and asset allocation.
Transaction execution
In addition to determining the choice of investment instrument, the way in which deals are transacted is an essential component of treasury policy and processes. There has been a shift towards electronic dealing for more ‘vanilla’ instruments (e.g., deposits, MMFs, FX spot and forward transactions) in recent years. Some banks offer proprietary dealing tools, such as those that are part of an electronic banking system, while independent portals offer multi-bank dealing through a single channel.
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Although the benefits of electronic dealing are well-established, it has not yet been universally adopted. Figure 6 shows that the telephone remains the most popular dealing method for short-term investments at 36%. Both proprietary and independent electronic dealing portals remain popular (29% and 27% respectively), half of which are integrated with the treasury management system (TMS). Electronic dealing is more common for FX spot and forward transactions at present, but as treasurers are already familiar with this technology, we would expect adoption of online dealing portals to increase for short-term investments as well. In particular, the use of third-party, multi-bank dealing portals allows treasurers to seek competitive quotes more easily, allows them to track bank performance, and demonstrates they are accessing the best rates. Choosing the right dealing method is also important in managing operational risk, in particular by avoiding the need to input transaction details in a TMS or treasury module of an enterprise resource planning (ERP) system once it has been executed, which is resource-intensive and leads to the risk of error.
2014 and beyond
The research data in 2014 reflects continuing confidence in a slow recovery, albeit fitfully, with some inconsistency across markets. However, in an environment of continued low interest rates, large cash balances, deposit lines that are often fully utilised, and limited availability of highly-rated, liquidity instruments, companies with cash to invest are in a difficult position. Consequently, while counterparty risk and liquidity risk remain essential, many treasury departments are starting to refine their investment policies. This is a timely development, and will need to continue as regulations, such as Basel III and changes to the MMF industry in the United States, will drive change in the most commonly used cash instruments used by corporate investors: bank deposits and MMFs.[[[PAGE]]]
While the United States and Europe remain the largest investment markets, there are a variety of solutions in other regions to meet investor needs. These instruments are subject to different regulations, market practices, risk and liquidity characteristics. However, as corporations expand geographically, particularly in markets where repatriation of cash is either infeasible or undesirable, investing outside of home markets will become increasingly important, particularly where interest rates are higher.
Another impact of globalisation is the need to standardise cash and treasury management policies and processes, and maintain global visibility over liquidity and risk. As transaction decision-making and/or execution capabilities develop beyond the group treasury centre, use of a single integrated treasury technology platform becomes an essential requirement, of which an electronic dealing portal is a vital component.
