Published: August 01, 2013
Ahold Group’s treasury department has been instrumental in steering the company through turbulent times over the last 10 years. As a cash-rich business with a large investment portfolio, one of the outcomes of this has been an efficient and sophisticated approach to cash investment. In this article, Gavin Jones, VP Treasury, Royal Ahold discusses how the company’s investment strategy has evolved and where the industry may be leading.
We have a centralised approach to treasury at Ahold Group with a team of 11 treasury professionals, nine of whom are based in our finance company in Geneva and two in Boston. We manage a wide range of responsibilities across capital markets and corporate finance, liquidity and financial risk management, cash management, and systems management. Our core function is supporting and servicing the underlying business.
The structure we have in place now is relatively recent, following a series of important developments in treasury over the past 10 years. In the years following 2003, which was a challenging year for Ahold, the company was largely in recovery mode, consolidating its financial position, refocusing its business strategy and strengthening the balance sheet. The global financial crisis also proved a catalyst for greater operational and financial efficiency and risk control. Prompted by these two major events, we have gradually centralised our cash and treasury management activities and built the current treasury organisation, which has increased our visibility and control over cash, liquidity and risk.[[[PAGE]]]
As a cash-generative business, cash investment is a significant activity for treasury. A key function is to ensure any cash generated is readily available to support of the Group’s Reshaping Retail strategy. We currently have around €4bn of cash invested, comprising around 75% in EUR and 25% in USD. Approximately 60% of our income is generated in the US, with the remainder in Europe, while our major corporate cash outflows, such as dividends, share buybacks etc. are denominated in euros. This can result in converting a large proportion of our USD inflows into EUR.
Over the past 10 years, our investment approach has developed considerably. Between 2003 and 2007, we introduced a simple cash flow forecasting process, which has since been developed considerably to enable more sophisticated analysis of our future cash requirements. We are now able to calculate weekly forecasts over a six-month time horizon with a high degree of accuracy. This is a credit to the operating companies that provide the forecasts, and has facilitated better investment decision-making. We invested significantly in money market funds (MMFs) during this period, with yield and liquidity as our primary considerations. Like many corporate treasuries, we focused less on capital preservation as the AAA rating of the MMFs in which we invested seemed to be adequate risk protection.
In 2007, we sold our food service business in the United States for more than $7bn. This resulted in a large inflow of cash, the balance of which was retained by the business following a €3bn capital reduction and a €1bn share buyback programme. Around the same time, the sub-prime mortgage crisis in the United States was starting to emerge. Consequently, with both increased levels of cash and a changing investment landscape, we conducted a root-and-branch review of our investment approach and the composition of the MMFs in which we were invested. For example, we looked at all the assets which were held in each fund, and evaluated each asset manager’s approach to portfolio management and credit analysis.
As a result of this review, we were able to define what constituted the ‘ideal’ MMFs for our business. Instruments such as structured investment vehicles, collateralised loan obligations could not be included, nor could paper from the sponsoring bank. A minimum level of issuer diversification was also required. At a time when we needed a ‘safe haven’ from an investment standpoint, capital preservation became our primary investment objective, with liquidity a second objective and yield third, a complete reversal of our former investment strategy. By accepting a low yield, we recognised the negative cost of carry but decided that this was worthwhile in exchange for instant access and security of principal during a turbulent period. Our investment review put us in good stead during the 2008-9 financial crisis, and we crystallised our strategy into a more formal policy framework with only a few tweaks. We have since been proactive in reviewing our investment products every six months, in order to ensure that our investment approach continues to be appropriate to market conditions and Ahold’s risk appetite. Our portfolio of different investments is reviewed at least weekly.
We have typically held 50-60% of our cash in IMMFA or 2a7 funds at any one time, but following a prolonged period of low or negative yields, we recognise the need to find ways to achieve a higher yield whilst maintaining our investment objectives, of which capital preservation remains paramount. The MMF industry is going through a challenging period, with a distinction between IMMFA MMFs and EMSA’s short-term MMFs in Europe. Although MMFs can have a stable NAV(net asset value), an ESMA short-term MMFs tend to have a floating NAV. Similarly, there is regulatory pressure in the United States for 2a7 funds to move from a stable to floating NAV and potentially charge exit fees in times of stress. If the value of units can be eroded, there is a potential impact on capital preservation. Consequently, if constant NAV funds are effectively ‘killed off’ and replaced with variable NAV funds, these will no longer meet our investment objectives as effectively in the future. Furthermore, the positive yield on MMFs is largely driven by fee waivers as opposed to the underlying fund yield. This seems unlikely to be sustainable, which is another factor in our uncertainty about the future of MMFs remaining as our core investment product.
As a result, we are reducing our investment in MMFs in favour of alternative investment products. We currently have around 40% of cash invested in MMFs, a reduction of 10-20% from previous years, and this trend seems likely to continue. For example, we are working with our partner banks to award more deposits as part of our wider banking relationship. We are focused on ‘sticky deposit’ products and we will shortly start using a tripartite repo scheme. A key criterion in our decision to expand our investment approach is that every potential investment product should be thoroughly and consistently evaluated, reviewed in detail and approved at a senior level. Although it is a rigorous and potentially arduous procedure, it is quite quick in practice, and it has proved a valuable way of introducing new ideas and opportunities in a structured way. We also work through extensive ‘what if’ scenarios and rigorous ongoing due diligence to ensure that every investment product continues to meet our investment objectives.
In parallel with these developments, we have become more involved in the investment committee of the company’s pension scheme. This brings valuable experience and insights that can be applied to the company’s own investments. For example, we have been able to introduce the concept of a target portfolio, including instruments and tenor, and we aim to manage our investments within this.
With many corporations holding large cash balances leading to fully utilised credit limits, the potential decline of stable NAV MMFs, and changing appetite for investment amongst the banks as a result of Basel III, there is a need for a new products that meet treasurers’ security, liquidity and yield requirements. It takes a long time for new funds to be introduced, particularly if these are rated. We have found that banks are focused on introducing other, non-fund-style investment instrument more quickly, however, and it will be interesting to see what new products emerge. Due to the size of our investment portfolio and our active interest in new investment products, we are closely engaged with our banks to provide input and feedback on new product concepts. This is a valuable investment of time on our side, not only so that emerging investment products meet our own needs, but also those of the wider corporate community.
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