by Kathleen Hughes, Head of Global Liquidity Management Sales, and Jason Granet, Head of International Cash Portfolio Management for Global Liquidity Management, Goldman Sachs Asset Management
Investing primary cash
Money market funds (MMFs) are well-established in markets such as the US and UK as repositories of short-term or primary cash, and their use is increasing across Europe and Asia. Should market conditions continue to strengthen in the future, these products will remain extremely valuable in order to hold cash needed for working capital and other short-term requirements. MMFs have the potential to provide excellent security, where they offer AAA-rating, diversified assets, a high quality investment process, and same day access to liquidity.
There are a variety of situations, however, where treasurers do not necessarily need immediate access to cash. For example, companies that have achieved a reasonable degree of accuracy in their cash flow forecasting process may be able to structure the maturity of investments into the future to take advantage of improved returns further out on the yield curve. For example, cash being held in a ‘war chest’ for known outflows, mergers and acquisitions and/or future contingency could be held in longer-term investments; similarly pension funds and insurance companies may also have tranches of cash not required in the short term. In these situations, the first priority must remain the return of principal, but treasurers may be able to take advantage of the liquidity premium available by using a wider range of investment types.
Using secured instruments for secondary (medium-term) and tertiary (lond-term) cash brings a range of advantages over unsecured instruments in supporting treasurers’ risk management strategies.