Published: February 01, 2012
Since the financial crisis of September 2008 in particular, treasurers have increasingly recognised the importance of defining and delivering on the right investment policies. The current economic and regulatory challenges have resulted in a complex cash management environment for corporations globally. One element of this is the need to define and deliver on the right investment policies. Counterparty risk has become a particular priority but with a number of credit rating downgrades, and a growing awareness that no organisation is ‘too big to fail’, companies that have developed large cash balances often struggle to find a sufficient number of counterparty banks and issuers that meet their credit requirements.
The problem of finding appropriate repositories for cash is compounded by the need to maintain access to liquidity in an environment where borrowing is more difficult and expensive. Furthermore, with interest rates remaining at a historic low, treasurers and cash managers are tasked to generate a return on cash to prevent value erosion through inflation and rising prices.
To help understand investment trends and corporate treasurers’ priorities, SunGard conducted an online survey amongst treasurers globally, which attracted responses from 215 corporations. This included respondents from all regions and industries. Fifty per cent of companies were headquartered in the United States with a significant proportion of responses from other regions such as Europe and Asia. The survey aimed to understand corporates’ cash investment policies, their attitude to risk and return and consequently, their preferred cash investment instruments, both now and in the future. It also sought to explore how companies transact their investments in practice, such as using web-based portals.
The most popular investment type is bank deposits, used by 67.9%, followed by money market funds, used by 48.37% of respondents. In addition, a significant proportion of companies are attracted to government securities, such as US treasuries, with 29.3% of respondents indicating that they use these instruments.
From this survey, it appears that the general inclination among corporates is to continue with their existing investment strategy, but there are some noteworthy changes. Bank deposits continue to form the mainstay of corporate investment policy, with 61.69% of respondents indicating that deposits would be extremely important in the future. However, when compared with 67.91% using them today, this is a decrease of 6.22%.[[[PAGE]]]
Furthermore, while MMFs are used by 48.37% today, 55.1% identified MMFs as an extremely important part of their future investment strategy, an increase of 6.73%. Apart from this shift in emphasis from deposits to MMFs, it is significant that the other ‘winners’ from an investment point of view will be variations on MMFs, such as variable NAV funds and enhanced funds. There are a number of possible reasons for this.
Firstly, new legislation published by Institutional Money Market Funds Association (IMMFA) and European Securities and Markets Authority (ESMA) in Europe, and the US Securities and Exchange Commission (SEC) differentiates between MMFs and short-term MMFs. While MMFs must have a variable NAV, short-term MMFs may have a constant or variable NAV, with the implication that variable NAV funds will become more important in the future. Plus, companies are attracted to the security and liquidity of AAA-rated MMFs and now wish to leverage the advantages of these instruments while enhancing their yield.
Secondly, security and liquidity remain key considerations, a statement which is illustrated by the declining significance of single-issuer, traded instruments, such as medium-term notes (MTNs), corporate bonds, commercial paper and certificates of deposit. It should be noted, however, that these statistics do not indicate that a company will stop using these instruments, but simply that their relative importance as an instrument of choice may decline.
Thirdly, the sovereign debt crisis in Europe, continued market fragility and an uncertain future means that corporate treasurers recognise the value of the inherent diversification offered both by stable NAV and variable NAV/ enhanced funds.
Fourthly, the increased focus on funds that offer an enhanced yield illustrates that while security and liquidity remain primary investment objectives, yield is a greater priority than it has been in recent years, as described further below.
Figure 1 illustrates the relative strategic importance of different instruments in the future, while Figure 2 compares this with the current use of these instruments.
Money Market Funds (MMFs) are growing in importance as an investment instrument as both familiarity and availability increase. MMFs are most commonly used in the UK and US, both of which have the longest history of MMF investment and therefore investors are typically more familiar with these instruments than in other regions. In Europe and Asia, MMFs have been introduced more recently, accounting for their lower significance historically, and in some cases, less familiarity. Furthermore, there has been some ambiguity in the definition of MMFs in the past: various types of funds with quite different risk profiles have been described as MMFs. This has now changed with standardised definitions of MMFs and short-term MMFs. This standardisation is encouraging greater adoption, as are the factors described above.[[[PAGE]]]
Respondents who do not currently use MMFs were asked for their reasons. A roughly equivalent proportion of respondents expressed their concerns regarding credit quality (29%), liquidity (26%) and yield (30%). Other factors indicated include lack of familiarity with MMFs (16.7%). While these concerns are consistent with many companies’ overall investment considerations, security (including credit quality) and liquidity are typically the benefits of using MMFs as they comprise a diversified range of high quality assets, rigorous investment policies and credit research, and same-day access to liquidity. Consequently, it seems likely that many respondents who have these concerns are largely unfamiliar with MMFs.
The survey responses illustrate that corporate investment policies remain conservative, with a significant focus on security and liquidity. Both MMFs and the use of online portals have an important role to play in this respect. For example, MMFs provide high credit quality and diversification of assets and counterparty risk, while leading online portals provide a series of automated, customised policy compliance tools and alerts.
Preservation of capital remains the primary consideration. In addition, an equal number of respondents indicated that immediate access to all of their cash (44%), or a proportion of their cash (44%), is a major investment requirement. While this survey does not have historic data with which to compare these figures, it seems likely that the number of companies that are willing to compromise on same-day liquidity for at least some of their cash has increased. The proportion of respondents who noted that yield is a major consideration may appear surprising (17%). However, some respondents marked more than one response, suggesting that there is an obligation in many companies to seek the highest yield so long as investment decisions are within the company’s risk and liquidity policies. In addition, some companies may seek an enhanced yield on a proportion of their cash where they are prepared to take a higher risk.[[[PAGE]]]
The most significant investment challenge faced by corporate treasurers and cash managers today is the ability to forecast cash flow accurately (42.7%). Without a reasonable degree of confidence in future cash flow requirements, it is very difficult to devise appropriate investment horizons. One of the factors that contribute to accurate forecasting is effective systems integration and data aggregation, identified as a challenge by 13.5% of respondents. Organisational and communication issues are also highly significant.
Since the global financial crisis and with ongoing market liquidity constraints, cash management issues (indicated by 25.6% of respondents) such as accessing ‘trapped’ cash and consolidating cash flow has become a far higher priority for corporate treasurers and cash managers. There is also an increasing focus on physical and notional pooling and interest optimisation structures to enable cash surpluses to be offset against deficits.
The third challenge indicated by more than 20% of respondents was risk management. Counterparty, sovereign and liquidity risks are all significant considerations for corporate treasurers and cash managers as market turbulence continues to create casualties and sovereign risk, such as in southern Europe, has increased. Few treasury departments have the resources to conduct detailed credit analysis. Consequently, investments such as MMFs are valuable in that they leverage significant credit resources.
At the end of the survey, respondents were asked to provide their views on the future investment environment. Unsurprisingly, respondents had very mixed views. Some respondents are neutral and do not believe that there will be any significant change to investment conditions in the foreseeable future, with concerns that ongoing liquidity constraints, regulatory restrictions and low rates will continue to depress the investment market. Furthermore, continued uncertainty in the Eurozone in particular is likely to continue having an impact on market confidence in every region. Others are more optimistic, expecting that the range of investment opportunities will increase when interest rates eventually rise, and in response to new regulations, such as Basel III.
In general, the most positive responses were from those who recognised that market conditions are not the only factors in improving investment performance. These respondents saw the value of initiatives to unlock cash ‘trapped’ in subsidiaries, enhance forecasting and concentrate cash more effectively. During a period of continued uncertainty, defining and delivering on the right investment policies with an emphasis on counterparty stability and access to liquidity will remain extremely important for corporations globally. In this environment, combining internal initiatives to optimise cash management, and investing in secure, liquid and diversified instruments, such as MMFs, would appear to be strong example of industry best practice.
To review and download a complete copy of the survey-based study Corporate Cash Investment Report visit www.sungard.com/cashinvestment.
Click image to access disclaimer
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
