Treasury Think Tank Report
An off-the-record Treasury Think Tank session earlier this year brought together an array of prominent and highly experienced treasurers from around the globe to discuss the current and future short-term investing landscape. Their views are strikingly candid and get right to the heart of what it means to be a treasury investor.
In this report we highlight the key themes driving short-term investment decisions, while calling attention to areas for improvement in the investing process – including shortfalls in existing treasury systems and portals. Vendors and asset managers, take note.
Interwoven throughout this report are statistics from a 2020 Calastone whitepaper, ‘Money market funds in uncertain times: Investors demand digitalisation and resilience’. These are based on results drawn from an independent online survey of 150 decision-makers from corporations and financial institutions (FIs) in major financial hubs — the United States, the United Kingdom, Singapore and Hong Kong.
TMI and Calastone would like to thank the Think Tank participants for giving up their time to help shape the future of short-term investing and the technology that supports it.
Theme 1: Bringing people and data together through technology
The Covid-19 pandemic has created volatility in all markets but it has also accelerated a technological leap forward, not least in the area of process automation. While technology has been a feature of financial market trading and investing for some time, removing friction from investment and settlement processes has suddenly become one of the highest priorities.
Where once colleagues in close physical proximity could be called upon to help fix issues – and even manually process faxed instructions – the pandemic all but removed that option as most were forced into remote working. This sudden shift saw companies having to accelerate their technology agenda almost overnight to enable both work to continue and human interaction to take place.
To enable more efficient remote working, some treasury departments have started or accelerated the implementation of core technologies such as a treasury management system (TMS). In fact, one Think Tank participant commented that the advent of Covid-19 gave their TMS project “the green light” because it enabled essential data to be harvested and actioned immediately.
Treasury teams continue to address the lack of automation tools, from real-time intraday reporting of cleared balances and transactions to a more direct and digital access to money markets and other investment alternatives. These comments chime with the findings of the aforementioned Calastone whitepaper with 97% of corporate respondents noting the need for automation throughout the investment process.
The bottom line:
By and large, treasurers are appreciating this accelerated technology environment. Having more centralised and real-time data is proving beneficial on numerous fronts, especially for making more informed decisions around cash investments. Nevertheless, there are still holes and barriers in their tech set-ups (more on this later), and many treasurers are finding it hard to replicate ‘watercooler’ conversations and insights when working remotely.
Theme 2: Preserving liquidity at all costs
One treasurer on the Think Tank panel reflected on the March 2020 environment saying: “At the start of the pandemic, we just wanted to make sure that we could service our debts and meet possible shareholder distributions, so we just left as much cash as possible in the bank.” Later, with some clarity emerging, their plan switched to concentrating funds in cash pools and exploring alternative investment options.
The advent of the health crisis again focused attention on the importance of tight liquidity management. As one treasurer explained, “we rolled out stress testing and scenario analysis because we needed to be in control and have a more complete picture of our liquidity; we did that very quickly”.
The understandable scramble for liquidity was fuelled, for many businesses, by initial uncertainty and rumours. It demanded a deep dive into precise income forecasts, which for many treasurers included investment yields. It was not always good news. “We went to our policy, did our research, did more stress testing and found a big hole in our expected investment income as rates plummeted,” admitted one treasury participant.
When a multimillion-dollar investment income is expected but does not materialise, the need to be “nimble in working through these dislocations” is evident from a liquidity standpoint, they said. It’s a widespread view that created some significant and rapid outflows (see fig. 1) in prime money market funds (MMFs), with one participant saying their firm shifted $500m in prime funds to government funds in just two days, as “things were starting to become gridlocked”.
Another treasurer recounted how their company had spun off from its parent during the pandemic and that to manage its circa $1bn cash, the now standalone business deployed a modified version of its previous investment policy. It already had some cash invested in government funds and mostly had time deposits with its banks. Treasury, being attuned to the idea that, in that moment, “liquidity was king”, decided to issue further debt of around $750m “to make sure that we had cash on hand, just in case”.
As a highly leveraged business out of the starting block, this new business needed to find some yield to help offset its interest expense. Opting for time deposits and interest-bearing money market deposit accounts, its cash is currently invested in highly liquid instruments, “and it’s going to remain there until basically the crisis is truly over”.
The bottom line:
Visibility and control over corporate liquidity has never been more critical. The ability to swiftly shift liquidity from one vehicle to another has also come under the spotlight. Naturally, the risk-adverse nature of treasury investment policies has seen more focus being given to new off-bank balance-sheet alternatives.
Theme 3: Thinking of short-term alternatives
Generally, in times of stress, risk-averse investors start looking for capital preservation. Where many entered lockdown with reduced sales revenue outlooks, one treasurer stated that the flexibility offered by MMFs was vital “because we needed to dive in and out each day, depending on the cash situation”.
The pandemic even led this treasurer to abandon fixed-term deposits simply because they tied up cash for at least one month, and that, they reported, “was not something we could afford at that point in time, given the market situation”.
While many investors have been erring on the side of caution, some of their asset managers have been urging their consideration of the ultra-short space as an alternative to MMFs and deposits given the interest rate context. Ultra-short duration funds offer investment flexibility from a credit perspective. A major benefit is the potential for added yield, but for corporate treasurers this remains a contentious topic given the lower credit quality and the reduced levels of regulation and protection. Nonetheless, one Treasury Think Tank participant said ultra-short had been offered as an alternative, and had seen some managers “pushing the envelope a little further” as a means of picking up yield.
Another area of exploration is treasury exchange-traded funds (ETFs). These passively managed funds provide exposure to baskets of US Treasury bonds. Although these funds do not seem to have performed as strongly as other ETFs during the toughest months of the pandemic, they do offer a way to achieve the desired exposure.
A straw poll among the Think Tank participants showed treasury ETFs to be an option worth considering, and many sought additional information around this instrument. It is worth noting, however, that it was unanimously the case that investment policy would require a revisit around ETFs, given the potential for interest rate risk. That said, it was deemed “a step too far” for one treasurer, for now, but as another participant noted, in current times where negative rates persist in some markets, “you can’t just sit doing nothing, you have to think of other ideas”.
Money market ETFs are also an option to obtain exposure to high-quality liquid assets and high-quality debt through a single transaction and they are increasingly pleasing the credit appetite of cautious investors.
One Think Tank participant, a treasurer of a US-based global corporation, explained how a mandatory inter-company lending programme had been put in place. Every 100%-owned entity, and some of the joint ventures (JVs) where the majority share was owned, is required to invest excess cash or borrow their funds from central treasury. This means that ultimately the cash ends up in the US, with entities able to invest or borrow from treasury in their functional currency. “There’s no exposure at entity level,” they explained. “Treasury hedges, converts it to dollars and we invest in the US.” That said, the firm’s investment policy is under constant review and will be changed appropriately, enabling a rapid response to new opportunities or risks.
The Calastone whitepaper findings support the panel’s assertions that treasurers are starting to think differently about the way they invest their short-term cash. According to the report, 47% have reduced their investments into MMFs despite the current pandemic. In addition, 18% are investing less and reallocating to new asset classes and 29% are investing less and holding more cash.
The bottom line:
Treasurers are tempted to look beyond traditional short-term investment instruments as a means to achieve greater returns. Ultra-short strategies and ETFs are on the radar. Yet investment policies must remain conservative. Further education of the Investment Committee may be required, as well as some first-movers in this space who are prepared to blaze a trail for others.
Theme 4: Risk and regulation: good but not great
MMFs have been subject to a raft of regulatory reform in recent years in the US and Europe – and regulatory change is a “fact of life”, as one treasurer put it. While another Think Tank straw poll revealed little in the way of general concern, one treasurer raised the point that were the liquidity fees and redemption gates to be applied in the event of a stress event, as is now the requirement, it raises a potential threat to liquidity. The fees and gates have been designed to mitigate runs on MMFs, but the participant said “a solution must be found to limit this impact” on liquidity confidence.
The panel also mentioned that regulatory changes sometimes have positive unintended consequences, inasmuch as they require the fintech and vendor community to be fully responsive to calls for flexibility, and offering additional transparency and reporting functionalities where needed. The corporates agreed that it is now firmly the fintech community’s remit to assist treasurers “in adapting to whatever is coming down the pipeline, and to give comfort that it is possible to adapt”.
This echoes the findings of the Calastone whitepaper, where 15% of respondents stated that improvements in their ability to meet regulatory and tax reporting requirements is ranked in their top three investment needs.
The bottom line:
MMF regulation 2.0 is already underway, with consultations currently taking place in the US and more to follow in Europe. Corporates are not overly concerned by potential changes but expect their technology vendors (and vendors’ partners) to be able to assist them in preparing for shifts in the regulatory and reporting landscapes.
Theme 5: Sustainability is a longer-term goal
Sustainability has arrived in the short-term investment space, but it is apparent to some on the panel that words appear louder than actions at this point in time. There have been “really positive discussions around sustainability” with some of the asset managers, as cited by one treasury participant. However, while it was generally agreed that ESG (environmental, social, and governance) funds can be “just as good” if not better than regular funds in terms of performance, too often follow-up conversations have not been forthcoming “on either side”.
It was mooted that the absence of solid commitment in this space could stem from a lack of understanding of the goals of sustainability. There was a common belief that to achieve what is truly green in the financial space still requires “a lot of effort on the part of the corporate”. However, it was suggested by one treasurer that the EU taxonomy has arrived as an “enabler”, providing “a better means of comparability and more objectivity” in this quest.
This participant believes it is now easier for investors to make fair comparisons between funds. As green criteria become stricter, driven in part by demanding institutional investors, the arrival of the European Union taxonomy also enables companies based within the bloc to begin understanding their own position as investment targets, in relation to others, through something approaching a standardised view of wider ESG thinking.
Analysis was referenced by one participant “proving that during the crisis sustainable funds were out-performing some conventional funds by as much as four times”. If this is borne out, it implies that ESG-driven funds in general may even be “crisis-proof” for the simple reason that they focus on the security of vital ‘living’ elements such as health, energy, and transportation.
The bottom line:
Sustainability is emerging as an additional short-term investment criterion. The range of ESG funds on offer from asset managers is still relatively small and a lack of standards and commitment in this space is currently hampering uptake. Nevertheless, treasurers are not blind to ESG. They recognise the ability of ESG funds to deliver a level of performance and provide a means to achieve their own corporate ESG objectives from an investment perspective.
A fintech’s view
Calastone’s response to this issue is to offer an alternative way. The firm runs the world’s largest funds network and providers treasurers with a transparent, one-step liquidity trading process that integrates with every system and party in the investment process. In doing so, it has created a safer investment environment by eliminating manual activities while providing full visibility over every trade and payment.
For those with a treasury system, TMS or enterprise resource planning (ERP) without the trading capabilities, or the capabilities to place all their holding information there, Calastone can automate the delivery of this information directly into the preferred system. It also lets corporates, which don’t want to use a portal, trade directly with any fund provider using their existing treasury system or ERP.
Theme 6: Automation doesn’t always mean easier investing
Just as ESG products display variance in their efficacy, the current raft of investment technologies are similarly unequal, it was agreed. One treasurer described how they had been enthusiastically using a fully integrated money market portal only for support for it to be withdrawn almost overnight. “We had no choice other than to move away from it – and given the timeline and the fact treasury had over 50 accounts in 10 countries to manage, the pressure to find an alternative was huge.”
With automated processes such as settlement and interest calculation missing or ineffective, the hastily selected replacement “very clearly was not to our standard”, it was reported. Its vendor has been “talking” of improvements ever since. However, said the treasurer, “it’s very slow; there’s lots of lip service but not a lot of delivery”. The search continues.
The ‘ideal’ is a “multi-product platform”, taking a best-of-breed approach for time deposits, money markets and repos, but also offering an integrated view of treasury’s underlying exposures across all products, as well as incorporating investment policy and compliance features. Yet the ideal remains elusive.
While there is significant competition in the short-term platform market, it was criticised by some panel members as “basically all doing the same thing”. Given the number of years that these platforms have existed, the view was expressed that vendors have “underinvested”.
With funds now paying less to the portals, it was agreed that “it’s probably not the right time for them to have an aggressive investment strategy”. Nonetheless, more customer-centricity would be appreciated by treasurers, as would greater willingness on the part of the vendors to collaborate on new features that users want, rather than those users being pushed to accept what is offered.
An opportunity was seen here by one panellist for the TMS vendor community to step in and deliver the right products. “Sadly, its one that hasn’t been realised,” they reported. Indeed, even though this treasurer’s existing TMS has been in place for around six years, and despite deployment of a very usable portal, all of their investments are still handled ‘off-line’.
“We love our portal – we were an early adopter and have a great financial arrangement – but it would have been nice if our TMS vendor had said ‘let’s build an interface for you’. I think on both sides we would have got some benefits.” The company has several negotiated bank deposits, with rates tending to be higher than MMF returns, but they’re not in the system. “That’s a real shame because it’s a significant amount in assets.”
One treasurer with the full suite of available TMS functionality still described it as “rubbish”, believing the vendor to have “dropped the ball for treasury”. Many banks offer automatic overnight investments into MMFs but these are obviously proprietary and partisan, it was said. Using a bank-agnostic system for foreign exchange (FX) transactions has not been an issue, so now this treasury is seeking a bank-agnostic investment portal.
But there was frustration here. With solutions having been on the market for years, the panellist argued that “it’s time to give us something that’s ready to go. You know what corporates want on the offer side, so do something, give us something that we can just plug and play”.
The Calastone whitepaper findings add further weight to the panel’s opinions around the need for improved systems’ integration and functionality: 93% of corporate respondents feel that some aspect of the MMF investment process needs better automation. Meanwhile, 33% of corporate respondents cite manual data entry and reconciliation across systems that do not interact or integrate seamlessly as a significant burden that should be eliminated.
The bottom line:
Investment technology firms have not fully delivered in crystallising many of the benefits and improvements that the new technologies offer. Such heartfelt views should make sure that vendors and fintechs deliver the tools that are actually wanted, as opposed to the tools they want to provide. Staying agnostic is the key for providers such as Calastone, and this was acknowledged as “absolutely well said” feedback.
The ability to translate needs of the treasurer, and be able to connect all players seamlessly, will not only accelerate the uptake of market alternatives but it will also be the key differentiator for any vendor or fintech that wants to play in this competitive arena.
