Published: April 01, 2008
The 2007 survey attracted corporate treasurers from around the world who provided constructive feedback. With such a wide and varied range of respondents, the survey, which has again been compiled in conjunction with The Association of Corporate Treasurers (ACT), continues to provide valuable insights into the current dynamics that drive the cash management industry.
As in previous years we are very pleased to have received the support of the European Associations of Corporate Treasurers (EACT), which has helped to boost the number of responses from across Continental Europe.
Despite the increased number of surveys now being conducted in the sector, this year’s Global Cash Management Survey has been successful in attracting a record number of respondents from across the world. In total, 339 qualifying responses were received, fifty percent more than last year. The majority of these, 290, were received electronically, with the remainder completing an identical, hard-copy version of the questionnaire.
The responses this year are particularly interesting because the Survey took place over the summer, at the start of the credit market difficulties. Where possible we have tried to separate the online responses (which can be accurately dated) into those received before September, and those that were returned during or after September, to see if we can see any noticeable changes in responses.
In addition, we conducted interviews with a number of survey respondents in November, to clarify certain points and gauge any changes of opinion that may be driven by the ongoing crisis in credit markets. We have incorporated any changes in sentiment, where appropriate.
Number of responses
The number of responses this year (339) was the largest ever, with over 50% more respondents than last year (206), and above the previous record set in 2005 (310).
Respondents clearly preferred to provide their responses online (290), representing a similar preference to last year. The survey once again attracted wide participation from both a geographic and corporate perspective, with responses received from treasurers acting for different sized companies in a range of industries and from across the globe.
Country where surplus cash is managed/location of respondent
This year the Survey was more globally inclusive than ever, with an impressive global spread of respondents covering a wide range of regions and markets. Geographically, the largest proportion of responses once more came from the UK with 23%, but this is down from 49% in 2006. Meanwhile the USA, Germany and Czech Republic were in second, third and fourth place with 18%, 14% and 7% respectively. [[[PAGE]]]
Response on behalf of group or subsidiary
The vast majority of respondents answered on behalf of the parent group, with 76% of responses from parent groups. This has been trending slightly lower over the last couple of years, down from 80% last year and 82% in 2005. Parent groups represented the highest proportion of respondents in the US (94%), and the lowest proportion in Eastern Europe (43%). Conversely, 57% of Eastern European responses were on behalf of subsidiaries.
Market capitalisation
For the first time this year, the proportion of all respondents from companies with a market capitalisation of over USD 5 billion reached 50%, up from 39% in 2006 and 31% in 2005.
While the range of companies was very broad, the vast majority of all respondents represented companies with a market capitalisation of over USD 500 million, with only 14% of responses from companies with a market cap below this. The exception to this was in Eastern Europe, where the percentage of companies with a market cap of USD 500 million or less (29%) was double the average for all respondents.
Number of banking relationships
The number of banking relationships appears to have increased since last year. This is unexpected because it reverses the trend of recent years, which showed a steady trend towards fewer banking relationships. One possible reason for the increase in the number of banking relationships this year could be the credit market turmoil, which may have prompted cash managers to search further afield for services, better yield and to spread risk.
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While the majority of respondents continue to have five or fewer primary bank relationships, at 76% this year, the proportion is slightly lower than last year when 83% had five or fewer relationships. Looking at the results by region, respondents in the UK have the greatest number of primary banking relationships, followed by Western Europe. 63% of UK respondents had five or fewer primary banking relationships, while 20% had
6-10 relationships. The proportion of respondents who have five or fewer secondary bank relationships has also declined, with 38% this year compared to 45% in 2006.
Services primary banks are used for
Once again, cash management services, credit facilities and foreign exchange services were the top three banking services used by respondents, with very little change in the overall percentages. However, respondents are now using a wider range of services. The percentages of respondents using trade finance, consultancy and advisory services, risk management, asset management and pension services all increased significantly, by at least 10% in each area. The large rise in asset management services was mainly due to a far higher usage of this service by respondents in the US.
Important criteria when selecting a primary bank
This year, as in previous years, credit facilities and the quality of relationship management were the two most important factors. However, they have swapped places since last year, with the quality of relationship management, customer service and support taking the top spot this year.
The events of the summer appear to have had no real impact on bank selection criteria. This is what we would have expected, because the majority of treasurers will select their banks at the start of the year.
Use of online portals/platforms
We asked the survey participants about their use of online portals/platforms. The largest proportion of respondents who do utilise these online tools use them for cash management purposes, with foreign exchange and investments in second and third place.
In each category - general cash management, foreign exchange and investments - the majority of respondents preferred to use multi bank rather than single bank platforms. [[[PAGE]]]
Multi bank platforms are those which are connected to more than one bank. The largest difference between single and multi bank platform usage was for investments, with 40% and 60% respectively, reflecting the need for multiple brokers by the majority of US corporate treasury departments who opt to participate directly in the security markets. These platforms have been more popular and prevalent in the US, compared to Europe and Asia, and more popular with self directed treasuries.
There has been a sharp increase in the use of multi bank portals since 2006, when only 23% of respondents used this service and 48% used single bank portals.
Looking at the responses by location, there is a preference for multi bank platforms across all regions. However, the largest proportion of respondents using multi bank rather than single bank platforms was in Western Europe, where 64% used multi bank portals.
Areas of importance for the treasury department
As would be expected, cash management remains the most important area for treasury departments. The importance of this area has further increased this year, with 53% of respondents assigning it the top score, up from 45% in 2006.
Cash flow forecasting was once again deemed the second most important area by treasurers, although the percentage assigning it the top ranking has declined from 26% last year to 16% in 2007. Control issues and risk management were placed third and fourth respectively.
The results are particularly interesting when looking at pre and post September responses. In particular, cash flow forecasting and risk management were deemed to be more important for those who responded during or after September, while control issues and cash investment were less important to this group.
How cash management is structured now and in the future
The proportion of pure global cash management structures is 29%, which has barely changed since 2006 (28%), despite expectations last year of a large increase in this category. However, there has been a 10% increase in the proportion of global oversight with regional autonomy structures, to 41%.
Treasurers again predict a future increase in global cash management structures, forecasting a rise to 47%. In conjunction with the predictions made last year, it therefore appears that respondents expect change to occur at a faster pace than actually happens. [[[PAGE]]]
Surplus cash allocations by region
Bank deposits continue to be the most commonly used type of investment, with the overall allocation remaining static at 61%. There is, however, a high degree of regional disparity.
US treasurers are most likely to use pooled investments, with 63% of surplus cash allocated to this investment type, compared to an all-region average of just 30%. They are also the highest users of direct investments, allocating 20% of surplus cash to this investment type, compared to just 2% in the UK where treasurers allocate the least amount of surplus cash to direct investments. Furthermore, US treasurers are least likely to allocate surplus cash to bank deposits, allocating just 17% to this investment type, compared to the 61% all-region average.
In contrast, Eastern European treasurers are the highest users of bank deposits, with 81% of surplus cash allocated to this investment type, up from 71% last year. Pooled investments have not yet become fully acceptable in this region, with only 5% of surplus cash allocated to this investment type, down from 9% in 2006. One reason for this trend might be the greater percentage of companies from Eastern Europe with a market cap of USD 500 million or less. It may also signal a lack of presence of money market fund providers in the region, and the fact that money market funds in Europe are primarily offered in Euro, US Dollar and Sterling, rather than local Eastern European currencies. As these countries adopt the Euro we are likely to see pooled investments gain in popularity in the region.
Surplus cash allocations by market cap
The responses show a general trend for larger companies to be more likely to allocate surplus cash to pooled investments, while smaller companies are more likely to use bank deposits.
Instruments used for pooled funds
Money market funds continue to be allocated the largest percentage of assets, with an overall average of 71% allocated to this type of pooled investment, although this is down from 80% in 2006. Money market funds are also the most used vehicle across all regions and by every market cap. This reflects the importance and acceptance of money market funds by treasurers as the most efficient vehicle for providing security, liquidity and competitive yield for risk averse investors. It is interesting to note that before September, more treasurers were using and interested in using enhanced yield funds, however this trend reversed itself post September, reflecting the risk aversion that has been prevalent in the markets since last August.
By region, UK treasurers use the narrowest range of pooled investment instruments, with no respondents using short dated or total return funds. In contrast, Western European treasurers are more likely to use short dated or enhanced yield funds.
The use of money market funds appears to be highly correlated to company size: as market cap increases, so does the use of these funds. This is also the case with total return funds, which are not used at all by companies with a market cap of less than USD 500 million.
Pooled instruments being considered for use
The majority of treasurers who are considering using pooled instruments are looking at money market funds, with 58% weighing up this option. However, while current use of enhanced yield funds is low (16%), another 39% of respondents are considering using this type of investment - more than one-third of those considering using any type of pooled investment.
Looking at responses by date, there was a significant drop in those considering using enhanced yield funds during or after September, compared to interest registered by those who replied before September. This may reflect a direct response to the credit crisis, and a perception that enhanced yield investments could produce better returns but with increased risk.
Meanwhile, the use of segregated/separately managed accounts and short-dated fixed income funds could potentially more than double from their current usage of 22% and 18% respectively. As cash reserves continue to grow across all industries, in combination with a greater understanding of money market instruments, many treasury departments are beginning to feel that customised segregated accounts are a more suitable option for them. This result may also be partly driven by the popularity of segregated mandates in the US and an increase in the absolute number of respondents from that region.
Criteria in order of importance for selecting pooled investments
When selecting AAA-rated money market funds or enhanced yield funds, treasurers thought that yield was the most important factor for both vehicles.
In terms of AAA-rated money market funds, 33% of respondents ranked yield top. This reflects a change in sentiment since last year, when reputation/brand was considered to be the most important factor. In 2006, 28% ranked yield as most important, putting it in second place behind reputation/brand, which achieved the top ranking from 35% of respondents. This year reputation/brand has fallen to third place, with bank relationship taking second place. [[[PAGE]]]
Investment convenience has also fallen down the order of selection criteria for AAArated money market funds, from 8% rating it most important in 2006 to just 2% this year. This change is most likely due to improvements in investment convenience, causing treasurers to take it more for granted.
Looking at the timing of responses in relation to selecting a money market fund, treasurers who responded from September onwards thought that yield, bank relationship and fees were all more important than those who responded before September. In contrast, cut-off time was considered to be much less important.
Reasons for respondents who will not be using pooled funds
For treasurers who do not currently use pooled funds and who are not considering using them, the main reason continues to be their preference for managing cash internally. The second largest reason is that they are net borrowers, which was also the second most important reason last year.
Money market instruments currently used/considered for use
Commercial paper and certificates of deposit are the two most commonly used money market instruments, with 25% and 24% of total money market instrument allocations respectively.
Respondents were also asked which instruments they are considering using in the future, which revealed a positive outlook for short-dated government bonds, short-dated corporate bonds and floating rate notes. The potential increase in short-dated securities may be a result of treasurers anticipating higher emphasis on chasing yield, while the wider availability of floating rate notes may mean that treasurers are more comfortable using them.
Investments allowed by guidelines
Responses this year suggest that there are fewer guidelines in place for bank deposits and pooled investments than last year, but more guidelines for direct investments.
By region, notable differences are the much lower allowance of pooled investments and direct investments in Eastern Europe, while the US and UK have fewer guidelines restricting pooled investments, and the US also has a higher allowance of direct investments.
Investment period and cash balance
Most respondents invest their surplus cash for a short period of time. Euro and US Dollar denominated investments both have an average life span of one month, while Sterling investments have a slightly shorter time horizon, averaging just two-and-a-half weeks. For all three currencies, the average cash balance was less than 50 million.
Minimum credit rating required
In line with previous years, respondents who invest in pooled investments are much more likely to require AAA-ratings for these investments. [[[PAGE]]]
Ratings allowed by investment guidelines
Meanwhile, investment guidelines for credit ratings were also the most stringent for pooled funds, and across all ratings agencies.
Frequency of credit rating monitoring
Consistent with last year’s survey results, there is no clear consensus over the appropriate frequency with which to review credit ratings and a wide range of strategies are applied across the different regions.
However, in Eastern Europe credit ratings are most likely to be only checked at the point of investment (41%). Conversely, Eastern Europe also has the highest percentage of respondents who monitor credit ratings on an annual basis (29%), while treasurers in the UK and Ireland are most likely to monitor ratings on a quarterly basis.
By size, smaller companies are more likely to only monitor credit ratings at the point of investment, with 61% of respondents from companies that have market caps of USD 500 million or less selecting this option. Respondents from companies that have a market cap of more than USD 500 million were increasingly likely to review credit ratings on a quarterly basis.
More respondents require LIBOR+ for their pooled and direct investment target returns than for any other single target. Bank deposit target returns were more evenly distributed between LIBOR+, LIBOR, LIBID and EONIA.
Willingness to take risk for higher yield
When seeking higher yield, respondents were most willing to take on additional duration risk and least willing to take additional foreign exchange risk. However, when looking at responses submitted during or after September, respondents were less willing to take credit risk, more willing to take foreign exchange risk, and even more willing to take on duration risk. It will be interesting to see whether this change in sentiment is just a short-term reaction or the first sign of a new long-term trend.
Cut-off times by currency
Consistent with previous years, most respondents favour late morning cut-off times for Sterling, Euro and US Dollar positions. Sterling and US Dollar position cut-off times also have a smaller peak mid afternoon.
Sixty-seven per cent of respondents also indicated that they would be willing to consider an earlier cut-off time if it meant delivering a higher yield.
Currency and location of surplus cash
Last year the largest amount of cash holdings (44%) were in Sterling; however, this has declined substantially to just 18% this year. At 39%, the largest proportion of surplus cash is now held in Euro, with the US Dollar in second place with 32% of cash holdings. This change corresponds with a decline in the percentage of respondents from the UK and a rise in the proportion of responses from Central and Eastern Europe.
By location, there has been an increase in Euro investments held in Germany at the expense of the UK.
Comparing responses submitted during or after September with those completed before, there was a substantial increase in Euro holdings and a decline in surplus cash held in US Dollars. [[[PAGE]]]
Reasons for choice of cash location
Respondents were asked to select two main drivers for their choice of location for holding cash. The most important reason is clearing services and cut-off times, which is consistent with last year. However, tax has now moved up to second place, with customer service and time zone joint third. Interestingly, respondents tended to select either clearing services and cut-off time or tax as a main driver, but not both.
Techniques used in cash concentration structures
Zero balance structures were the most popular vehicles among treasurers, used by 49% of respondents. Notional pooling was less popular (13%), while 24% used both notional pooling and zero balance structures.
Use of automated investment sweeps
There has been a slight increase in the usage of automated sweeps, which is consistent with last years’ responses. This year 44% of respondents use automated sweeps. Out of the 56% who do not use them, the perceived lack of accuracy of real-time cash projections remains the main deterrent, while insufficient parameter flexibility was also viewed as negative.
This year’s Survey results show very little difference in the cash positions of companies from the 2005 and 2006 surveys. Subsidiaries were again more likely to be depositors than parent companies, with 56% of subsidiaries depositing compared to 41% of parent companies.
Services outsourced to an external provider
This year, the most used service from external providers was cash pooling, which was the third most popular in 2006. The actual percentage of respondents using this service has increased by approximately 20% since last year.
Meanwhile, last year’s most common external service was foreign exchange execution, which fell to third place this year although the percentage of respondents using this service is roughly unchanged. The second most utilised external provision was for automated cash sweeping, up from fourth place in 2006. [[[PAGE]]]
In the final section of the Survey, treasures were asked to comment on the key concerns that they have about managing their surplus cash and in their treasury departments. Respondents were also invited to express their views on future developments.
Concerns about managing cash positions
The concerns raised about cash management were very similar to those expressed in previous years. The most common concern was good forecasting, while liquidity issues, yield and reporting were also highlighted.
Concerns in the treasury department
The largest concern expressed by respondents was about merger and acquisition activity, with 18% highlighting fears about the impact that M&A deals would have on their own company and working environment. Meanwhile, 16% of treasurers were also worried about the changing regulatory environment, which they felt overloaded operational tasks with additional reporting requirements.
Predicted developments in cash management
The impact of the Single European Payments Area was seen as the key future development, which is consistent with last year’s results, with 26% of respondents highlighting this issue. Automation, globalisation and online based solutions were also predicted to increase in the future.
Additional views in cash management
Responses varied greatly in terms of how external providers could assist with cash management. However, improved systems and services were key themes, while 10% of respondents also flagged better cut-off times.
The Global Cash Management Survey 2007 has revealed some interesting findings, both in terms of persistent, ongoing trends and for the aspects of cash management where attitudes or trends are changing. The telephone interviews that we conducted in November have also proved particularly helpful, both in providing additional valuable insights and enabling us to gain more in-depth views on some of the findings from the Survey.
Hence there was a definite sense of expectation that the consequences of the credit crisis would be managed within this context, and not on a more global level.
The survey is provided to you for information purposes only. The views expressed herein are not to be taken as an advice or recommendation to support an investment decision.
The complete survey can be read at http://www.jpmgloballiquidity.com/gle/4_3.php
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