The New Generation of Cash Management

An Interview with Jason Singer, Managing Director, Head of International Cash Portfolio Management, Goldman Sachs Asset Management

AAA-rated money market funds (MMFs) including government funds, have typically been seen as the safe haven that many investors have come to rely on during the turbulence of recent times. But with market confidence starting to return, albeit tentatively at this stage, how are treasurers likely to develop their cash investment strategy? In this interview, we are delighted to talk to Jason Singer of Goldman Sachs Asset Management (GSAM) on the changes that he is witnessing amongst corporate investors.

Corporate investors have been increasingly attracted to AAA-rated MMFs, particularly government funds, over the past year, during a period of heightened concern over counterparty and liquidity risk. Consequently, security and liquidity have been considered paramount, with little if any focus on yield. Do you see any signs that corporate investment behaviour is changing and to what would you attribute this?

Absolutely, the past year or so has seen a so called ’flight to quality’ with assets under management in MMFs almost doubling. We have also seen the emergence of government and treasury MMFs, a new category of funds within the money market group. These funds invest exclusively in government and treasury debt and have been very popular with European and Asian investors. As markets stabilised and confidence started to return in the second quarter of this year, AAA-rated MMFs continued to generate phenomenal interest, but some investors also started to seek higher yields than those provided by government funds in particular. As a consequence, there has been a modest 10% fall in assets held in government funds while funds including instruments such as commercial paper have started to grow.

The opportunities for higher yield are still modest given the low interest-rate environment. Security and access to cash remain vital investment criteria for most, but an increase of a few basis points’ yield has some value which investors are increasingly seeking to leverage.

However, the big and we think long-term change to investment behaviour lies in the way people view cash. Increasingly, cash is seen as an asset class in its own right. This means that corporate investors are taking a much more active approach to money market funds – and a much more active and thorough approach to evaluating managers.

What investment opportunities do corporate treasurers have to increase yield without unduly compromising security and liquidity?

There are inevitably compromises to be made if the balance between these three cornerstones of investment policy is shifted. Until recently, security and liquidity have seemingly entirely eclipsed yield in priority, and companies have been able to enjoy same-day liquidity and capital preservation. If these considerations remain the primary emphasis, then investing in AAA-rated MMFs, including government funds, will remain a priority. However, some companies are able to make compromises in terms of access to liquidity. In these cases, they may decide to pursue a Libor-generative approach as part of their overall cash management strategy.

What should a treasurer understand by Libor generation, and what type of instruments would be included?

Essentially a Libor generation strategy is one that seeks to increase the returns on cash by investing in a wider range of instruments than AAA-rated MMFs. For example, we see triparty reverse repurchase agreements (repos) as being a valuable investment instrument. These can be pooled within a fund, or used for investment individually. Either way, we believe repos present a low-risk strategy which should be attractive to treasurers. [[[PAGE]]]

What are the pros and cons of a Libor-generative approach? What typical compromises do investors have to make in order to benefit from enhanced yield?

We would not anticipate that treasurers would place all of their cash into a Libor-generative instrument, but that Libor generation would be part of an overall strategy. The compromise that companies are making is primarily liquidity. There is an opportunity cost to keeping all cash in highly liquid instruments (such as AAA-rated MMFs with same day access to cash) which is appropriate for a portion of the company’s cash; however, not all cash is required on a daily basis. For example, a company that is highly cash-generative and/or has the ability to forecast cash requirements with some accuracy may have surplus cash which can be invested for a longer period. The approach we suggest is to use maturity ladders to match the maturity of the investment instrument with the cash requirement.

Cash is now recognised as a separate asset class requiring active management. Before the crisis, it was possible for investors to find constant returns based on 3m or 6m Libor with very short-term liquidity, perhaps T+1 or T+2. This was one of the issues that we think fuelled the crisis: although investors had access to very short-term liquidity, the underlying assets might have had a far longer maturity. Over the past 12 to 18 months, the market has evolved. While there are now increasing opportunities for modest Libor generation, such a strategy needs to be linked more closely to the maturity of the instrument

With the proposed changes to the classification and regulation of MMFs, what will this mean for Libor-generative instruments?

The proposed changes in regulation, and likely classification of MMFs into short-term MMFs (which would incorporate the AAA-rated MMFs covered by Institutional Money Market Funds Association [IMMFA]) and regular MMFs, are undoubtedly a positive development for investors and for the wider industry. We warmly welcome increased transparency, industry harmonisation and greater investor education, so we are very supportive of these changes. How the proposals will affect Libor-generative instrument is as yet unclear, as it is still an evolving asset class.

However, whether investing in AAA-rated MMFs and/or pursuing other opportunities for Libor generation, it is still essential that investors conduct their own due diligence on their cash manager and the products in which they invest, irrespective of the greater assurances provided by regulation. For example, one of the things that we suggest that treasurers look at is the materiality of the cash business to their manager i.e. whether it is a core, or supplementary business. For example, GSAM has over $664bn1 in assets under management, of which $282bn1 in assets are in MMFs. Companies need to be assured that their cash manager has the competency to manage their cash effectively and that they are providing the instruments that the business requires.

One of the other things that we suggest that treasurers consider is how MMF providers have navigated through the past two years since the sub-prime crisis first materialised. What changes have they made to their investment processes and what degree of focus do they place on credit research?

How do you see investor behaviour, and the products in which they invest, developing over the foreseeable future?

Although as discussed previously, the growth in assets held in MMFs has started to level out over the past couple of months, after an unprecedented rise, we believe that MMFs will continue to be in vogue. We think that it is likely that some investors will seek to move a portion of their cash into Libor-generative products, but we also think there will continue to be a progression of new users who recognise the value of MMFs with their inherent diversification and same-day liquidity, compared with deposits with fixed maturities and exposure to a single counterparty.

Every transaction starts and ends with cash, and the importance of cash as a distinct asset class is now recognised, leading investors to be more diligent in the way that they manage it.

1 As at March 31 2009