Corporate treasurers, a cautious lot, are taking baby steps to add risk.
The banks are becoming a less attractive place for companies to hold cash. With Basel III rules forcing banks to hold greater reserves against demand deposits, many no longer want the cash. In some cases, banks in Europe have started to charge companies for holding it. “There are a lot of stresses on the banking side,” said PWC’s Frank. “The banks have to hold higher reserves, and it limits their ability to earn returns.”
The other major investment channel for managing large amounts of cash—money market funds—are also in the midst of transition. New rules from the Securities and Exchange Commission that go into effect next summer will force institutional prime money market funds (which can invest in nongovernment securities) to have floating net asset values (NAV) as well as liquidity fees and withdrawal gates, depending on the situation (see Re-Weight And See, page 24). Treasurers don’t like any of that, but they have yet to decide what to do about it. When asked how their investing would change as a result of the reforms, 14% said they would stay in prime funds, 13% said they would shift to stable NAV government funds, and 56% said they didn’t know yet, according to the liquidity survey.
“We thought there would be more of a plan of attack by companies at this point, but they’re waiting to take action,” said Campbell. “We’re still in the early stages of evaluation of the situation.”
The fallout from the financial crisis is still fresh in corporate treasurers’ minds. Many cash managers got burned investing in “high-quality” mortgage-backed securities that offered more yield but ultimately carried far more risk. Chris Martin, head of liquidity products in the global asset management division of HSBC, said that corporate treasurers in all regional markets are now undertaking more reviews of their investment mixes, but it doesn’t necessarily mean that they’ll change the mix. “There’s nothing wrong with doing a review and determining that you’re happy with where you are,” said Martin at HSBC.
Campbell does see plenty of evidence, however, that treasurers are preparing for change, including updates to corporate investment policies. Forty-two percent of respondents said they had updated their investment policies within the past year. Of those changes, 21% were to add more asset classes to their investment mix, 13% were to lengthen allowable maturities on investments, and 18% to add restrictions on the purchase of specific risky securities.
“We’ve seen companies start to put in the infrastructure to handle separate accounts external and other options available to them,” said Campbell. With a separately managed account, an asset manager invests in securities on behalf of a nonfinancial corporation with an investment strategy tailored to meet specific liquidity, risk appetite and yield targets.
Given the amount of cash available for investment—and given how lean many treasury organizations have become since the financial crisis—it makes sense that companies would look for outside help to manage money. Without the resources internally to analyze complex investments, making use of the services of external asset managers could become more common. “Companies with significant excess cash have always used external managers for certain things,” said PwC’s Frank. “However, all the changes in markets will expand the opportunities for outside managers to help with various parts of [corporate] portfolios.”
“It’s an ugly short-term cash investment scene out there.
~ Craig Martin, AFP
Other than the largest pharmaceutical and technology companies—who have in-house asset management groups like Apple’s Braeburn Capital and who still often use external managers for pieces of their portfolio—most companies don’t have the means to invest in asset classes like real estate, commodities and alternatives across global markets.
That represents an opportunity for asset managers. Chris Martin, head of liquidity products in the global asset management division of HSBC Holdings, helps clients determine their cash and liquidity needs and draft investment strategies for their cash holdings. HSBC is one of the largest global corporate asset managers, and Martin said he is seeing a lot more interest from corporate clients in separate accounts managed by HSBC and other outside professionals.
“If companies don’t need daily liquidity on all their cash, separately managed accounts are an alternative that can enable a higher yield,” he said. “Not every separate account will be seeking a higher return, but you can customize the accounts to your requirements.” While corporate clients still have capital preservation and liquidity foremost in mind, they are more actively considering options. “With the combination of low yields and regulatory reform, it’s natural that companies would be looking for alternatives. We’re seeing a lot of interest in reviewing money market funds and managed accounts.”
One approach is to segment cash into separate buckets—working capital needs, the core cash liquidity buffer, strategic cash (for things like stock buybacks, M&A activity and/or business investment). Once those needs have been segmented, companies can determine the appropriate investing strategies for each bucket. “As yields start to pick up, there is more value in segmenting cash,” said HSBC’s Martin.