Approaches to Investing short-term cash in Corporate Treasury

Commentary

Risk versus reward. 

Treasurers face this eternal trade-off directly when investing short term cash. There is pressure to increase earnings, and a constant search for new solutions, but the priorities remain, in order:

1. Safety
2. Liquidity
3. Yield

Companies put a lot of effort into making money and bringing in cash: the potential downside to losing money outweighs any yield benefit risky investments may bring.

As always, there is a lot of complex detail, depending on the size, the cash balance and the culture of the company.

• Most companies have a formal investment policy, often approved by the board.
• One of the benefits of centralising cash is to avoid paying the bid/offer spread of having cash in one place, and debt in another. Several peers used notional pooling (BMG and JPMorgan were mentioned) to achieve this. Both banks offer deposits for the cash in the pool.
• The most used instruments are bank deposits and MMFs (Money Market Funds). A few peers invest directly in high quality sovereign bonds, as well as repos. The rules can be more flexible in highly regulated countries, such as Turkey and Angola.
• Some peers used bank deposits as a means of balancing wallet share with relationship banks, but most take advantage of the higher rates provided by MMFs.
• Others left pools of cash in different countries and regions: in these cases, the short term investments were frequently managed by a team in central treasury.
• One peer managing Latin America was pleased with the better yield offered by some currencies with higher nominal interest rates, though this was not a common approach. Most of the commonly used instruments are available in LA markets.
• All peers on the call apply counterparty limits. These are usually decided using the credit rating and (or) the CDS (available on Bloomberg). However, one peer has a maximum amount, irrespective of rating – this may be determined in relation to the company’s own loss bearing capacity. One peer also tends to focus on SIBs (Systemically Important Banks), be it globally or domestically important.
• One peer assesses counterparty limits frequently - they vary during the year.
• Peers also regularly monitor the share price of their banks, for signs of stress.
• There are nearly always restrictions on duration:
  • Typically, investments are short (maximum one to three months), to limit risk
  • Accounting is a factor: investments with a maturity beyond three months are not classified as cash equivalents. This is not a concern for everyone.
  • Some – rarely – cross 12 months
• MMFs, are widely used, but have to be managed: 
  • If the amount is significant, their mandates have to mirror the investment restrictions of the company for instruments, duration, counterparty limits and credit quality.
  • Usually, peers are not allowed to own more than a specified share of a MMF, to avoid potentially creating issues when withdrawing a large amount. 10% was frequently mentioned.
  • Most peers require detailed reporting of the holdings. This can be daily (direct, or via Bloomberg or Cachematrix in the Blackrock portal), but weekly and monthly updates are common.
  • For peers with multiple MMF holdings, the detailed data is aggregated. If several MMFs hold the same investment, the company may exceed its limit for that entity, especially if it also holds direct investments.
  • Peers also track the NAVs of their MMFs, to make sure they don’t “break the buck,” i.e., have a mark to market value below book.
  • One peer has unusually large cash balances, and uses an AI based reporting tool (Spotfire) for reporting
  • Cutoff times are a constraint. One US based peer finds high yield bank accounts are more flexible and give better rates.
  • Peers trade with their MMFs directly, or via their TMS – 360T and FIS were mentioned.
• Several peers also use asset managers – often relationship banks - with appropriately restrictive mandates.
• The peer with the unusually high balances also uses brokers to access a broader network: capacity can be an issue at quarter and year ends, when banks’ and MMFs’s appetite for deposits frequently wanes.
• MMFs usually invest in sovereign debt. Some peers invest directly in sovereign bonds, though most do not. None of the peers on the call authorised direct loans to other corporates
• Balance sheet structure is important. Many corporates view cash as a low yielding asset, but two peers’ companies consciously maintain significant cash balances, to reduce financial risk and to be sure funds are always available for R&D.
• Companies with significant long term cash balances sometimes may define a layer which is available for long term investments, which can include equity in entities with useful technologies. One peer stays with debt, but is looking at external fund managers and a new internal team for this layer.
• Switzerland applies a 1% stamp duty on withdrawals from MMFs which are not domiciled in the country. Australia has rules for intercompany loans which can make cross border cash pooling less attractive, thus increasing the need to invest locally. 

Bottom line: most corporates do not want to hold too much cash – but they all have to manage the cash they do have. Prudence and risk reduction are the order of the day – but every effort should still be made to maximise return, within the risk parameters. The more cash a company has, the bigger the effort. There is an extensive toolbox to manage the risks: counterparty limits, liquidity, concentration. 

This is another key area where treasurers do vital work the rest of the company does not always see, or appreciate.