Corporate treasurers, a cautious lot, are taking baby steps to add risk.
Corporations worldwide are sitting on a mountain of cash that for the most part is earning very little return. Many companies are updating their investment policies and preparing to change the mix in terms of how they manage that cash—particularly as leaving it sitting, unproductive, in bank accounts could soon become quite expensive. They are evaluating internal guidelines for investment and, in some instances, looking for outside help.
Change has been slow. However, as new regulations take hold and companies start to feel the bite from new fees on liquidity held in bank accounts, the pace of change could pick up—and quickly.
Although many corporate treasurers have refinanced their companies’ debt to take advantage of low interest rates, they are also overseeing huge stockpiles of cash that, activist investors might argue, would be more productive in shareholders’ hands than moldering in low-yielding bank accounts.
“There’s a ton of cash out there that needs to be invested,” said Peter Frank, an advisory principal at PwC specializing in corporate treasury management. “With rates incredibly low around the world and a lot of regulatory changes happening, it’s a tough environment [in which] to be managing excess cash.”
There is a lot to manage. Moody’s Investor Services pegged the combined cash balance of US corporations at $1.7 trillion at the end of 2014. Bloomberg puts the figure much higher. Based on public filings, the news organization says the top 299 American companies have $2.1 trillion in cash parked in off-shore markets alone—there to avoid paying big taxes on repatriation.
US companies aren’t the only ones hoarding cash. The 600 companies in the STOXX Europe 600 Index have a total of €2.2 trillion ($2.5 trillion) in cash among them, according to Bloomberg. Interest rates in much of Europe are even lower than in the US, and with new Basel III banking rules starting to bite, some European banks are actually starting to charge companies to hold excess cash in deposit accounts.
“It’s an ugly short-term cash investment scene out there,” said Craig Martin, executive director of the Corporate Treasurers Council at the Association of Financial Professionals. “There is still not much yield pickup for taking risk.”
Corporate treasurers on the whole remain a very conservative group, more interested in limiting risk than in earning returns. With short-term interest rates extremely low around the world, treasurers are loath to take on more maturity and credit risk despite their growing cash piles. “Corporations tend to have very low appetites for risk when it comes to investments,” said Frank, who noted that he has not seen a lot of corporate clients changing their investment policies. “It’s not their business. Their primary objective is capital preservation and maintaining liquidity, and yield is third on the priority list.”
There’s a ton of cash out there that needs to be invested.
~ Peter Frank, PwC
Nevertheless, corporate cash managers will have to rethink their core cash management strategies, because their two favorite investment vehicles–bank deposits and money market funds–are undergoing major regulatory-inspired changes. That coupled with an investment landscape that is likely to include rising interest rates (eventually), and expanding risk spreads, provides an incentive to start managing cash more actively and hiring outside managers to help.
“Investors haven’t been paid much for taking risk in this environment. That will likely change in the next 6 to 12 months.” said Ben Campbell, CEO of Capital Advisor Group, an investment adviser specializing in institutional cash investments. “With still-low interest rates and a stable economy, we see treasurers looking to add in risk in a measured way.”
They aren’t exactly jumping in with both feet. An annual survey of corporate financial professionals in the US conducted by Campbell’s treasury consulting firm, Strategic Treasurer, suggests that most have yet to decide what to do about their core cash management situations despite new Basel III rules and imminent changes in money-market fund regulation.
On the banking front, corporations have been slow to address their exposures to uninsured banks, despite the significant deterioration in bank credit ratings since the financial crisis. Various kinds of deposit accounts at banking institutions remain the favorite investment vehicles of corporate cash managers, with 70% of survey respondents using them in the US and 49% using them for offshore investment. Almost half (49%) of cash managers said their companies had no investment policy limit on their exposure to uninsured bank deposits, and 23% had no minimum credit rating for banks they would deal with.
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.