Published: May 01, 2013
Risk and Reward: Making Your Cash Work Harder
During the Cash Management University programme organised by BNP Paribas smaller workshop sessions allowed delegates the chance to interact with their treasury peers and representatives from BNP Paribas and other vendors. One such session focused on short-term investment options for treasurers.
The theme of the workshop was how treasurers can make their cash work harder for the business in a time when the economic situation remains challenging and risk management figures highly on the treasury agenda. Proceedings began with a presentation from BNP Paribas Investment Partners that focused on the current market conditions and how treasurers are responding to them.
One of the main problems faced by treasurers in the short-term investment area is that interest rates are very low. Low rates are not just a euro phenomenon and have been seen in a number of global currencies over the past few years. Perhaps the one thing that differs in the past six months is that, while there has been little variation in the Fed fund rate or the Bank of England rates, there has been a move by the Eurozone. Here, the 30-day average rate has dipped from around 0.35% in July 2012 to below 0.1% by November 2012. This is the result of an attempt by the ECB to protect purchasing power and therefore price stability in the Eurozone. On top of the low rates, short-term credit spreads are tight, even expensive.
The presentation went on to look at how treasurers are reacting to these challenging conditions. Many are reviewing their strategies to take into account the flat markets, with access to liquidity being a key priority. To ensure this, corporates are looking to improve corporate efficiency and hoarding cash.
As a reaction to the lack in availability of bank loans, some corporates have looked to see if there is opportunity to issue via the bond market.
Many are also reviewing their sources of liquidity. As a reaction to the lack in availability of bank loans, some corporates have looked to see if there is opportunity to issue via the bond market. Those that are already in this market are making sure that they are ready to go at a moment’s notice if the markets do the right thing. For corporates that have issued in the past, it might actually make sense to buy some of those bonds back. In addition, corporates are reviewing their banking partners to ensure that they access to strong lenders and service providers.
Thinking ahead, and while it is possible that the Eurozone will not break up, it is prudent to have a contingency plan if that should be the case. This has been another issue that has been on the mind of corporates over the past year. Some companies are giving consideration to whether the entity that is borrowing and the entity that is holding their cash are actually in the right places, given the scenarios that the company may envisage happening to them.
With access to liquidity secured, the next issue facing treasurers is how to make prudent investment choices. There are a number of factors to consider here. For example, one question to ask is whether your organisation can or will accept negative interest rate returns. There is also a question around whether your treasury prefers to focus exclusively on AAA-rated money market funds (MMFs) or whether there are steps that you can take as a company to determine your own tolerable risk exposures to different investment options. The point was made that through revamped counterparty policies and carrying out diligent regular reviews of exposure, it is possible to diversify investments in safe directions. Some new products on the market do provide the safety and liquidity that treasurers are looking for while also including some yield. However, it may take some time before there is much interest in products beyond those that are AAA-rated.[[[PAGE]]]
Being able to quickly and accurately establish investment exposures to different countries, banks and other counterparties, is essential for treasurers. This knowledge aids the efficient management of investments in line with the risk profile that the company has, while it also lets the treasurer move funds to take advantage of changing circumstances.
Technology plays an important role in delivering this functionality. This was the focus of a presentation by SunGard during the workshop, which specifically highlighted the benefits of using an MMF portal to manage your exposures.
A portal of this kind will gather holdings on a huge variety of funds. It can then consolidate, search, identify and gauge exposure by industry sector, CUSIP/ISIN, credit rating, country, issuer or by underlying security. The treasurer can then use the portal to quickly assess risk and exposure, drawing upon multiple data points across their portfolio. Many portals also incorporate a ‘news feed’ feature, where variables such as credit ratings are validated on a daily basis.
The presentation laid out the following benefits that a portal could offer treasurers in managing MMF investments:
With the markets currently flat, using technology tools such as MMF portals can help treasurers easily identify and act on subtle differences in the performance between different funds. Even if this comes down to identifying just half a basis point difference in performance, the treasurer is in control to adjust his or her portfolio accordingly, making their cash work harder for the business.
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