Published: November 01, 2012
SunGard recently commissioned a study among corporate treasury professionals to understand corporate attitudes to cash investment, including strategic cash holdings, asset allocation, investment policies and transaction execution. This follows a similar study conducted in 2011 (a summary of which was published in TMI February 2012) enabling us to identify trends and developments over time.
The study attracted responses from 209 corporations globally. This included respondents from all regions and industries, with over 55% of companies headquartered in North America and a significant number of responses from Europe.
This article outlines some of the key findings from the study. For more information about the study or to reserve your copy of the report visit www.sungard.com/cashmanagement
The majority of companies involved in this study had already centralised their treasury at a global or regional level. Of those companies, 59% represented a single, global treasury centre, and 34% of companies are adopting a regional treasury approach. This data would appear to reflect a higher proportion of global treasury centres than would normally be expected; however, this may be explained by the fact that a large proportion of companies were headquartered in the United States, some of which have predominantly domestic cash and treasury management requirements. In addition, although individual respondents may represent a global treasury centre, this is not to say that the company does not also have regional treasury centres.
Approximately half (51%) of companies had not changed the degree of centralisation in their treasury organisation over the past 12 months. Forty-three per cent had increased the level of cash and treasury centralisation, illustrating that centralisation remains a priority for many companies. This is supported by the fact that since last year’s study, the proportion of companies with a decentralised treasury approach has fallen from 16% to 3%.
Companies hold cash balances for a variety of reasons. In the short term, cash is required for working capital financing (noted by 29% of the respondents). Some companies hold cash for the longer term to finance capital investment or mergers and acquisitions (M&A), to pay down debt and to pay dividends to shareholders. In addition, 17% of companies noted that they held surplus cash as a ‘buffer’ against dips in revenue in the future.[[[PAGE]]]
Figure 1 demonstrates that 40% of the companies had not experienced any material change to their cash balances over the past 12 months. Thirty-seven per cent of companies increased the amount of surplus cash, a third of which had seen a significant increase. The key reasons given for this increase were the following, in order of importance:
In addition, cost reductions (including interest costs), release of trapped cash, delays in capital expenditure, or M&A and divestments were also factors given. This is consistent with trends witnessed in recent years where companies are accumulating growing cash buffers for capital investment, M&A, or as protection against periods of lower revenues in the future.
Twenty-two per cent of the respondents reduced cash balances, typically as a result of M&A, capital investment, paying down debt or returning cash to shareholders.
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In the 2011 study, we highlighted the fact that corporate treasurers’ greatest investment challenges were mostly process-driven. For example, 42% of respondents in 2011 noted the need to enhance cash flow forecasting to facilitate better cash investment decisions. In 2012, market issues have once again emerged as a priority. Participants were asked to identify their three most pressing cash investment challenges, and to rank these in order (where 1 is the most important). Figure 2 clearly shows concern about the Eurozone crisis as the most pressing issue for treasurers. This also results in issues relating to counterparty risk, such as how cash can be invested securely bearing in mind that limits with highly rated banks may be fully utilised.[[[PAGE]]]
Regulatory changes such as Basel III and changes to MMF legislation1 are also creating considerable uncertainty in treasurers’ cash investment approach. An immediate issue for corporate investors will be the expiry of the Federal Deposit Insurance Corporation (FDIC) guarantee on non-interest bearing accounts on December 31, 2012. Many companies that have used FDIC insured deposits to ensure the security of funds will need to find alternative repositories for cash.
As Figure 3 shows, nearly 82% of respondents use bank deposits for cash investment, with an average of 57% of cash held in deposits. While only 40% of companies use short-term MMFs (typically constant net asset value (NAV), AAA-rated MMFs), these companies hold a high proportion of their cash in these funds: an average of 50%. This represents an increase of more than 11% from 2011. Although only 9% of companies surveyed invest in MMFs that have a variable NAV, these companies hold an average of 36% of their cash in these instruments. In 2011, this figure was only 4.5%, reflecting a gradual change to corporate investment strategy in line with changing regulation that differentiates between ’short-term MMFs’ that may have a constant or variable NAV with very rigid investment guidelines, and ‘MMFs’ that have a variable NAV and that allow maturities of a slightly longer term to be included in the fund.
Participants were then asked whether these instruments would be more or less important in the next 12 months. In most cases, instruments that treasurers currently use will remain at a similar level of importance in the future, but they expressed an interest in exploring a wider range of investment options, which links with the growing surplus cash balances experienced by many respondents. This is likely to be exacerbated further by the large amount of cash currently held in FDIC insured deposits that will now need to be invested in alternative instruments. Consequently, we anticipate that MMFs (including both short-term MMFs and MMFs under the new ESMA definition) are likely to become more important repositories of cash on the basis of their security and liquidity.
Forty per cent of respondents already used short-term MMFs for cash investment, with more than 25% overall indicating that these instruments were likely to become more important in the future. However, there remains a sizeable group of corporate investors who are not attracted to short-term MMFs or MMFs at present. This would appear to be surprising in light of the high credit quality, inherent diversification, sophisticated credit analysis, and access to liquidity that these funds offer. In 2011, the most significant reasons why companies chose not to invest in MMFs (either short-term MMFs or MMFs) were concerns over yield (30%), credit quality (29%) and liquidity (26%). These results suggested that some respondents were not yet familiar with these instruments, in that credit quality and liquidity are typically among the major reasons why companies choose to invest in these funds. MMFs represent a significant investment opportunity for companies currently invested in FDIC insured deposits, as they provide comparable levels of liquidity and security, and also a yield that is commensurate with interest bearing deposits.[[[PAGE]]]
In 2012, 9% of respondents are still not familiar with MMFs. Yield has become more important, cited by 45% of respondents as a reason not to invest in MMFs. Concerns regarding credit risk and liquidity also remain important factors, noted by 29% and 24% of respondents respectively. Regulation has emerged strongly as a concern, as regulators in both the US and Europe continue to focus on enhancing the resilience of funds to extreme market shocks.
Twenty-eight per cent of respondents mentioned ‘other’ reasons for not using MMFs. In most cases, companies did not have surplus cash balances and therefore cash investment instruments in general were not applicable to their business. However, among those that had surplus cash balances but did not use MMFs, the primary reason was that their corporate policy did not permit the use of these funds.
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Although companies’ asset allocation may be shifting or expanding a little to reflect a greater emphasis on yield and the need to find additional repositories of cash, investment policies have remained largely consistent over the past 12 months. In 2011, 44% of respondents’ investment objective was either preservation of capital with immediate access to all cash, or preservation of capital with immediate access to some cash. Seventeen per cent noted that while preservation of capital and liquidity were both important, their aim was to maximise yield. Some companies that indicated that preservation of capital and access to some of their cash was their priority last year are now more actively seeking an enhanced yield (Figure 4). Many companies have focused on improving visibility of cash and accuracy of cash flow forecasting over recent years, making it easier to quantify the amount of cash required for short-term needs, and the amount of strategic cash available for longer-term investment. Consequently, during the current extended period of low interest rates, during which time costs are continuing to increase, many companies are seeking to enhance their investment returns while maintaining a high degree of security and liquidity.
Just over half (51%) of cash investment transactions (except MMFs, see below) are conducted via telephone. With a variety of bank proprietary and independent portals now available, which can be integrated with a treasury management system (TMS) or enterprise resource planning (ERP), it is surprising that this number is still so high, particularly among large multinational corporations. By obtaining competitive prices through an electronic portal, transacting online and automatically importing the details of the trade and competitive quotes into the TMS, transactions are fully auditable, processes are streamlined, and the risk of error or fraud is substantially reduced. Consequently, companies that have not yet decided to use online trading portals have considerable potential to increase automation, transparency and accountability in cash investment decision-making.
Companies are more likely to use an online trading portal for MMFs than other instruments. Companies that are not yet using a MMF portal cite the lack of integration with their TMS, inability to access their preferred funds, and lack of familiarity with MMF portals as their reasons not to do so. However, some indicated that they have plans to introduce a MMF portal in the future. As MMF portals continue to gain traction, a growing number of fund providers are working with vendors to make their funds available through multi-fund portals, which is in turn making these portals more attractive. Furthermore, the objection that some companies raised that it was difficult to integrate their portals with their internal systems should not apply if using a sophisticated solution with strong integration capabilities.[[[PAGE]]]
The financial markets remain volatile and uncertain, and there is little likelihood of interest rates increasing in the foreseeable future. Companies are continuing to generate healthy cash flow, which, in many cases, they are accumulating in order to fund strategic investment and M&A, and to cushion the business from potential liquidity shocks in the future. This leads to the problem of how best to invest this cash. Counterparty risk remains a priority, and with a number of high profile credit rating downgrades, treasurers are finding it more difficult to identify appropriate destinations for the company’s cash that comply with credit and liquidity requirements.
In conjunction with these problems, the changing regulatory environment poses challenges for corporate investors. Basel III will result in some types of investments becoming more attractive for banks and vice versa, which is one factor in the increase of investment in corporate debt such as commercial paper and corporate bonds. Regulation in both the US and Europe surrounding MMFs is also acting as a catalyst for change, despite on-going regulatory uncertainty in the US. Furthermore, the expiration of the FDIC insured deposit scheme will prompt new investment decision-making. Although investors now have the benefit of consistent definitions of different types of MMFs, there is still some uncertainty about the investment implications. Some companies are starting to extend their investment horizons from AAA-rated short-term MMFs to MMFs that permit assets with a longer maturity, but it will take time both for fund providers to expand the scope of funds that they offer, and for corporate investors to adopt a wider range of funds into their investment portfolios. However, with the on-going need to balance counterparty risk, liquidity and yield appropriately, both short-term MMFs and MMFs are likely to become increasingly important elements of corporate investors’ portfolio.
Note
[1] New requirements published by Institutional Money Market Funds Association (IMMFA) and European Securities and Markets Authority (ESMA) in Europe, and the U.S. Securities and Exchange Commission (SEC) in the United States differentiates between MMFs and short-term MMFs. While MMFs must have a variable NAV, short-term MMFs may have a constant or variable NAV, with the implication that variable NAV funds will become more important in the future. In most cases, companies still use ’MMFs’ as a generic term, including both types of fund. In this report, ’MMFs’ is therefore used to refer to short-term MMFs and MMFs collectively, unless otherwise indicated.
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