Investment policies will be rethought along two distinct lines.
Over recent meetings with NeuGroup peer groups, treasurers and their investment managers have shed new light on the increasingly stark choice corporates face with their cash portfolios.
Treasurers too often are faced with a mandate to find additional yield within a relatively narrow range of “safe” asset classes or are subject to board-level approval, which gives them ever narrower scope for action. This means they either get out of the muddle and adjust their investment policies toward a more risk-limit, or risk-appetite based approach or they rethink cash investment with a much heavier bias to returning cash to shareholders.
A risk-limit approach. Some of the practical ramifications of this approach were outlined in a presentation at the Treasury Investment Managers’ Peer Group (see related item here), which included the objective to give treasury greater range of motion to invest cash without asset-class constraints. Similarly, at a recent meeting of the Tech20, several firms noted the advantages of risk-limit, or risk-appetite based mandates. Essentially, the investment policy should call for treasury to get senior management to set with board oversight a risk appetite for the cash portfolio, and then allow treasury to optimize its investment choices within that risk limit.
Just give the cash back to shareholders instead. The risk-limit discussion will also drive home the reality at many companies that they really would be better off returning more cash to shareholders. Returning cash may not be inevitable in the short-run, but more companies are seeing it that way in the longer-run. Investing cash is just an interim requirement and not a source of value, so principal protection and ALM guides its decision-making. Plus, there are potential shareholder value ramifications. IBM, for example, has become a poster child for the positives to be gained from being very transparent about shareholder distribution levels along with performance goals.
In basic terms, treasurers can either get for their investment managers the flexibility offered by a risk-limit mandate or just tell them to park cash in the safest value stores where it can wait for the inevitable distribution.