Treasury Investors Ask: Where Do We Put the Cash?

Along with low rates, floating NAVs, credit issues and new MMF regulations, members are deciding where to put the cash.

1) Where Did the Cash Go? It is estimated that over $1 trillion left prime funds, most of it headed to government money market funds. Many of the members moved liquidity funds from prime funds to government funds, but wonder how long this will last. Members shared alternatives to prime funds such as short-term bond funds and separate accounts and triggers for what will make them reconsider alternatives, and when.

2) Is There Really Such a Thing as a Superforecaster? Michael Mauboussin from Credit Suisse led a discussion on sharpening forecasting skills. Many traits of superforecasters, such as personality, training and how they work in teams, could also assist members in being better managers and mentors.

3) Credit Concerns Lurk. A successful program monitors the investments closely. It is important regardless of internally or externally managed programs to have a process and metrics in place to monitor credit daily, weekly and monthly. Members shared and compared their portfolio management practices for internal and external management strategies.

Where Did the Cash Go?

A recent survey of treasurers indicates that only 7% of treasurers planned to stay in prime funds. How did money market fund investors react to the October 2016 implementation of the new money market fund reforms?

KEY TAKEAWAYS

1) Massive shift out of prime funds into government funds. It is estimated that $1 trillion moved out of prime funds. Most of the money was moved by investors themselves; however, some fund complexes have converted their fund offerings from prime funds to government funds. There are currently 150 fewer prime funds available today. As a result of the shift and declining balances in the funds, managers of these funds have increased the liquid asset percentage to 80%, further reducing the yields on prime funds.

2) Liquidity concerns were the primary reason for the switch. Lack of liquidity in stressed markets was a primary concern for members. The newly implemented MMF reform gives the fund company the ability to impose fees and gates in a stressed environment. Thus, the possibility of having these gates and fees imposed when they needed cash was another reason cited for the switch. Government funds are not subject to this regulation. The declining size of the prime funds was also a reason for the switch; many of the members’ investment policies restrict the investment in the fund to a certain percentage of the total fund. Another member suggested that the fees and gates are not a concern, but outflows from the funds are troublesome.

3) What will lure them back? Spread might bring some investors back, but this would be gradual. Some members believe that the headline risk related to fees and gates is not worth the incremental yield. Members did agree that at some point, earning almost nothing and possibly negative yields will force them to either reconsider prime funds or move to other alternatives. Some members suggested that a yield differential of 25 basis points between the prime and government fund options might entice them to reconsider their decision. Others suggested time alone might bring them back, as many have shifted to government funds and taken a wait-and-see attitude.

4) Adding arrows to the bag. One member walked members through how his company was handling MMF reform. He explained that his team received approval to add items to the investment portfolio. They didn’t have a view on where the market was going, so they left it open and available if needed. One new investment addition is the ability to invest in an ultra-short bond fund. This investment is limited to 5% to 10% of the total portfolio, and their investment in the fund cannot exceed 10% of the fund’s market value.

5) Members consider private placement funds, but few have pulled the trigger. One investment alternative to the money market fund is a private fund option. The private funds would not be subject to the same regulations. However, the mutual fund is more transparent than the private placement fund. So, although tempting, most are not comfortable moving in this direction until these funds have more commitments and grow in size.

OUTLOOK

Prime money market funds have seen significant outflows. A large portion of the fund is being transferred to government funds. Members agree that this is supposed to be a temporary solution, but will the funds still be available when you want to go back?

Is There Really Such a Thing as a Superforecaster?

Michael Mauboussin, Managing Director and Head of Global Financial Strategies at Credit Suisse, reviewed the key qualities of superforecasters, including their personalities, how they work in teams and how training helps. The discussion was geared toward helping members improve decision making in their organizations.

Key Takeaways

1) Foresight is a real and measurable skill. The quality of a forecast is more related to the way of thinking. The degree of conviction affects the accuracy of the forecast. Mind-set takes over and makes it hard to understand and see new views. Most of the predictions are overconfident, and most predictions that have a confidence level of over 90% are not correct that often; the most common confidence level shown is around 60-70%.

2) Superforecasters are actively open-minded, intellectually humble, numerate, thoughtful updaters and hard working. When presenting a case as a probability, one is opening oneself up to feedback. Mr. Mauboussin used the following example. “How likely is something to happen if you say maybe?” The answers among the members varied from 10% to 90%. Communication then allows for discussion.

3) Teams can be better than individuals, but only under the right conditions. Factoring into the team’s success is size, composition and management. Mr. Mauboussin suggested the ideal team is 4 to 5 people; smaller is better than bigger—the bigger you are, the more coordination is needed. Diversity in the composition of the team is also important. More diversity gives the team more cognitive tools; however, a downside to diversity can be the failure to communicate.

Six factors that explain how to make teams work:

• Psychological safety. Team members feel safe to take risks and be vulnerable in front of one another.
• Dependability. Team members get things done on time and meet a high bar for excellence.
• Structure and clarity. Team members have clear roles, plans and goals.
• Meaning. Work is personally important to team members.
• Impact. Team members think their work matters; that creates change.
• Intelligence. Getting good answers is different from asking good questions.

Outlook

Mr. Mauboussin showed the members how to work efficiently in teams and the importance of communication and feedback. It is also important to keep an open mind and not let confidence levels get in the way.

Credit Concerns Lurk

The credit component of most members’ investment portfolio is sizable. What should members be concerned about? We compared and contrasted how many members perform credit risk analysis internally versus relying on external managers in search of best practices.

Key Takeaways

1) Good stewards of capital. One member’s $10 billion investment portfolio follows the company’s internal policy regarding:

• Capital preservation.
• Maintaining liquidity to meet liquidity and capital needs.
• Maximizing investment returns while diversifying risk.
• Ensuring counterparty risk diversification across the enterprise.

2) Benchmarking makes you rationalize why you hold positions over and under the market. Having a benchmark does allow for performance measurement and attribution, and this is important. A benchmark also allows you to qualify for management the positions and rationale for holding or not holding a particular sector. The member also explained that their goal is not trying to hit major outperformance; the objective is to outperform the benchmark and have enough liquidity for operations.

3) Sell decision is always tough. When asked how they handle deteriorating credit, the member explained sometimes they need to sell the issue. They conduct monthly readouts with the treasurer, which focus on the top ten and bottom ten, and then make a decision. They also present quarterly to the capital markets review committee; here they also discuss any issues or concerns. They will at times hold fallen angels, which have sometimes turned out to be their best performers.

Outlook

Managing the investment portfolio internally takes the right skills and process. The member outlined a very well-constructed process for members to consider, even if the funds are externally managed.