By Barb Shegog
With an uncertain era of money market funds approaching, many companies are moving to separate accounts. But what does the process involve?
There is a lot of news lately about the coming new world of money market funds—the mix of variable and fixed-net asset value regime, gates and fees, and other requirements. With that uncertainty, companies have been exploring alternatives to MMFs, including moving to separately managed accounts (SMA).
Treasurers have been learning for some time that SMAs can help treasurers diversify their credit exposures, manage their liquidity needs and deliver yield objectives consistent with their risk tolerance.
Many drivers
There are many factors companies consider when deciding to move cash from MMFs. For separate accounts, factors include the flexibility offered as well as the size of the pool of assets that, say, are outgrowing an MMF. The downside is that they offer slightly less liquidity. For many companies, a separate account balance represents the carved out surplus cash of the company. This cash previously may have been wholly invested in an MMF and now, for regulatory reasons and to get some incremental yield it is going into an SMA. This doesn’t mean all the cash exits the MMF; there will be some left behind for the cash needed for daily needs of the company.
The next logical step, if the company lacks expertise for internal management, is to look for an asset manager with whom to partner.
Stakeholders
It’s also important to establish who in the organization owns the decisions related to separate account managers, including the decision to transfer assets to the account. At a spring meeting of the NeuGroup’s Treasury Investment Managers’ Peer Group (TIMPG), a pre-meeting survey revealed that the CFO was the most cited final decision maker, followed closely by the treasurer. However, in most cases treasury leads the decision process and makes recommendations. The panel also stressed that is also very important to have accounting and tax involved with this decision.
investment managers and then some
Outside managers can offer great advice when setting up separate accounts. For example, those considering moving to an SMA should note that when investing only in money market funds, the accounting, while limited, is often provided by the fund company. However, moving to a separate account means the company now has to handle the accounting. Therefore do not be afraid to lean on the company’s asset managers to walk the treasury team through the accounting mechanics.
Picking an SMA provider
For many cash-rich corporations, the separate account management selection starts with the banking relationships. Therefore, get started with the banking group first, but listened to others. Using asset managers outside the company’s banking group would require very compelling reasons. Word-of-mouth is a very common manner for corporations to get a list of managers to interview.
Treasury should consider using referrals to build a list of asset managers to use. Members within The NeuGroup’s three TIMPG groups often use each other as a source of referrals. Once the decisions are made the panelists recommend keeping a short list of managers as liquidity profiles can change quickly
Determine the number of managers
There are no hard and fast rules for determining the number of asset managers used or the size of separate accounts they manage. What are you comfortable with? What feels right based on economics?
Three to four managers seems to be the sweet spot for the right number of managers. This will give investors some diversification and yet not make the job of managing the managers too cumbersome. For some investors, the amount they are willing to outsource to a manager is a set dollar amount with, for example, $1bn to $1.5bn the total amount to each manager regardless of the size of the portfolio. Once you hire more than two or three managers, the economies of scale will disappear, as many asset managers provide a sliding fee schedule.
In the next few years, separate account management is expected to grow. The combination of money market fund reform and search for yield makes shifting out of money market funds attractive for cash rich corporations.