How does a company take a nearly all-cash ultra-liquid philosophy and evolve it to one of significantly greater sophistication, complexity and additional resources? This will be one of the topics (“Developing and Optimal Investment Policy”) to be explored at next week’s NeuGroup Assistant Treasurers’ Group of 30 meeting, which will take place at Google’s offices in California.
For one company presenting, continually growing cash balances with diminishing returns has been the primary driver behind its own investment evolution. The company has extend its duration to well beyond current liquidity, lowered its allowed credit rating to BBB, and added security types such as foreign government and foreign corporate debt to their list of approved investments. This may sound pretty tame to some companies but it represents a dramatic shift for company whose average duration historically has been less than 90 days.
To make all of this happen for a portfolio in excess of $40 billion, the company has solicited the support from numerous outside asset managers who are no doubt dancing in the hallways over this change in investment philosophy.
Conservative bias
As a whole, AT30 members rates themselves as either “very conservative” (42 percent) or “moderately conservative” (53 percent), with one member rating themselves at “moderately aggressive.” Indeed, 84 percent of members indicate they are confined by their policy to investment grade credits.
One key component of an efficient investment policy is how far up the organization you have to go for approval to make substantive changes to the policy. Those less fortunate are required to take their request all the way to the board of directors which clearly serves, and likely by design, as a hurdle. You have to really believe in a change to go that level of trouble. Most of the group (58 percent) can get their suggested changes heard and acted upon by the treasurer or CFO.
The impact of the global financial crisis on investment practices has been an interesting phenomenon with corporate investors. The pre-meeting survey asked if crisis and subsequent recovery resulted in modifications to their investment policy. 37 percent said they made “no changes”. 26 percent said they “became more conservative and have remained so”. But 21 percent said they “became more conservative but have since become more aggressive.” We don’t know all of the motivations behind those who modified their policies or those who simply stayed their course. But we do know that for one company, earning 1 percent on more than $30 billion was simply no longer tolerable.