As usual the just ended Treasury Management Association of New York’s 2013 2013 New York Cash Exchange conference included a wide range of sessions and topics. But two popular topics concerned ways to manage cash after possible changes coming to the money market fund industry, and also ways to bump up returns on investment.
In cash management, one suggestion was creating a custom portfolio while in terms boosting yield, one session suggested broadening the investment guidelines.
Separate accounts.
While all the regulatory machinations are going on in Washington (and globally) about the future of money market funds treasurers and other investors are actively looking at alternatives for their cash needs. And there has been no shortage of banks and other interested parties creating new places to park cash (see related story here).
At TMANY, a panel in a session called “Effectively Managing Corporate Cash Reserves,” suggested practitioners employ separately managed accounts (SMAs). Creating and SMA was also part of an investment policy session.
Bruce Guiot, the CIO of the Miami University in Ohio, walked audience members through SMAs in the managing corporate cash reserves session. At Miami, Mr. Guiot uses SMAs for core cash and long-term capital. Core cash he considers able to satisfy 2-6 months of cash needs; highly liquid with low volatility and includes only high-quality bonds (1-3 year duration). Mr. Guiot said the advantages of SMAs are that they are highly transparent. “There’s no guessing,” he said. Also, there is the ability to manage investment overlap, the university owns the investments, and they are “actual bonds” versus just the net asset value, which also provide protection if interest rates rise.
The one drawback, Mr. Guiot said, is that there are custody costs as well as management fees.
Although not particularly noted as downsides, in another session, with Goldman Sachs Asset Management, a panel suggested that practitioners be ready for “a lot of work” if they go the separate account route. “You’re creating the policy, selecting the managers; you’re overseeing [the portfolio] and managing it,” said John Olivo, portfolio manager at GSAM. All this must be done while keeping a sharp on eye on the regulatory environment, he added.
Broadening the investment policy.
With a low (or zero) interest rate environment expected to continue at least until at least 2014 (recent Fed pronouncement notwithstanding), investors will continue to be challenged with finding any meaningful yield on the investment balances. But some companies have discovered one way to squeeze out a little return, and that is by broadening the investment policy to include lower quality debt.
Some companies in the NeuGroup’s Treasury Investment Management Peer Group (TIMPG) in 2012 said they had some success trying this. Several members had been able to get their Boards on board (along with executive management) to agree to a lower credit rating. The key argument was that the companies with the higher credit ratings were most commonly financial institutions that have considerable negative baggage. Industrial names, on the other hand, have a lower credit rating but are perceived as stronger and more stable. This direction for diversification is generally appealing to management, and it was noted that “a lot of BBB industrials trade like single A because people want out of financials.”
This was reiterated at the TMANY conference. GSAM’s Mr. Olivo said in his investment policy discussion that there is definitely a stigma to “expanding to BBBs,” however, as a first attempt with, say, the board, industrials would be the way to go. “BBB industrials are probably the most stable,” he said. This, versus financials, which are more highly rated but certainly on thinner ice as of late.