The Mixed Up World of Managing Cash

“If I reach for an extra 10bps and miss, I get fired, but if I keep things the way they are and underperform by 20bps no one cares.” That was stand-out quote from a mid-year meeting of The NeuGroup’s Treasurers Group of Thirty Large Cap Edition (T30 LC). The comment came amid a discussion by one member of the group who said this was his guiding principle as he considered changes to his cash investment policy and approach.

One suggestion was to use coming money market fund reform to revisit cash investment strategy. It was noted during the discussion that one can lose sight of how many corporates have been content to use money-market funds as their primary cash investment vehicle. The prospect of gates and fees coming to a prime fund near your as well as the availability of government paper for government funds has more firms looking to emulate cash-rich tech firms with separately managed accounts (SMAs) and establishing longer-term cash buckets to expand the range of asset classes and instrument types available to invest in. Like a large number of cash-rich corporates, one member uses SMAs for longer-duration and short-duration cash investment portfolios alongside money market funds and cash deposits.

Meanwhile, companies’ growing offshore cash has been forcing them to contemplate longer-duration strategies. One member has seen its offshore cash portfolio grow in the last few years to 50% of the total. In line with this, treasury has embraced longer-term strategies targeting one year and relying on external managers. As the cash portfolio grows offshore and regulatory pressure increases on holding less in cash and money market funds, there is a natural tendency to want to expand the longer-duration bucket or add a strategic cash bucket.

Benchmarking external managers with the same mandate can shed light on performance. Another consideration is how to benchmark the external managers to your company’s policy mandate. Should the managers be given the same mandate to make it easy to measure? Often times yes is the answer, as you can measure them against each other and trim back on a manager who is underperforming.

Of course, given the “lean meme” of corporate treasury, members should ask themselves whether they have the staffing to pursue the desired cash management approach. This was the consideration one member noted; and for him, he had the resources and the ability to pursue the changes he wanted to implement with current staffing.

This is where policy restrictions on credit, allocation to other asset classes and concentration limits hinder the decision to execute on this. Plus, to manage the additional mandates and risk requires more staff and other resources. Thus the bias to continue with the status quo or even move to a US Treasuries-only approach (since there is rarely a concentration limit on them) remains strong.