Corporate investment managers are adding portfolio risk and increasing allocations.
Although the economic recovery is stalling somewhat, corporate treasury investment managers continue to add assets and increase allocations to their portfolios. In a survey conducted before the NeuGroup’s spring Treasury Investment Managers’ Peer Group meeting, members revealed that their risk appetites and investment policies were changing to reflect far more “adding” and “increasing” in allocation than “dropping” and “decreasing.”
Among the assets classes that have been added are bank loans, EMD, BBB corporates, supras and sovereigns, and ABS/CMBS. The asset classes that were being dropped include munis and prime MMF. Meanwhile there is still heightened caution and divided opinions on the safety of certain assets such as bank loans, non-IG credit, munis and ABS.
Despite some members dropping munis, several members are reentering the space, or, actually, never left, despite the negative headlines. And now they are enjoying very positive results. One member from a tech company pointed out that there are some legal limitations to munis, mostly based on the amount of debt one may have outstanding. This actually was the reason at least one company exited the class. One company acknowledged that it doesn’t formally set limits on its muni activity, although does have a discussions around limits when talking to its money managers.
Other observations from the meeting:
- Two-thirds of the group now allow BBB as the minimum credit rating to be included in the asset classes of their portfolio. Of the ones who currently don’t, many are considering it.
- More than half of the group hires outside money managers. One company said they had always kept a close eye on the outside money managers by giving each manager the investment policy but still keeping the decision-making (which asset classes they would be able to purchase) confined to the corporate treasury team.
- Look to the experts for guidance on asset classes. One member wondered hot to decide which asset classes to be in when it comes to asset allocation. Answers varied, with some asking/discussing with their managers or consulting a third party. One member asks her broker/dealers about what asset classes they should be considering. They report to their investment counsel quarterly with the asset classes they are in, and they haven’t changed their IP in 3 years.
- Another member uses basic investment strategies, and also looks at efficient frontier and pros vs. cons for short- and long-term. The company does a lot of quantitative analysis and modeling as they are reluctant to go to the board and just say it is a hot asset class
Ultimately many members work with outside investment consultants. According to a show-of-hands poll at the meeting, three members of the group use investment consultants, two of whom have had positive experiences with them. Another member has found that an investment consultant offers an element of independence and credibility which helps to sell ideas to the CFO and the board.