Although chaotic Europe seems to be on the brink, treasurers are increasing risk.
Despite the terrible news out of Europe and threats of a eurozone collapse, corporate investment managers are slowly inching their way into more risk. To be sure, most are staying well clear of Europe, looking for places where they are most exposed to the continent and reducing that exposure where they can.
According to a pre-meeting survey of the NeuGroup’s fall Treasury Investment Managers’ Peer Group (TIMPG), there has been more risk on and than risk off since that group’s last meeting in the spring. The risk increasing has mostly taken the form of additional credit and duration risk, while the risk reduction has mostly taken the form of further asset diversification and abandoning prime funds.
Prime funds out of fashion. One area where the risk reduction is mostly taking place is in prime funds, which have been perceived as too risky given their exposure to EU financials. According to several members of the TIMPG this had already happened, a few of whom exited to the funds as early as 2008. “With rates as low as they are and plenty of other options, we just don’t see the risk/return tradeoff,” one member said. Another member did note that as a result of some of the corporate hesitance on prime funds, many have been reducing their holdings in EU exposure and shifting to Nordic banks.
So where to invest? Several members noted they have moved their prime fund cash into government funds and bank deposits with the temporary 100 percent FDIC guarantee. Some are also using bank deposits to receive earnings credits to offset their bank fees. Others point to Temporary Liquidity Guarantee Program (TLGP) bonds. Although the program has been over since 2010, the paper issued under the program remains guaranteed and continues to trade.
The financial firm that sponsored the TIMPG meeting said it has been buying TLGP bonds lately because prices have dropped; there is also plenty of liquidity for the product, which has added to their appeal. One member reported recently selling some positions to raise liquidity for an acquisition. Two other members report that they have been buying European TLGP.
Another investment area of interest for corporates is emerging market debt (EMD). With traditional yields remaining low and EMD becoming more commonplace, more companies are embracing it in their portfolios. Several TIMPG members reported adding EMD to their portfolios this year.
Watching Europe. While many treasurers are rearranging portfolios in search of yield, they all have their eye on Europe and a possible breakup of the European Union. Although some treasurers remain skeptical of such an outcome, it doesn’t mean that they aren’t building contingency plans for it or to some degree taking action to mitigate it.
The easy stuff like moving deposits out of European banks deemed vulnerable has already been done. Figuring out the impact on both financial and commercial contracts referencing the euro under various break-up scenarios has been more of a challenge. Since there is no legal mechanism to exit the euro, there is also no legal certainty that efforts to mitigate a euro break-up would work as intended. Thus, many of the scenarios are hard to act on.