In today’s extremely low-return, flat-yield environment, cash and investments at corporations continue to grow, but they remain short in maturity and risk-averse in holding. This is all happening as investment decisions are being shaped by mixed views on the business and regulatory outlook. That’s according to the 2012 AFP Corporate Liquidity Survey.
Continued growth in cash balance. Most companies that participated in the survey expect their cash balances to continue to grow primarily through year 2012; about 41 percent of organizations held greater cash and short-term investment balances during the first quarter of 2012 than in the first quarter of 2011. In addition, many organizations anticipate their international cash balances to grow faster than their US balances, indicating an optimistic business outlook.
Among reasons for the change, higher operating cash flow was cited as the most common driver of higher cash holdings, while increased capital expenditures was pointed out as the most common driver of lower cash holdings.
Safety as top priority. For corporate treasurers and investment managers overseeing the short-term investment portfolio, safety of principal remains to be the primary concern. Seventy-four percent of organizations’ short-term balances are held in one of three traditional investment vehicles: bank deposits, money market funds and US Treasury securities; most particularly, bank deposits have become the primary short-term investment vehicle, accounting for 51 percent of short-term investment balances – the highest allocation to bank deposits in the survey’s seven-year lifespan and nine percentage points above last year’s findings.
Indeed, the Earnings Credit Rate (ECR), coupled with the unlimited FDIC insurance on non-interest bearing bank accounts, has made bank deposits very at¬tractive. Even with the repeal of Regulation Q, whereby commercial banks can pay interest on bank accounts, ECR continues to be a viable investment selection (net of FDIC assessment fees) as companies use the earnings credit to pay down bank fees.
Goal to remain short and liquid. Since the Federal Reserve has stated its intention to keep key interest rates low well into 2014, there has been little incentive to invest further out on the yield curve, and with limited value being perceived by corporates in investing in longer maturities, 72 percent of organizations’ short-term investment are currently held in vehicles that mature in 30 days or less; meanwhile down the road, 86 percent of financial professionals expect the average maturity of their organization’s short-term investment portfolio to stay the same or shorten further.
MMFs ruling may be game changer. While the SEC rule changes involving money market funds (MMFs) have not been finalized, corporations expressed their intention to rethink their short-term investment mix due to concern about regulations related to money market funds, with one potential outcome being a kind of exodus from MMFs and even greater flows to banks.
If money market mutual funds (MMFs) shift to a floating net asset value (NAV), up to 77 percent of organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs currently in their short-term investment portfolio as a result; similarly, inability for corporations to fully liquidate MMF holdings immediately, or fund companies’ having to raise sufficient capital (e.g., through fees) also result in large portion of respondent’s withdrawal from MMFs, 80 percent for the former and 66 percent for the latter.
Separately, at The NeuGroup’s Spring 2012 Treasury Investment Managers’ Peer Group (TIMPG) meeting, SEC MMF Rules is also ranked as number one concern for fellow investment managers, compared to other regulatory developments such as Dodd-Frank, Basel III, and FASB/IASB.