Continued low interest rates, a build-up of excess cash that companies cannot easily re-invest in expanding production – but that they don’t want to re-distribute to shareholders – and regulatory pressures have forced change in how treasurers manage liquidity.
What started as adapting to extraordinary market conditions at a point in the cycle now begins to look more like a long-term and secular change in approach.
"The buffer of much higher yields from pure cash holdings that we had before the financial crisis has long gone and treasurers now need to think more about cash-flow forecasting and how that might help them identify pockets of surplus cash that can be put to better use.”
Once this cash has been identified, treasury teams need to find where they can place funds, but still have access to them.
Jim Fuell, head of global liquidity sales, international, at JPMorgan Asset Management, says: “Corporates want to have access to their money when they need it. If a CEO says they need funds for a merger, the cash can’t be tied up in illiquid investments.”
While some treasurers wish to continue with business as normal, their banks are feeling the strain of regulatory pressures. This might be pushing them to look into other options.
|Jim Fuell, JPMorgan|
Fuell says: “Corporates do still look to their banks as a home to place some of their short-term investments and are comfortable with leaving their money on balance sheet, particularly if it is within their core bank group. But bank regulations, specifically Basel III, are impacting some banks appetites for the level and types of balances they want to hold.”
In the new world, banks don’t really want corporate cash deposits. At the Association of Corporate Treasurers' annual conference in Manchester earlier in May, the need for diversification was mentioned on a number of occasions, and from different perspectives.
Trying to deal with these new market conditions by adapting what is already in place is the first step of most treasury teams.
Lee McDarby, managing director, corporate foreign exchange and international payments, at Moneycorp, says: “Diversification takes many forms – it is not just spreading a bundle of different assets. It is dealing with the assets you have, and moulding the business around the market. It is not something you see that often, as it is difficult to renegotiate contracts or change supply chains.”
From the FX perspective, the continued stability of most cross-currency rates has allowed treasurers to refocus on other areas of concern.
McDarby says: “If you look at the euro-dollar over the past three years, there has been a tiny range of changes. They’re arguably the two most important currencies in the world and it has hardly moved. Despite all the geopolitical turmoil, it’s stayed a remarkably tight band.”
If volatility remains at this subdued level for some time to come, it should allow treasurers some space to transfer their attention on to areas needing more work.
“Whilst surprises in the UK general election may occur, and Brexit negotiations will no doubt be tough, the pound is unlikely to see any great changes in the coming months, so treasurers can build the business against the dollar or the euro,” adds McDarby.
Once this has been assessed, treasurers are looking for advice on what is available beyond their traditional parameters of high quality and liquid.
Invesco's Cross says some are looking into investment options they might not have considered before.
“We have seen an increase in conversations around the use of bond portfolios, commercial and residential property funds and multi-asset income portfolios," she says. "Multi-asset income portfolios, which aim to offer capital preservation in all market conditions and annual income distributions of more than 3.5%, we think will be particularly attractive.”
As treasurers expand the range of potential investments, Moneycorp's McDarby also points to hedging as being one option now under consideration.
“Treasurers are thinking about hedging a lot more than before," he says. "Often changes act as a wake-up call, too, in terms of checking policy and the approach to hedges.”
Some of these options provide yields that are becoming increasingly difficult to realize in the traditional havens of short-term banks deposits and government paper.
Dean Heaney, institutional sales director at Invesco, says: “We see a wide range of options for treasurers, from 30 basis points on sterling money market funds, 4% from property portfolios, higher yielding bonds portfolios between 5% and 10%, through to 15% from private credit strategies.
“However, we feel that yield alone should not be the only factor. The aim of capital preservation should also be taken into account. As such, multi-asset income solutions, offering 3.5% yield with low correlations to their asset classes and preservation of capital in all market conditions, should be very attractive.”
Even with diversified funds, what is achievable might not be too high, without taking on board more risk, including liquidity risk.
JPMorgan's Fuell says: “Corporate treasurers need to have realistic expectations of what the market can deliver. When the central banks set rates at minus 40bp, achieving positive yields will not happen without taking a level of incremental risk.
“If a client were to approach us to manage a short-term euro mandate with exposure only to triple-A rated banks, it would be unrealistic if they are looking to earn 100-plus basis points.”
Invesco's Heaney says the cooperation between the corporate treasurer and their advisers needs to be clear about what exactly it is they are trying to achieve, and what resources they have.
“When investing in variable net asset value portfolios, there is always the risk to loss of capital, but we feel that over a market cycle you are sufficiently rewarded for that risk over and above a traditional money market fund," he says.
"By working closely with treasury teams to understand their requirements and future cash flows, we can help build portfolios that look to reduce overall risk.”