The Association for Financial Professionals, an organization which represents corporate treasurers, released it 2012 AFP Liquidity Survey this morning. The latest version of the annual study contains one of the most comprehensive looks at large corporations' short-term investment policies and practices, and we excerpt a number of the findings of interest to the money market mutual fund investment community below. AFP's Introduction says, "Short-term cash management has never been more in a state of flux than in recent years. Events during the past four years that have had an impact on organizations' cash positions are still fresh in the minds of many financial professionals and continue to influence how they manage their cash. Companies -- not just those operating within the U.S. but also those operating globally -- continue to hold high levels of cash. In an extremely low-return, flat-yield environment, it is no wonder safety and liquidity remain the top two primary investment objectives for most companies, with yield being a distant third. Recent research from the Association of Financial Professionals reveals that most companies expect their cash balances to continue to grow primarily through increased operating cash flows. In addition, many organizations anticipate their international cash balances to grow faster than their U.S. balances."
The Liquidity Survey's Key Findings include: "Forty-one percent of survey respondents report that their organizations held greater cash balances during the first quarter of 2012 than in the first quarter of 2011.... Fifty-one percent of short-term investment balances are maintained in bank deposits, an increase of nine percentage points from the 42 percent reported in the 2011 survey and the highest share reported since AFP began conducting the Liquidity Survey. As recently as the 2006 survey, the average bank-deposit allocation was 23 percent. Organizations invest in an average of 2.4 vehicles for their cash and short-term investment balances, a figure that has not changed from that reported in the 2010 or 2011 surveys. Seventy-four percent of all cash balances are maintained in banks, money market funds and Treasury securities. Three out of five survey respondents do not expect their organizations will reduce the amount of short-term investment balances maintained in non-interest bearing bank accounts after the expiration of unlimited FDIC insurance (currently scheduled for the end of 2012)."
The Key Findings state about money fund regulations, "In light of possible SEC rule changes involving money market funds (MMFs): Seventy-seven 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 of allowing NAVs to float. Eighty percent of organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs in their short-term investment portfolio as a result of being unable to fully liquidate MMF holdings immediately (i.e., holdback provisions). Sixty-six percent of organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs in their short-term investment portfolio should fund companies have to raise sufficient capital (e.g., through fees)."
AFP's latest survey, which was sponsored by RBS, explains, "Financial professionals generally expect current trends in their organizations' level of cash balances to continue, with a larger share of survey respondents indicating their organizations are likely to see their cash balances increase over the next year rather than decrease. Nearly all organizations permit the use of bank deposits as vehicles for short-term investments. In addition, 68 percent of organizations permit investment in Treasury bills, while more than half of organizations allow the use of "pure" Treasury money market funds (MMFs, allowed by 56 percent of organizations). Commercial paper (45 percent) and prime (diversified) MMFs (44 percent) are two other commonly permitted vehicles.... Still, organizations are shifting away from MMFs: MMFs account for only 19 percent of organizations' short-term investment portfolios, compared to 30 percent in 2011. However, large organizations with over $1 billion in revenues continue to allocate more of their short-term investments to money markets than do smaller organizations."
It adds, "With more of their portfolio in bank deposits, organizations are relying increasingly on bank instruments for their cash and short-term investments. The most commonly used bank products are non-interest bearing accounts and time deposits; 58 percent of financial professionals report their organizations use non-interest bearing accounts while 53 percent report using time deposits. Structured certificates and products are less commonly used vehicles, with fewer than one in five organizations using each. A majority of financial professionals do not expect significant changes to their organizations' strategies for short-term investments in bank accounts when (if) unlimited FDIC insurance is phased out at the end of 2012. However, two in five respondents do indicate their organizations may diversify their holdings by reducing short term investment in non-interest bearing accounts. This figure rises to nearly half of net investor and publicly owned companies, representing significant potential withdrawals from banks. The most likely destination for the cash held in non-interest bearing bank accounts would be prime MMFs, Treasury-based MMFs, Treasury securities and/or agency bonds."
The Survey also comments on "Portals," "Twenty-nine percent of organizations use an electronic, multi-family trading portal to execute at least a portion of their short-term investment transactions. Large organizations and those that are publicly held are much more likely than smaller and privately held ones to use a multi-family trading portal.... While organizations can use electronic trading portals to trade a number of investment vehicles, they do so primarily to trade prime MMFs (cited by 69 percent of respondents) and Treasury MMFs (57 percent). Just over one in five organizations that use an electronic trading portal do so to manage bank time deposits. Thirteen percent use portals for direct investment in Treasury/government securities and seven percent use them for transactions involving holdings of commercial paper."
AFP explains, "When selecting money market funds, 60 percent of financial professionals cite fund ratings as a primary consideration in their organizations' decision-making. Counterparty risk is the second most commonly cited factor (53 percent), followed by the fund's sponsorship status as part of a bank relationship (51 percent) as well as yield (51 percent).... Interestingly, more than half of financial professionals rate yield as a primary driver in money market fund selection, even though only two percent of respondents indicate yield is the primary objective for their organizations' overall short term investment portfolios. Financial professionals whose organizations have annual revenues less than $1 billion are more likely than those from larger ones to indicate yield as one of the most influential factors for money market fund selection.... A greater share of respondents from organizations with at least $1 billion in revenue indicate their organizations prioritize diversification of underlying instruments, counterparty risk of underlying investments, and fund ratings in their selection process." (Look for excerpts from the AFP Survey's section on MMF Reform in coming days.)
Finally, the survey concludes, "As companies look ahead and consider their investment options beyond the end of the year when unlimited FDIC insurance on non-interest bearing accounts is set to expire, many will have to make some critical decisions about their short-term investment allocation mix. To what extent will organizations re-allocate their short term investment portfolio from bank accounts into other investment vehicles? And if they do move this cash out of banks, where would these balances flow to? The most obvious destinations, based on recent history, are Treasuries and "pure" Treasury money market funds. But the possibility of MMFs losing their attractiveness as a result of speculated SEC rule changes may slow any move back into MMFs."
