We wrote earlier this week on the "2024 AFP Liquidity Survey." (See our June 24 News, "AFP 2024 Liquidity Survey: Cash Still King Among Corporates, Increasing.") Today, we continue our excerpts from the annual survey of corporate investors' cash habits. Discussing "Current Allocations of Short-Term Investments," AFP says, "Companies maintain their investments in relatively few vehicles. Organizations invest in an average 2.7 vehicles for their cash and short-term investments -- unchanged from the average reported in 2023. Most organizations continue to allocate a large share of their short-term investment balances -- an average of 83% — in safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. This result is four percentage points higher than the 79% reported in 2023 -- and the highest percentage on record since AFP began tracking the data. The typical organization currently maintains 47% of its short-term investments in bank deposits. This allocation is the same as reported last year (2023) but is 8 percentage points lower than the 55% reported in 2022, and lower than both the 52% reported in 2021 and the 51% in 2020. This year's allocation is similar to percentages reported in 2019 (46%) and 2018 (49%)."
They explain, "The larger shares of short-term investments allocated to bank deposits for 2020-2022 were likely due to the liquidity and cash flow crisis during the pandemic. Post pandemic, the economy regained stability; that could explain the decline in bank deposits in 2023. However, the regional banking crisis in the spring of 2023 also likely contributed to the 47% allocation in bank deposits. Organizations were focused on the concentration of risks in their bank deposits. It appears that treasury practitioners continue to be cautious and are diversifying their organizations' deposits."
AFP writes, "The allocations in Government/Treasury money market mutual funds increased by 1.8 percentage points to 19.8% in 2023; the allocation is higher for larger, publicly held companies and net investor companies than for other organizations. Investment allocation to Treasury securities (includes bills, notes and bonds) is 12.4%. This allocation is more common for companies with annual revenue less than $1 billion and for those that are net investors, investment grade and privately held than for other organizations. Overall, as deposits remained stable, allocations to Government/Treasury money funds and Treasury securities increased, driving the larger allocation in the top three investment selections overall. These shifts in investment vehicles signal that organizations continue to be cautious and are leaning towards allocating their investments in those vehicles which offer stability and safety -- especially in the wake of the regional banking crisis."
A sidebar on "Mandatory Liquidity Fee Filing[s]," says, "In July of 2023, the Securities and Exchange Commission (SEC) adopted amendments to certain rules that govern money market funds under the Investment Company Act of 1940. The amendments will increase minimum liquidity requirements for money market funds to provide a more substantial liquidity buffer in the event of rapid redemptions.... The amendments will also remove provisions in the current rule that permit a money market fund to suspend redemptions temporarily through a gate, and allow money market funds to impose liquidity fees if their weekly liquid assets fall below a certain threshold. These changes are designed to reduce the risk of investor 'runs' on money market funds during periods of market stress. These amendments go into effect on October 2, 2024."
It continues, "To address concerns about redemption costs and liquidity, the amendments will require institutional Prime and institutional tax-exempt money market funds to impose liquidity fees when a fund experiences daily net redemptions that exceed 5% of net assets, unless the fund's liquidity costs are de minimis. In addition, the amendments will require any non-government money market fund to impose a discretionary liquidity fee if the board determines that a fee is in the best interest of the fund. These amendments are designed to protect remaining shareholders from dilution and to allocate costs more fairly so that shareholders bear the costs of redeeming from the fund when liquidity in underlying short-term funding markets is costly."
AFP adds, "A majority of organizations does not have Prime-fund exposure, and 32% are taking a wait-and-see approach. The views of the remaining 14% are divided between increasing, decreasing or eliminating Prime-fund exposure. Prime funds account for only 4% of current investment allocations, so the impact from corporate investors would be minimal. Due to the complexity of the ability to mandate a liquidity fee, many investment firms are exiting Prime funds. For the almost one-third of Prime holders taking a wait-and-see approach, their decision to exit Prime funds might ultimately boil down to timing -- i.e., when their current Prime funds will likely exit the market. Most Prime funds are transitioning to Government funds, so it is likely that is where the allocation change will be."
A section on "Money Market Funds," tells us, "Various drivers play a role in the selection of money market funds. The three factors that play the most important role are fund ratings, yield and fees. Sixty-two percent of treasury and finance professionals cite fund ratings as a primary driver (among the top three drivers), while 63% cite yield and 35% cite fees as having a significant role when selecting a mutual fund. While safety, liquidity and yield rank first, second and third as guiding investment objectives overall, this year's survey results show that organizations evaluate money funds similarly to bank deposits. The funds utilized are predominantly Government money market funds. Safety and security are well understood by many -- obligations of the U.S. government with a stable NAV; but with the banking crisis in the rear-view mirror, the desire to manage quality via fund ratings is likely a main reason. Treasury practitioners also want to make sure the underlying investments in a fund are all within an investment policy scope."
AFP concludes, "Over 40% of organizations' cash holdings increased within the U.S. in the past 12 months (through March 2024). The share of those respondents reporting a decrease in their companies' cash holdings within the U.S is 13% in the current survey. This result suggests organizations are being cautious and holding onto cash balances, implying some trepidation on their part. Slightly less than half of respondents anticipates that their organizations' current cash and short-term investment holdings will remain the same during the second and third quarters of 2024 (i.e., April 2024 through September 2024). Nearly one-third of respondents expects that their companies' current cash and short-term investment holdings will increase, while 20% predict a decrease in the second and third quarters of 2024. High interest rates and uncertainty in the economy are likely driving organizations to build their cash and short-term investment holdings."
They explain, "Changes in cash holdings appear to be driven by various factors. A large majority of respondents report that increased operating cash flow has had either a significant impact or some impact on the increase in their organizations' cash holdings in the past 12 months. Nearly 60% of survey respondents report that inflationary impacts have had either a significant impact or some impact on the decrease in their organizations' cash holdings in the past 12 months (ending in March 2024), while about half indicates that increased capital expenditures has had either a significant impact or some impact on the decrease in cash holdings during the same time period. Organizations are continuously working to balance their desire for safety and liquidity against a competitive rate of return. Safety continues to be the most-valued short-term investment objective for 65% of organizations. This is expected, given the high interest-rate environment and the possibility of inflation continuing to be a threat along with further interest-rate increases by the Federal Reserve."
Finally, the survey says, "As a result of the banking crisis in 2023, over 40% of organizations moved deposits from regional banks to larger banks, while 35% diversified their deposits across a greater number of banks to spread the risk in the event of a bank failure. Other steps taken to protect bank deposits were moving deposits to money funds and moving bank deposits to other forms of bank deposit products (25%). Most organizations continue to allocate a large share of their short-term investment balances -- 80% -- in safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities.... The next 12-18 months will be crucial for treasury professionals as they manage their organizations' cash and short-term investments in an uncertain economic environment. As the White House deals with two conflicts overseas ... there is also the unknown of whether the economy will be sufficiently stable to drive the Federal Reserve to begin lowering the federal funds rate."
