As we've written on and in our monthly Money Fund Intelligence newsletter, the Association of Financial Professionals recently released the results of its "2008 AFP Liquidity Survey," the third annual study of large corporations' cash and short-term investment behavior. Today, we take a more detailed look at their section on Investment Policies.

AFP found that 81% of organizations have a written "cash" investment policy and that most review their policies once a year. As we mentioned in our previous article, "AFP Survey Shows Money Funds Main Beneficiary of Flight-to-Safety," bank deposits and treasury bills are allowed by all organizations, and money funds are the third most popular allowable investment with 82% permitting. CP is permitted by 66%, agency securities by 59%, repo by 55%, eurodollar deposits by 49%, municipal securities by 36%, ABS by 31%, ARS by 18%, VRDNs by 17%, SMAs by 17%, and enhanced cash vehicles are allowed by just 15%.

AFP's survey says, "Most organizations have a written document that defines their policies for short-term investments. Written cash investment policies outline the acceptable investment vehicles and the percentage of an organization's portfolio that may be invested in those vehicles, along with the maximum maturity allowed and the minimum credit rating necessary for each investment vehicle. Maintaining a written investment policy is considered a best practice and often is used as part of an organization's efforts to comply with regulations under Sarbanes-Oxley. More recently, a number of organizations have reviewed their written investment policies in response to the turmoil in the credit markets over the past year."

It continues, "Eighty-one percent of organizations have a written document that outlines the organization's policies on cash investments. But the likelihood of an organization having such a written guideline is more pronounced among large organizations, those that are net investors and those with investment grade ratings. Significant percentages of smaller organizations, along with those that are net borrowers and those with non-investment grade credit ratings do not have a written investment policy. Thirty-five percent of organizations with annual revenues under $1 billion do not have a written cash investment policy compared to just five percent of those with annual revenues greater than $1 billion. Just over a quarter of net borrowers (27 percent) do not have a written cash investment policy while 29 percent of organizations with non-investment grade ratings do not have one."

Finally, AFP's Liquidity Survey says, "In devising their cash investment policies, most organizations look to balance their desire for safety and liquidity with their desire to generate a competitive rate of return. Still, for most organizations, the most important objective for their cash investment policy is safety of principal. Three-quarters of financial professionals indicate that the primary focus of their organization's cash investment policy is to protect their investment principal. For 23 percent of organizations, the primary objective of cash investment policies is to optimize liquidity." For the full survey results, click here.

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