The 2010 AFP Liquidity Survey was released earlier this week. (See the AFP Liquidity Survey page too.) The survey says, "During the rapid deterioration of business conditions over the previous two years, global credit markets froze, resulting in both corporate and individual investors fleeing from investment vehicles that previously had been deemed safe havens for short-term investments. Because of the detrimental impact that in the financial sector turmoil and the deep recession had on their access to short-term credit, organizations were increasingly emphasizing protecting principal of their short-term investment portfolio. A number of them moved investments into ultra-safe investment vehicles, such as bank deposits, money market mutual funds and Treasury securities."
Its Summary continues, "The question is when (and at what pace) organizations will begin to open up their short term investment portfolios and seek not only safety, but also increased liquidity and yield. At the same time, will organizations continue to hoard cash -- as many have in recent years -- or will they begin to seek other uses for this cash; such as for share repurchases and long-term business opportunities (e.g., M&A activity, capital investments)? In early May 2010, the Association for Financial Professionals conducted its fifth annual Liquidity Survey to provide financial professionals with an understanding of how organizations currently manage their short-term investment portfolios."
AFP explains, "This year's survey also explored the impact of the new Securities and Exchange Commission rules affecting money market funds. Through the end of May, the survey generated 337 responses, which are the basis of this report. The 2010 AFP Liquidity Survey was underwritten by Promontory Interfinancial Network, LLC."
The 24-page report says, "Key findings of the 2010 AFP Liquidity Survey include: A plurality of organizations increased their balances of cash and short-term investments in the six months leading up to May 2010. During May 2010, 43 percent of organizations held a larger balance in U.S. cash and short-term investments than they did six months earlier.... Organizations remain quite conservative in the strategies associated with their short-term investment portfolios. Overall, organizations' investment policies allow for the use of an average 4.7 short-term investment vehicles, in addition to bank deposits.... Eighty-three percent of organizations permit the use of Treasury bills while at least 60 percent of organizations permit the use of commercial paper, 'pure' Treasury money market mutual funds and agency securities."
The Key Findings continue, "Organizations allocate an average 74 percent of their short-term investment balances in three safe and liquid investment vehicles: bank deposits, money market mutual funds and Treasury securities. Bank deposits are the dominant investment vehicle for short-term investment portfolios. Forty-two percent of all short-term investment balances are held in bank accounts. Just two year earlier, the percentage was 25 percent." The survey, which split money market funds into two groups last year, shows "Diversified" money market funds with 15.8% of organizations' allocations and "pure" Treasury money funds with 9.3% of allocations. (So money fund holdings total 25.1% of "cash" assets.) "Bank deposits" are comprised of Time deposits (63% use), Non-interest bearing transaction (TAG) accounts (45% use), CDARS (17% use) and Insured cash shelter accounts (9% use).
On "Portals," AFP says, Twenty-one percent of organizations use an electronic, multi-family trading portal to execute at least some of their short-term investment transactions. Organizations using trading portals execute an average of 73 percent of their money market mutual fund transactions through the trading portal. " The survey adds, "The use of multi-family trading portals has remained stable over the past few years." (AFP's survey from two years ago showed usage at 25%.)
Finally, AFP writes, "In addition to questions related to cash and short-term investments, the 2010 AFP Liquidity Survey asked financial professionals about the impact that new SEC rules on money market funds (MMFs) may have on their organization's use of said funds." The survey found that the majority of respondents say, "It will have no bearing" when asked about the "Impact of 60-day shadow NAV on organizations' investment decisions in money market funds." Forty-five percent of respondents say their "Organization is generally comfortable with the [recent 2a-7] changes and will not modify its investment strategy."
