Corporate treasurers and CFOs continue to build their organizations' cash, but some are wary of investing that cash in money market funds due to low yields and the threat of reforms, according to the Association for Financial Professionals' "2014 AFP Liquidity Survey," which was released yesterday. The survey said 36 percent of companies reported rising cash reserves in the last year and among those that increased cash holdings, a full 73 percent indicated that bigger reserves were the result of better operating cash flows. Fewer than a quarter reduced reserves over the period. As far as respondents' driving principles for cash investment, "Slightly more than two-third of respondents (68 percent) indicate that safety is the most important short-term investment for their organization, while 28 percent of respondents report their organizations' most important cash investment policy objective is liquidity." These numbers are virtually unchanged from 2013.

Companies are sticking to ultra-conservative investment strategies with their short-term holdings, with 75 percent of all short-term investments maintained within three vehicles: bank deposits, money market funds, or U.S. Treasury securities. A full 52 percent of corporate cash holdings are maintained in bank deposits, the largest percentage reported since AFP began its Liquidity Survey series in 2006. Just 16 percent was invested in money market funds, the same as 2013, but down from 19 percent in 2012 and 30 percent in 2011. Larger organizations with at least $1 billion in revenues continue to allocate more of their short-term investments to money market funds than do smaller organizations (20 percent of the portfolio versus 11 percent).

One reason bank deposits have been more attractive is because of the lack of strong investment alternatives that generate yield. "Still another factor is the continued regulatory uncertainty surrounding money market funds (MMFs). It has been a year since the U.S. Securities and Exchange Commission (SEC) proposed reforms for these investment vehicles. Among those proposals was one that would allow floating of the net asset value (NAV) for prime institutional funds, an approach that ultimately could temper the perceived safety of the investment vehicle that had made these MMFs attractive as repositories for corporate short-term cash. In recent years, as proposals for regulating MMFs have been discussed, some organizations have moved significant proportions of their cash holdings away from MMFs and back into banks. Several questions arise from this. What, if anything, will occur should the SEC finally move ahead on its proposed regulatory changes? If companies move to liquidate some or all of their cash holdings, where then would these funds go?"

The floating NAV proposals are of particular concern. "From the perspective of many treasurers, a floating NAV would undermine the safety of principal that has made money market funds attractive investment vehicles. Should the SEC enact a floating NAV rule, many organizations will have to revise their investment policies and look for alternative investments that offer comparable safety, liquidity and yield."

When selecting money market funds, 73 percent of respondents cited yield as a primary consideration, up sharply from the 54 percent in the 2013 survey. "Fund ratings are the second most common driver in the selection of funds, cited by 69 percent of financial professionals, followed by both fund sponsorship status as part of a bank relationship and counterparty risk, each cited by 51 percent of survey respondents. Even as allocations to money market funds declined during the survey period, yield is the primary driver behind fund selection. On par with fund ratings, the popularity of yield likely reflects the transparency in reporting requirements and regulations enacted several years ago, along with a more positive outlook on credit expectations and counterparty risk of underlying investments. Also notable is the third-place ranking of fund sponsor (as part of the bank relationship) as the primary factor in selecting a fund. With many companies allocating over half of their balances to bank deposits and almost half of the money market funds selected as part of a bank relationship mix, one might infer there is an even greater focus in incorporating money market funds in the bank relationship process."

Regarding offshore cash management trends, the report says: "Three in five organizations hold some amount of their cash outside of the U.S. The share increases to three-quarters for publicly owned organizations; one in three of these companies hold at least half of their cash outside of the U.S. Large organizations are also more likely than smaller ones to maintain cash in international investments. Two-thirds of large organizations -- those with at least $1 billion in annual revenues -- hold cash outside the U.S. versus just under half of organizations with annual revenues under $1 billion that do so." Approximately 56% of non-U.S. cash holdings are maintained in bank-type investments (including CDs, time deposits, etc.), while 15 percent are held in money market mutual funds and 8 percent are in government securities.

On average, organizations allow 4.4 investment vehicles beyond bank deposits for their short-term investment portfolio, a slight decrease from the average 4.6 vehicles reported in the 2013 survey. The most permissible are Treasury securities (63% say they are permissible), "pure" Treasury money market funds (47%), commercial paper (45%), and diversified money market funds (41%). Organizations actually invest in an average of 2.7 vehicles for their cash and short-term investment balances -- same as 2013. Also, "70 percent of short-term investment portfolios are maintained in investments with maturities of 30 days or less, while 80 percent of financial professional do not anticipate any change in the tenor of their organizations' investment portfolios over the next year."

The report adds, "More than half of financial professionals whose organizations have non-U.S. cash holdings report significant changes to their companies' average balances over the past year. More organizations increased their average balances of both U.S. and non-U.S. cash holdings than decreased them, a pattern consistent with their overall shifts in balances."

The report adds, "Another important factor for many organizations is the ability to generate earning credit rates (ECRs) from their deposits (41 percent). For the past couple of years, ECRs have been enticing vehicles in which to place excess bank balances that would normally be placed in money market funds and/or Treasury securities. In recent times, ECRs have offered above-market rates of return compared to similar investment options that offer safety, liquidity and yield, in that order. Banks will continue to have a need for more stable longer term balances -- especially with pending impacts from Basel III. But this will come with more scrutiny and stable deposit availability from the company being worth more to the bank." It goes on to say, "Generally ECRs are used to defray only traditional cash management fees. An example is organizations may generate monthly bank fees that are defrayed by earning credits generated by holding excess cash balances."

The study also says the vast majority of financial professionals cite banks as resources their organizations use to access opening cash and short-term investment holdings information. "Larger companies typically have more cash and also have more resources to help them manage that cash and often use outside data providers that feed information to treasury workstations and/or money fund portals. More than five in six survey respondents indicate banks are an important information resource, with little variation by organization type. Other information resources used include: data feeds from information sources (cited by 29 percent of survey respondents); money market portals (29 percent); money market funds (28 percent); and custodians (24 percent)."

The survey was underwritten by RBS Citizens and conducted in May 2014, generating 740 responses. Respondents were senior finance and treasury executives from a broad range of companies -- typically U.S.-based multinationals with a median of $2 billion in revenue. AFP will take a deeper dive into the findings during a one-hour webinar on August 26 at 3:00 pm called the 2014 Liquidity Survey Companion Webinar. Our own Pete Crane, president, Crane Data, will be on the panel along with Tom Hunt, Director of Treasury Services, AFP, and Matthew Richardson, Head of Product Solutions, RBS Citizens.

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