The Association for Financial Professionals held a webinar earlier this week to dive into the details of its 2014 Liquidity Survey. (See Crane Data's July 15 News, "AFP Liquidity Survey: Corps Hold More Cash, Concern Over MMF Reform".) The webinar was hosted by Tom Hunt, director of Treasury Services, AFP, and featured our own Peter Crane, president, Crane Data, Jeffrey Graves, SVP, senior product manager, Treasury Solutions, RBS Citizens, and Mark Connor, principal, Corporate Treasury Investment Consulting. The hour-long session focused on corporate cash management trends from the survey, as well as the impact the SEC money market reforms could have on how corporations manage their cash."
Hunt led off by highlighting some of the key trends from the 2014 survey. The survey found that 68% of respondents said that safety is the most important objective of a cash investment policy. About 28% said liquidity was the most important objective, while 4% said yield. Those percentages really haven't moved much since the 2008 financial crisis, he said. Of corporations who have seen an increase in cash holdings, the vast majority. 73%, said it was due to increased operating cash flow. Of those who have had a decrease in cash holdings, the reasons were more mixed -- 43% said increased capital expenditures, 36% said decreased operating cash flow, and 28% said they paid back or retired debt.
Crane said the buildup of offshore cash is what's driving this massive cash build up. "The economy is growing, companies are making more money and a lot of that money is being trapped overseas. That's what's driving some of the cash numbers higher." If you factor in bank deposits and MMF assets, there is about $10 trillion sitting in cash, he said.
On the impact of money fund reform on cash strategies, Crane was quick to point out that the new rules won't be phased in for another two-plus years. "There's plenty of time, but the big questions I get asked are -- Is money going to move? And how much? I don't believe the outflows will be substantial, but there will be outflows. We've seen estimates out there that say anywhere from $50 billion to $500 billion will move out of prime institutional funds, but my estimate is more like $80 billion, or 10% of the market," said Crane.
"These are all wild guesses because who knows what's going to go on two years from now. But if rates are indeed rising, money market funds should look better when compared to different bank accounts, they'll actually have some yield. I do not believe it's going to be that disruptive." Crane believes the "hot money," the newer assets that came in the run up before the Reserve Fund broke the buck, is already gone. The assets since have been relatively stable and he expects it to stay that way.
Graves talked about asset allocation. "The low rate environment, Basel III regulations, and now these [money market reform] decisions being made final are continuing to force cash managers into some difficult decisions. Safety is still king, and certainly on top of mind for everyone, followed by liquidity and yield. But when it comes down to it, people are willing to sacrifice a few basis points into order to keep their company's money safe. There really aren't many options available in the market to tempt managers to go for higher rates because they just aren't there," said Graves.
The question going forward is when will rates rise? "The market right now is talking about second half of 2015. As that happens, managers are going to be torn -- do I grab for that extra yield or do I continue to keep it in a safe vehicle and give up some of that yield? Or is there a happy medium?"
So what happens now? "With the SEC rulings on money funds coming out, will this drive money out of the funds because of the floating NAV and gates and fees? This issue is on everyone's mind -- it's 'top of the house' right now." He's been talking to fund managers and asking them if they are intending to develop new products and new approaches. "It's just too early in the game to know. It's certainly something that is going to be a focus for everyone. It will be fascinating to see how it plays out."
Connor spoke about cash investment policies. Not only is it paramount to have a written cash management investment policy, said Connor, but it's important to review it on a regular basis – at least once a year and ideally once a quarter. The survey found that most (43%) review it annually, while 21% do once a quarter, and 19% do so every 2-4 years. With regard to MMFs, he advises companies to review the policy between now and when the reforms kick in.
"Many companies choose to be very specific about delineating parameters about money market funds in which they can invest. I would suggest that you are very specific about the variety, the class, and the new types that will be eligible. Meaning, if you don't want to buy a gated fund, make sure that's in your policy. If you want to buy a fund that is going to impose a liquidity fee, make sure you spell that out in your policy," he added. "In your policy, it's important to guard against putting too many eggs in one basket." Typically he recommends maximum limitation of somewhere between 50-75% in MMFs as a class and up to 50% in any single MMF. "Likewise, you don't want to be the biggest investor in a fund."
A well developed policy can be used for a separately managed account. "It can make sense to hire a money manager to invest your cash according to the parameters in your investment policy," he said. He has clients that pay 7-8 basis points for a manager. Their investment policies are a little more liberal than they would be for a typical MMF, which can help them, net of fees, get 5–15 basis points of yield."
Finally, there were three poll questions for the online audience. The first was: If you decide to move your company's cash, what will most influence your decision to leave prime MMFs? Most said "better rates in bank products." The second poll question was: Where will your company's cash be deployed if leaving MMFs because of SEC regulations? The dominant answer was also "bank deposits." The third poll question was: What changes might you consider to your investment policy? The top answer was, "more frequent review of the investment policy."
