Corporate treasurers are managing their cash investments strategically and more cautiously, according to a new survey by GT News, a publication for global treasury and cash management professionals, owned by the Association for Financial Professionals. Among the key findings; nearly eight in ten said their organizations have an investment policy for cash management, 70% view cash as an asset class, and more are concerned about Basel III than money market reforms.

The Investment Strategy Survey was conducted in June 2014, polling 238 GT News subscribers with 25% coming from Western Europe, 23% from the U.S., 20% from Asia, 14% from Middle East/Africa, and 6% from Latin/South America. Sponsored by State Street Global Advisors, the primary purpose of the survey was to better understand trends and challenges surrounding short-term investment strategies.

"While recent years have presented a number of challenges to cash investors, many treasury professionals have used this time to reflect on best practices and recalibrate their investment policy statements as needed. As the global economy returns to strength and new cash investments come to market, we believe cash investors with strong, updated investment policy statements in place will be much better prepared to take advantage of investment opportunities as they arise," writes Barry F.X. Smith, global head of cash management at SSgA in the welcome remarks.

The introduction says, "Prior to the banking crisis, the focus of short-term investing was on risk management versus yield management. Holding cash as an investment class was unheard of several years ago, but as seen in this survey report it is much more common now. Today, companies face a number of challenges when developing their investment strategy. They are operating in a low, short-term interest rate environment. They continue to do more with less -- perhaps a lingering result from the recession. Consequently, their reliance on prudent investment methods and processes are even more important."

As previously mentioned, 79% said their organizations have a formal, written investment policy that sets guidelines and parameters for managing their cash and short-term investments. Among companies with more than $1 billion in annual revenues, 88% have an investment policy compared to 68% of companies with less than $1 billion in annual revenues. Companies that are net investors are also more likely than net borrowers to maintain a formal investment policy. Also, 56% of companies that have an investment policy review it on an as-needed basis. "Key factors that could impact investment policies may include changes in an organization's financial condition, revisions in a company's risk tolerance, developing market conditions and evolving preferences of a company's senior management and/or Board of Directors. Further, 29 percent review it annually, while 15 percent monitor their policies quarterly or semiannually."

Seventy percent of survey respondents say their organizations classify cash as an asset class in their companies' investment policies -- that includes 71% of large companies and 74% of small companies. "Banks are important repositories for an organization's cash holdings. A large majority of companies currently place significant shares of their cash balances in bank products such as bank accounts, time deposits, demand notes and certificates of deposits. Thirty-five percent of survey respondents report that at least three-quarters of their companies' short-term cash holdings are placed in bank products. Slightly more than half indicate the same for less than 50 percent of their organizations' short-term cash holdings. Despite improved fundamentals in the banking sector, investment options are limited given the current low-rate environment."

The survey also asked what regulations most influence or impact cash management decision-making. Basel III is by far the highest (76%), while only 27% said the SEC's money market reform. Ahead of money market reform are Dodd-Frank (48%) and EMIR (30%). "Organizations are most concerned about credit-driven products and the segmentation and utilization of deposits under Basel III.... Basel III ranks as the most important regulation impacting a company's investment decision making. The capital ratio rules will ultimately require banks to hold up to eight percent of tier 1 capital. The net stable funding ratio will require banks to hold greater liquidity in the medium- and long-term funding of assets. Additionally, the liquidity coverage ratio will require banks to hold high-quality liquid assets accessible within 30 days. Eventually, Basel III regulations will mean that organizations can expect higher costs for credit-driven products since their bank partners will need to hold more capital as well as greater liquidity. Banks will value longer term, stable deposits and will most likely segment their clients accordingly. Consequently, the bank-relationship dynamic will change over time. While Basel III regulations have a phased timeline over the course of several years with full compliance by 2019, many companies are already beginning to feel their impact."

On money fund reforms, they wrote: "In July 2014, the SEC announced final money market fund reforms. These reforms include a floating NAV for institutional prime funds and municipal funds along with redemption fees and gates that could be used at the discretion of a fund's Board in certain situations for any fund. The floating NAV is to be implemented over a two-year period. This will allow the marketplace to adapt to the changes and, most importantly, will give investors time to consider possible changes to their investment policy, consider alternatives and evaluate any accounting impacts from floating NAV funds. Fees and gates are now options for a fund's Board of Directors to consider but they are not mandated and are open to all funds to implement. The fees and gates are additional tools at the disposal of the Board of Directors should they need to act in the best interests of fund shareholders at that point in time. The reforms clarified existing proposals and only impact U.S.-based 2a-7 funds. It remains to be seen if other countries will adopt similar regulations going forward."

The survey also polled respondents on what factors are most influencing liquidity, safety, and yield of cash investments. The most (54%) said the low interest rate environment, while 40% said the risk-return tradeoff. Further, 39% said rating changes of financial counterparties outside of investment policy limits, while 29% said lack of supply investment selections in higher quality names. Just 19% said onerous regulations driving down liquidity.

In conclusion, they write, "Regulations continue to play a key role in a company's investment strategies. Indeed, money fund reforms will have a compelling effect on the short-term liquidity industry. As the investment world watches the U.S. SEC implement changes to the treatment of money funds, the European Commission may reconsider proposals for reforms that it had suggested earlier this year. With more enhanced reporting and the implementation of redemption fees and redemption limits/gates on potentially any money market fund, it is fairly certain that due diligence and prudent investment policies and process will be just as important now if not more important than when the implementation timeframe rolls around. With money market fund reform in the U.S. scheduled to be implemented by 2016 and full implementation of Basel III by 2019; companies have to make decisions that will support their investment principles in a prudent manner. Having both a sound investment policy that is reviewed on a regular basis and the ability to adapt to market conditions using a disciplined, yet flexible framework will help investors weather any storm that develops during any business cycle."

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