A new survey by SunGard Financial Systems, released at the Association for Financial Professionals' Annual Conference in Washington yesterday, says that while companies have increased their cash balances in 2014, a significant number of corporate treasurers are concerned about how to invest it given market conditions and the regulatory environment. SunGard's fourth annual "Corporate Cash Investment Report" examines treasurers' changing attitudes toward cash investment over the last 12 months, including strategic cash holdings, asset allocation, investment policies and transaction execution. It is based on a survey, conducted in August, of 164 corporations globally with 51 percent located in North America.

Vince Tolve, vice president of SunGard's global trading business, comments, "New regulations will create new investment challenges and instruments for corporate treasurers. These clients are preparing for this transition while exploring investment opportunities outside their home markets. Integrated treasury platforms and multi-asset electronic dealing portals will become essential as decision-making and execution develop regionally."

Among the highlights, the survey revealed a growing number of companies increasing their cash balances. In 2014, 49% increased their cash balances, up from 43% in 2013 and 37% in 2012. "The reasons for holding this cash are changing as market confidence grows." About 33% said the primary reason for holding cash was to finance capital investment or merger & acquisitions, up 6% from the previous year. This is likely to be reflected in increased M&A over the coming months and years, the report said. "Growing confidence is also reflected in the fact that only 11 percent of companies are now holding cash as a 'buffer' against dips in revenue in the future, a fall from 13 percent last year and 17 percent in 2012." About 35% had no change, while 16% decreased cash balances.

However, the primary concern among treasurers is where to put this cash. The survey found that 31% said the "Lack of suitable repositories for cash" was the greatest concern, while about 62% said it was one of the top 3 concerns. "Lack of credit limits with highly rated banks" and "Inability to access 'trapped' cash" were cited as the greatest concern by 17% each. "Changes to investment landscape, e.g. proposed MMF reform" was the greatest concern of 10% of respondents and a top 3 concerns of about 35%. The survey explains, "Since SunGard first started conducting this annual study in 2011, treasurers' investment challenges have gradually shifted from operational to more strategic concerns."

In terms of asset allocation trends, "Deposits remain the most commonly used instrument, noted by 80 percent of respondents, an increase of 7 percent since 2013 although the total amount of cash invested has decreased very slightly from 57 percent to 55 percent. The use of constant net asset value (NAV) MMFs has fallen by 5 percent (from 52 to 47 percent) but companies have invested an average of 50 percent of their cash in these instruments, compared with 44 percent a year ago. In contrast, the number of companies investing in variable NAV MMFs has increased from 9 percent to 15 percent, although for a lower proportion of their total investments (from 44 percent in 2013 to 31 percent in 2014) perhaps reflecting caution as treasurers 'test the water' in their use of a new instrument.... The proportion of respondents investing in commercial paper has grown by more than 10 percent in the past year (27 percent in 2014 compared with 18 percent in 2013), to invest an average of 25 percent of total cash. This is potentially an important shift as investors seek to shift their exposure from financial institutions to corporates." Also, about 8% invested in short-term bonds.

The instruments that respondents said would become more important in the future were commercial paper (23 percent), deposits (21 percent), constant NAV MMFs (18 percent), and separately managed accounts (16 percent). "However, this is a mixed picture given that a comparable proportion of respondents thought that constant NAV MMFs and separately managed accounts would become less important. This may also reflect a somewhat confused picture of the changing regulatory environment, particularly in relation to MMFs. Over time, the use of constant NAV funds will necessarily decrease, certainly in the United States and potentially other markets in the future, as new regulations take effect. What remains to be seen is the degree to which corporate investors will wish to transfer to variable NAV funds, or whether they will choose to invest in other instruments. So far, there appears to be a slowly growing appetite for variable NAV funds, which is a reassuring development in that MMFs play an important role for many companies in diversifying their counterparty and liquidity risk, and provide useful repositories for surplus cash in an environment where high-quality investment opportunities are relatively scarce."

On the use of money market funds, it says 46% of respondents already use constant NAV MMFs for cash investment, with 18 percent indicating that these instruments were likely to become more important in the future. "However, this indicates that there is a relatively large proportion, 54 percent, of corporate investors, which is a slightly larger figure than in 2013, who are not attracted to MMFs at present. The primary reason for corporate investors' lack of interest in MMFs was the relatively low yield on these instruments compared with other investment products, cited by 51 percent of respondents. Concerns over liquidity and counterparty risk were also considerable, noted by 24 percent. While in previous years' studies, lack of familiarity with MMFs was an obstacle to investment, this is no longer the case; however, the relatively high proportion of respondents that indicated concerns over counterparty risk and liquidity suggests that there is still some way to go in informing the corporate treasury community about the diversified, liquid nature of MMFs. Regulatory uncertainty was also noted as an issue (21 percent)."

On the impact of MMF reforms, the survey said, "The MMF industry is undergoing substantial change in the United States, with the potential for similar changes in Europe. However, these changes are aimed to increase the resilience of the MMFs against market shocks, so while change inevitably results in uncertainty, treasurers should consider whether the new generation of MMFs will help them to achieve their investment objectives. The reforms will have "valuation, accounting, and operational implications" for fund managers, and will therefore have a profound impact on the MMF industry. Accounting treatment differs for corporates too, which may require some change to existing systems. Another significant amendment to Rule 2a-7 funds will be the removal of credit ratings, which will create challenges for many corporate investors for whom credit rating is a key investment criterion.... Respondents noted that deposits, commercial paper and separately managed accounts were likely to be the most likely alternatives or additions to corporate investment policies, but it was clear from the results that many treasurers were not yet aware of the reforms and the implications for the MMF industry."

In conclusion, it says, "2014 reflects continuing confidence in a slow recovery, albeit fitfully with some inconsistency across markets. However, there is no prospect of a rise in interest rates, cash balances remain high, deposit lines are often fully utilized and availability of highly-rated, liquidity instruments remains limited, placing companies with cash to invest in difficult position. Consequently, while counterparty risk and liquidity risk remain essential, many treasury departments are starting to refine their investment policies. This is a timely development, and treasurers will need to monitor the changes in the industry as regulations such as Basel III and changes to the MMF industry in the United States (and most likely Europe in the future) mean that the most commonly used cash instruments used by corporate investors: bank deposits and MMFs, will change in the future."

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