The Association for Financial Professionals' "2015 Liquidity Survey", released Wednesday, shows that corporate treasurers have concerns about money fund reforms, continue to increase bank deposits and continue to increase cash levels. The press release says, "Treasury and finance professionals continue to value safety of principal above all when investing corporate cash, but the number fell 3 percent in 2015, according to new research by the Association for Financial Professionals. The 2015 AFP Liquidity Survey, underwritten by State Street Global Advisors (SSGA), revealed a continued stance on preservation of principal in finance professionals' safety-first investing attitude -- a sign that companies may not be willing to accept more risk in order to earn more yield on corporate investments just yet. Additionally, 31 percent cite liquidity as the primary investment objective -- the highest since AFP began tracking the importance of organizations' cash investment objectives in 2008." Specifically, 46% said their organizations "would not invest in prime funds or would move money out of prime funds altogether."
The release continues, "One possible factor in finance pros' downplaying safety could be Securities and Exchange Commission rule changes to money market funds. The new rules do not take effect until October 2016, but a majority of organizations are planning to make changes in how they invest in prime MMFs. A full 56 percent of all corporate cash holdings are maintained in banks -- the largest percentage reported since AFP began its Liquidity Survey series in 2006." Barry F.X. Smith, global head of SSGA's cash management business, comments, "The results of this liquidity survey confirm that the changing cash landscape is top of mind for our treasury clients.... Money market reform makes this landscape more challenging to navigate and investors need new insights to help them succeed in this period of uncertainty and change."
The 33-page report, which generated 936 responses, provides deeper insight into liquidity management. As previously stated, 56% of cash is kept in bank deposits, while the amount in money market funds decreased slightly. "Organizations invest in an average of 3.2 vehicles for their cash and short-term investment balances, an increase from the average 2.7 investment vehicles reported in 2014 and 2013. The overall majority of organizations continue to allocate most of their short-term investment balances -- an average of 77 percent -- in three safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities."
AFP explains, "But organizations are shifting away from MMFs: MMFs account for only 15 percent of organizations' short-term investment portfolios, off one percentage point from the 16 percent reported in both 2014 and 2013, below the 19 percent in 2012 and significant lower than the 30 percent in 2011. Larger organizations with at least $1 billion in annual revenues continue to allocate more of their short-term investments to money markets than do smaller ones (20 percent of portfolios versus 11 percent)." Outside the US, 68% are in bank deposits and 14% are in MMFs.
There was substantial amount of commentary related to money market funds. On criteria for selecting a money fund, AFP says, "[F]or the majority of organizations (54 percent) the most important factor when selecting a fund was not the fund ratings as one might suspect, but rather the fund sponsor taking a role in the bank relationship mix and support. Forty-six percent of finance professionals rank fund ratings as the number one consideration when selecting a fund, while 37 percent rank counterparty risk of underlying instruments as the primary deciding factor. The second most important factor in selecting a money market fund is yield (cited by 39 percent of practitioners), closely followed by both counterparty risk and diversification of underlying instruments... In prior years, fund ratings and yield were the top two criteria. With changes in money market funds occurring in 2016, the determinants for selecting a fund could change as well."
The survey says, "The majority of finance professionals expect their organizations will make significant changes in their approach to investing in prime money market funds as a result of the new SEC rules. Nearly half (46 percent) anticipate their companies will either discontinue investing in prime funds altogether or move some or all their holdings out of those funds. Another 20 percent indicate that their organizations would move their money into government MMFs or into bank products to maintain stability. Prime money funds currently account for nine percent of organizations' cash and short-term investments (vs. 56 percent for bank deposits)." Also, 6% is in Government/Treasury funds and 1% is in Muni/Tax Exempt funds.
The report adds, "Many investors moved money out of prime funds during the financial crisis and some of that money has not yet come back. As funds start to make announcements about share class changes, fund changes and the like, the additional clarity around money fund options will help companies make their investment decisions and align their investment policies accordingly."
But, "For many, the floating NAV is simply a deal breaker." Specifically, 29% said they would not invest in Prime funds altogether and 17% would move out of Prime funds. Also, 37% would not make any significant changes to how it invests in Prime funds, while 20% would move into Government funds or bank products. It adds, "Only 12 percent report that their companies would make changes to their investment policies to accommodate floating NAV funds. For those organizations that do decide to invest in prime funds, the number one factor to consider is concentration risk. Companies prefer not to be over-weighted in a certain fund if redemptions of the fund through announced changes occur. Companies will need to be proactive in managing their fund lineup to make sure they monitor fund changes and ratings."
Further, "The full "fallout" from the changes in money fund treatment won't be clear for some time. Many questions remain. Where will the money flow from in terms of money fund changes? The most likely answer (as of the writing of this report) is that money will flow out of bank deposits into Treasuries and money market funds if ratings, fund sponsorship, and yield all fit within certain parameters. The most likely recipients of bank deposit outflows will be government securities or government money funds, assuming the Fed's Reverse Repo program remains intact and the supply of government securities post Quantitative Easing are absorbed."
Will wider spreads make a difference? AFP writes, "Since organizations will face an environment in which interest rates are more optimal than they are currently, along with the SEC's 2a7 fund rule changes fully implemented, AFP asked survey participants about their organizations' appetite for prime funds vs. government funds given the expected yield differential based on the underlying securities. Regardless of the spread between government funds and prime funds, nearly half of the organizations would not invest in prime funds. Twenty percent of finance professionals report that their companies would invest in prime funds if the spread was at least 50 bps; an additional 19 percent would do so if the spread was at least 10 bps.... Remember that safety of principal is cited as the most important company investment objective. With a floating NAV, the ability to access cash at full value from one day to the next puts this objective at risk and thus is a major concern for some companies."
What about alternatives? The survey tells us, "Separately Managed Accounts is most often cited as an alternative organizations would consider in response to the money market reform implemented by the SEC (52 percent of survey respondents). Other options organizations would opt for are extending maturities (19 percent) and investing in money funds that have final maturity of 60 days or less that offers amortized cost treatment (17 percent). Separately managed accounts offer better transparency and an investment mandate unique to the company.... As long as safety, liquidity and yield keep pace, the ability to implement new products will center on risk management and explaining any new alternatives to companies' Senior Management, since liquidity has proven vital to organizations throughout the past several years with the banking crisis. If those investments are hard to explain or if the risks versus the returns are unquantifiable, the likelihood they will be added to an investment policy remain elusive. Companies would rather give up yield to maintain safety of principal -- a proven concept."
On investment policies, it explains, "As organizations prepare for the changes that will result from the SEC money market fund reform, finance professionals anticipate various changes in their organization's investment policies. One out of three organizations will likely implement changes in fund concentration risk if they have invested in prime funds. Companies will want to review their investment policies in terms of those changes that will impact their investments in money funds and evaluate the risks that might result come from those regulatory changes. Other changes survey respondents foresee as a result of the new SEC rules are: Fund rating changes (cited by 23 percent of survey respondents); Adding separately managed accounts (22 percent); Defining counterparty limits for bank deposits (22 percent)."
On ratings, it adds, "Nearly eight out of ten finance professionals report that their organizations' investment policies require money funds to be rated. The stipulations regarding ratings are fairly stringent: 35 percent indicate their policies require at least one rating agency assign an AAA rating and 27 percent indicate that money funds have to earn AAA ratings from at least two agencies. Investment policies at larger organizations, those with an investment grade rating, and those which are publicly owned are more likely than other companies to require money funds be rated. Those companies with more stringent money fund requirements are also more likely to have written investment policies."
Finally, on WAMs, AFP says, "Finance professionals report that their organizations continue to place most of their short-term investment portfolios into instruments with very short maturities. On average, 66 percent of all short-term investment holdings are in vehicles with maturities of 30 days or less.... Looking ahead through the first half of 2016, the vast majority of survey respondents -- 81 percent -- expect their organizations to maintain the current profile for maturity within their short-term investment portfolios. Finally, 31% increased their cash balances last year within the US, while 46% were unchanged and 22% decreased their cash balances."
