A panel of experts discussed the findings of the Association for Financial Professionals' "2015 AFP Liquidity Survey last week during a webinar hosted by AFP and survey sponsor State Street Global Advisors. The webinar, called "2015 Liquidity Survey Highlights," featured Tom Hunt, Director of Treasury Services, AFP; Matt Steinaway, Global Head of Cash Management, SSgA; Jim Gilligan, Assistant Treasurer, Great Plains Energy/Kansas City Power & Light Company; and Crane Data President Peter Crane. Much of the focus centered on money market funds and their place within an evolving cash investment landscape. (See too our July 9 News, "AFP Liquidity Survey 2015 Shows Safety Still First, Record Deposits.")
Hunt began with an overview of the results, saying, "The most important objective in cash investment policy for an organization has always been safety first." This year was no exception, he commented, as the survey found that 65% cited Safety as the most important, while 31% said Liquidity and just 4% said Yield. Further, the bulk of cash investments, 56%, remains in Bank Deposits, explained Hunt, while money market funds are a distant second. A total of 15% of assets are in MMFs with 9% in Prime funds and 6% in Government funds. The big question is. How will these percentages change when the new money market fund rules are implemented in October 2016? Will money flow out of Prime to Government? Or, with Bank Deposits facing their own set of regulations, will money migrate into money market funds?
Crane pointed out that yield could come into play. While yield has ranked a distant third, Crane added, "It's important to keep in mind that we're coming out of a period where yield has not mattered at all. We've had seven years of zero yields. The Fed moving, I would argue, may be even more important than the regulatory changes going through the pipeline."
He continued, "Yield is the very reason money funds have $2.6 trillion and why everything's not sitting in banks. Once rates lift off the floor, I think you're going to hear a giant sucking sound as a lot of bank assets try to get into money funds." Crane continued, "There's no doubt that government money market funds and the Treasury bills in general are going to see inflows. The question is: are prime funds going to see outflows? If there's a 40 or 50 basis point spread between Government and Prime, I think a lot of money is going to end up in Prime."
What may result is investors will tier their cash so they have a layer in government and a layer in prime, Crane said. "In the past with money market mutual funds you got your safety, liquidity, and yield all in one place. In the future, you're going to get your safety and liquidity in one place and your yield somewhere else," he told the AFP webinar.
SSgA's Steinaway agreed with the tiering concept, given the evolving landscape. "There is an unnatural mismatch between supply and demand for liquidity products and that is reflected in some of the variance we see in the marketplace. If you look at Crane Data, you'll see a Prime fund yielding 24 basis points and a Treasury fund yielding 8 basis points on a gross basis. Over time as rates increase and the demand mechanics shifts in the marketplace, that spread could potentially widen." The potential for higher demand for Government and Treasury funds could drive liquidity cost up and yields lower. "That needs to be thought of when constructing an Investment Policy," he said.
The best way for treasurers to deal with this is to understand their liquidity needs and consider bucketing their allocations, Steinaway added. Where you have daily liquidity needs, you could put cash into a Government fund. Where the cash might not be needed for 3 or 6 months you could put it into a longer term vehicle. "We think it's very important to strike that balance between the real need for cash and taking duration in the cash that is not needed for immediate use," said Steinaway.
On the topic of Investment Policies, the AFP survey said 70% of treasurers surveyed had an investment policy for cash. "I found that very encouraging," said Steinaway. "In this marketplace cash is a very complex asset class and rapidly changing. Approximately two thirds are looking at their cash investment policies at least once a year and in some cases more frequently than that. We think that's an important takeaway certainly as regulations are changing and we're facing a potential rate hike. We think it is worthy of a frequent review."
The key is to maintain flexibility in cash investment policy statements and be responsive to changes. "Something we've been talking about for a while at State Street is the recognition of cash as an actively managed asset class. The market is evolving and that paradigm has shifted -- it's really is an active investment class. That requires a rigorous cash investment policy that is frequently reviewed and modified to reflect some of the changes in the marketplace."
Kansas City Power and Light Company's Gilligan said corporate treasurers haven't put a lot of focus yet on money fund reforms. "In my conversations with my peers, perhaps shockingly perhaps not so shockingly, a lot of treasurers have just not given much thought to this yet." One reason it's not top of mind is because implementation is still over a year away, he said. Another reason, he added, "is that a lot of investors are not even using money market funds right now primarily due to the higher earnings credit rates they can achieve by leaving their deposits in banks. And that has been substantiated I think by the liquidity survey that showed bank deposits have increased dramatically since the beginning of the financial crisis."
As we get nearer to October 2016, Gilligan said corporate treasurers need to have a better understanding of the money market fund rules and the possible ramifications. He commented, "It's important that corporate treasurers review their investment policies to make sure that their policies allow investments of money market funds under the new rules and new products being developed outside of money market funds." If not, they will need to make adjustments in their investment policies.
Note: AFP will host its Annual Conference, the largest gathering of corporate treasurers in the U.S., Oct, 18-21 in Denver, where money market funds and cash investments will be a big topic of discussion. (Most large institutional money fund managers and many online trading "portals" exhibit at this show too.) Among the sessions involving "cash", Crane Data's Peter Crane will present on "Floating NAV Money Funds and Cash Alternatives" along with Vicki Fiegehen, Sr. Manager Treasury Investments for Qualcomm Incorporated, and Lance Doherty, Director Treasury for Pacific Life Insurance Company, on Monday a.m., Oct. 19.
