We wrote earlier this week that the Association for Financial Professionals released its "2017 AFP Liquidity Survey and quoted from the AFP's press release. (See our July 12 Link of the Day.) Today, we quote from the "Report of Survey Highlights," which is available to the public. It says, "[T]reasury and finance professionals remain cautiously optimistic. Safety is still of the utmost importance to them. Despite encouraging signs from the Federal Reserve -- particularly the Federal Open Market Committee’s decisions to gradually raise short-term interest rates -- organizations' investment policies are still not focused on yield. Indeed, a general feeling of apprehension is reflected in companies' heavy reliance on bank deposits as their investment vehicles of choice: 53 percent of all corporate cash holdings are still maintained at banks. That is slightly lower than the 55 percent reported last year."

It explains, "With the final stage of money fund reform implementation in October of 2016, investor sentiment was leaning towards stable NAV -- net asset value -- money market funds. As a result, the market saw a massive shift of balances from prime funds to government or Treasury-backed funds. Floating NAVs, along with gates and fees, did not sit well with corporate treasurers who needed to provide preservation of principal and liquidity in an environment where yield is not a priority."

The summary tells us, "To examine current and emerging trends in organizations' cash and short-term investment holdings, investment policies and strategies, the Association for Financial Professionals (AFP) conducted its 12th annual Liquidity Survey in April 2017. The survey generated 683 responses which are the basis of this report. Results from this survey will provide treasury and finance professionals with critical benchmarks on short-term investment holdings and strategies. AFP thanks State Street Global Advisors (SSGA) for underwriting the 2017 AFP Liquidity Survey."

AFP writes, "Seventy-two percent of organizations have a written investment policy that dictates their short-term investment strategy.... Safety of principal continues to be paramount: two-thirds (67 percent) of survey respondents indicate that safety is the most important short-term investment objective for their organizations.... Thirty percent of survey respondents indicate their organizations' most important cash investment policy objective is liquidity.... Yield continues to be ranked a distant third as the most important objective of an organization's cash investment policy. Only three percent of finance professionals cite return as the most important investment objective. The prevailing low-yield environment remains a headwind for any organization whose primary cash or short-term investment objective is return."

The AFP comments, "The overall majority of organizations continues to allocate most of their short-term portfolio -- an average of 76 percent in 2017 -- in three safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. MMFs currently account for 21 percent of organizations' short-term investment portfolios, a larger share than the 17 percent reported in the 2016 survey. Deposit accounts are being used by 39 percent of organizations, a decrease from the 42 percent reported in 2016."

On the SEC's MMF Reforms, they say, "In response to the 2007-2008 financial crisis, the Securities and Exchange Commission (SEC) adopted in 2010 a first series of amendments to its rules on money market funds that were designed to make money market funds more resilient.... On July 23, 2014, the Commission adopted more fundamental structural changes to money market fund regulations. Those reforms required prime institutional money market funds to "float their net asset value (NAV)" (i.e., no longer maintain a stable price) and provide non-government money market fund boards with new tools -- liquidity fees and redemption gates -- to address runs. These changes took effect on October 14, 2016."

AFP writes, "As one result of these changes, the money market fund industry saw a tremendous shift in asset balances flowing from prime/floating NAV funds to government/stable NAV products.... Many companies discontinued investing in prime funds -- with no plans to resume. Others are taking a wait and see approach, provided they are comfortable with the accounting and have the staff to support the administrative task of credit/diversification monitoring."

They tell us, "As a result of the SEC reforms, 41 percent of survey respondents indicate that their companies do not plan to invest in prime funds. Twenty-three percent report they would consider investing in prime funds if the NAV doesn't move very much, and 20 percent indicate they would consider investing in prime funds if the spread between prime funds and other investments becomes significant. Seventeen percent do not plan to make any changes in how their organizations invest in prime MMFs. A significant spread between prime funds and other short-term investments will more likely impact the decision to resume investing in prime funds among larger organizations and those that are publicly owned than among other companies."

AFP's summary concludes, "The management of corporate cash and short-term investments in 2017 is relatively stable compared to that in 2016. However, there are numerous macroeconomic and regulatory shifts MAC that could alter the picture in the near future. The majority of cash continues to be maintained in bank deposits, and there are few signs that organizations' reliance on bank deposits as their primary investment vehicles will change, at least in the near future. Safety continues to be the top priority for finance professionals when mapping out organizations’ investment policies. This, combined with the lower yield generated from other opportunities, is one reason banks remain a more attractive option."

They explain, "The regulatory changes implemented last October by the SEC requiring prime institutional money market funds to float their NAV seems to be continuing to discourage greater investments in prime funds. Finance professionals appear to be taking a "wait and see" approach, and want to ensure that the NAV doesn't move much, or are working to understand the mechanics of a fund and its underlying securities.... Also a factor is when and how many times the Federal Reserve will increase interest rates. Whether those increases will generate sufficient yield to pique the interest of corporate investors and encourage them to shift to vehicles outside of those traditionally thought to be ultra-safe is yet to be seen."

Finally, they write, "It is difficult to predict what short-term cash and investment allocations will look like a year from now. Treasury and finance professionals will weigh their decisions based on the economic and business climate. The uncertain and volatile environment in which they have been operating of late appears to be the new normal, and therefore more challenging for them when making decisions on managing their organizations' investments."

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