We finally had a chance to put our notes together from last week's Association for Financial Professionals Annual Conference in San Diego. While most of the institutional money fund industry attended, there were only a handful of sessions actually addressing cash investing. Among the hot topics discussed by money market professionals and corporate treasurers were the gradual return to Prime money funds, a shift away from bank deposits into market-based instruments, and the possibility of using alternative cash investments. We briefly review three of the sessions we attended below.
The first segment, "Disruption: Turning Change into Opportunity in Liquidity Management Practices" featured Jason Granet from Goldman Sachs Asset Management, Geoffrey Nolan of Qualcomm, and Rene Bustamante of FedEx Corporation. Granet commented, "I think the single biggest thing [is] how quickly things can change on this front. I joke about checking my phone because there have been so many situations, [where you] wake up in the morning and you see something on your device, and ... scramble to do different things." He discussed a series of events impacting the money markets, and added, "We are making sure that we are in touch with clients ... to connect on the issues that matter."
Nolan told us, "Disruptions are going to continue to happen. What we have done to help us manage through these turbulent times is we have developed an investment framework in which we think ... 2-5 years out.... The key is that portfolio design, whether asset management or corporate, is part of the process.... Another key to that for the investment team you have to socialize the results up the chain of command. That is really important. What we don't want to have happen is bad news, something goes sideways in the markets, the portfolio takes a hit, and then the treasurer sees what those results are going to be. I call that a career limiting maneuver. You want transparency: [when] things go bad, [you want to know] what it's going to look like. If I can be invisible to the organization, then I am doing my job."
Bustamente said, "In the 24 years I have been with [FedEx], I have seen just about everything.... I will tell you, the climate right now is one that we have to continue to monitor.... Money never sleeps. Money is always moving. A disruption can create both positives or negatives. We have to plan for both.... No matter what happens, no matter what the world throws at you, you are ready to execute a plan. That is the one thing I would say that has to become part of your overall culture.... We have to develop good people that we can just pick up the phone and call.... Principle number one is to always prepare for the worst."
Another session, "When Cash Comes at a Cost: Efficient Methods for Managing Global Cash in Today's Regulatory Regime," was run by Beccy Milchem of BlackRock. It also included Qualcomm's Nolan, as well as Jamie Cortas of Dell. Milchem said, "In this current environment, every decision you make can have an impact and comes with a cost." She asked panelists to comment on their investment policies, and about "tips on how you can invest your cash more opportunistically."
Cortas commented, "I get to be a recipient of the cash that goes into that portfolio. This is what drives your investment policy ... it all starts with how much ... can you say is extra liquidity and how much can I earn incremental income? That helps to drive your policy.... You can do something more interesting with it than if it's cash to pay the electric bill or payroll. You have to be very cognizant about where you are putting that money."
Milchem asked about technology, which was also a hot topic at AFP. Nolan responded, "Given a portfolio of our size, identifying and managing that risk is an important topic. And it is something we spend an inordinate amount of time on every day and every week. You cannot do it on a spreadsheet.... Without the technology, we could not keep on top of it. There are different ways to use the technology, and we identify and define risk, we measure it, and then we manage it.... In our portfolio, we're fortunate to have an analytics system which helps us identify those risks. This isn't a paid advertisement for BlackRock but we do use BlackRock's analytic systems.... Over and over again, whether it is Asia crisis or financial crisis, you look at how the portfolio reacts. If you are okay with that way it reacts, fantastic, move on. Check it a couple of weeks later. If you don't like it, then you have to tweak the portfolio."
Cortas added, "I think for anyone that's been around the last five to ten years, if you think about when the European crisis was happening, or even the credit crisis, maybe you get that call from the treasurer or CFO, [asking] 'What was in the money market fund? Do you have exposure?' I remember looking through PDFs ... trying to somehow consolidate them into something that was legible. The last 5-10 years have [seen a lot of developments] in the money market world. As a result of, for better or worse, money market reform, [we've seen] standardization [and] reporting.... It makes life a lot easier ... having a system so I can look across and see all of my exposures."
Milchem told the AFP audience, "We talked earlier about the effects US money market fund reform, and I'm sure many of the audience are aware that we will be embarking on reforming in Europe within the next year. On a very high level in Europe, what we have is two structures which are very similar to the 2a-7 reforms. We have stable government money market funds, and we will have short term private funds. Within Europe, we do have this third structure, ... this hybrid structure called a low volatility NAV, which is LVNAV for short.... There was a lot of debate within the industry about what that threshold should be and I think the asset management industry community is fairly comfortable with that 20-basis point threshold."
Nolan also commented, "Regulations in the U.S. are really putting a lot of constraints on the banks ... so, they really just don't want your money." But Asian banks, he added, have an "unbelievable demand for dollars."
The final session, "The Return of Returns: Transforming Your Investment Strategy for a Nonzero-Interest-Rate World," was led by Garrett Sloan of Wells Fargo Securities and included Dana Laidhold of The Carlyle Group and Zeke Loretto of eBay. Sloan commented, "For you as corporate cash investors ... one of the things that really characterized the market 5 to 7 years ago was ... banks started to really outperform market products. Every single time the Federal Reserve raises rates and we get further away from zero, that dynamic starts to shift and we are back to market based instruments. Short term interest rates have come up from zero, which certainly begs the question 'What else can I be doing with my money?' Are there other options other than sitting in these bank products."
Laidhold commented, "[Following] the crisis, the concept of return fell out of the marketplace. So it really didn't behoove us to be investing our cash.... The infrastructure over time had gotten stale and lagged. Earnings credit was the best return on our cash, where we stayed for a long period of time. Then the market pushed us to reevaluate.... [We embarked on an] 18-month journey on platforms and infrastructure, focusing on building the capabilities to have alternatives to cash, being ready for when the first Fed funds hike would occur."
When asked, "Did you get completely out of prime?" She answered, "We did for a period of time and then we got back in.... [We] got out [and] we went back in 6 to 8 months later. We were very focused on which fund we were using, the size, the liquidity, the assets that were being held, etc. We didn't just jump back into the same products we were using before."
Finally, Loretto explained, "In 2009, eBay divested an asset, Skype, and with these cash proceeds that took our cash balances north of $5 billion. Prior to that we had outsourced 100% of our cash management.... The decision was made internally that with this amount of cash, we should begin to develop the in-house expertise to manage at least a portion of this.... Over time we were managing 100% of our cash in house. At this point, the thing that distinguishes eBay is that we manage that across 3 portfolios, 2 liquidity portfolios and 1 short duration. Our guiding principles are capital preservation, liquidity and earning a respectable risk vs. return. That framework goes into how we buy each security and how we construct a portfolio."
