As we wrote yesterday, the Association for Financial Professionals released its "2019 AFP Liquidity Survey" on Tuesday. We quoted from the press release and introduction yesterday, and today we excerpt the major sections on cash. AFP tells us, "It has been over a decade since the Great Recession. Financial leaders are still cautious, and safety continues to be a top priority when planning investments, despite several Fed Rate increases. However, the silver lining is that the share of organizations focusing on liquidity is on the uptick, the highest it has been since AFP began tracking this in 2008." (Note: Thanks again to those of you who attended our 11th annual Crane's Money Fund Symposium in Boston! We had a record 584 register.... Attendees and Crane Data subscribers can access the conference binder materials (including the recordings, which went up last night) via our "Money Fund Symposium 2019 Download Center.")

They state, "The greatest share of allocations continues to be in bank products (46 percent) followed by Government money market funds (at 14 percent) and Treasury bills (six percent). The share of funds allocated to Prime Funds has increased, almost equaling the share in T-bills. Bank relationships continue to be core to a company's operating cash investment mix. Banks are the primary source that treasury and finance professionals turn to for information. Most organizations' cash holdings are held in bank deposits; practitioners value their bank-related investments differently than they do other investment vehicles."

AFP continues, "Allocations in bank deposits have moved into Government money market funds. Separately managed accounts have long been the traditional offset to Prime Funds, but their increased adoption rate has been slow -- currently at approximately five percent of investment allocations -- but that adoption rate is expected to grow. A third of respondents anticipates their organizations will consider Prime Funds as their number one investment option."

They tell us, "Survey participants continue to view separately managed accounts as a potential investment alternative, but find it is often hard to justify the extra expense of such an investment vehicle despite increased transparency, custom investment mandates, benchmark tracking and customized reporting. Much of this can be accomplished with lower-cost alternatives in bank and money market products augmented by stronger technology."

The survey says, "Of those organizations that repatriated off-shore earnings in the wake of the TCJA, over two-thirds repatriated less than 50 percent of their off-shore earnings, 20 percent repatriated 51-to-75 percent of their off-shore earnings and the remaining 11 percent repatriated 76-to-100 percent of the same. Of those companies that repatriated less than 50 percent of their off-shore earnings, 25 percent are done with repatriation and 26 percent plan to repatriate additional funds in less than six months; 40 percent are uncertain about the timing of moving their offshore funds home."

It adds, "A majority (80 percent) of organizations' investment policies requires money market funds be rated. Thirty-five percent of organizations require at least one rating agency assign a AAA rating and 27 percent mandate that their money funds earn a AAA rating from at least two agencies."

AFP also tells us, "The typical organization currently maintains 46 percent of its short-term investment portfolio in bank deposits. This allocation is a three-percentage-point decrease from 2018, a seven-percentage-point decrease from 2017 and the lowest share since 2011. Holding balances in bank-related products is a sign of confidence in companies banking partners -- even as yields have increased through federal funds rate increases and credit quality in comparable instruments being equal. Companies maintain their investments in relatively few vehicles. Organizations invest in an average of 2.6 vehicles for their cash and short-term investments. This average is identical to that reported in 2018."

They write, "Corporate treasurers remain cautious. Yet, with interest-rate increases they are willing to move their organizations' allocations, albeit small, into commercial paper, Prime money funds and Eurodollar deposits as well. While bank deposits continue to be the number-one holding, the overall interest-rate environment is causing some practitioners to reallocate their organizations' holdings into other, higher yield, more-opportunistic investments where the credit risk is irrelevant."

AFP also comments, "The overall majority of organizations continues to allocate a large share of their short-term investment balances -- an average of 74 percent -- in safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. Money market funds currently account for 22 percent of organizations' short-term investment portfolios, slightly higher than the 19 percent reported in 2018. The allocation to Government funds is 14 percent, similar to the 13 percent reported last year. This small shift shows that Prime Funds are growing faster than Government funds; perhaps as time progresses, balances will increase in Prime Funds."

The report continues, "Only 14 percent of respondents consider ESG investment parameters when managing operating cash, 70 percent do not consider ESG and 14 percent are unsure about taking ESG parameters into account. Net investors (19 percent) and larger organizations with annual revenue of at least $1 billion (17 percent) are more likely to consider ESG criteria than are other organizations."

AFP's conclusion says, "Despite a strong U.S. economy, treasury and finance professionals continue to be apprehensive about drawing-down on their organizations' short-term cash and investments. Safety remains the most important short-term investment objective for treasurers when it comes to their organizations' cash liquidity needs; 64 percent of respondents cite safety as their most valued short-term investment objective. It is encouraging to note that the share of survey participants highlighting liquidity as a priority -- 33 percent -- is the highest percentage since AFP began conducting its liquidity survey."

It states, "This group of practitioners is more inclined than they have been in the past to invest their organizations' cash and short-term investments in vehicles other than bank products, with Government/Treasury money market mutual funds, Treasury bills, commercial paper and Prime Funds being the likely alternatives. The shares of cash and short-term balances inside the U.S. and those outside the U.S. held by companies have increased at a similar pace, 30 percent and 28 percent respectively, over the 12 months ending March 1, 2019; the share of cash balances held within the U.S. is larger than the share of cash balances held outside the U.S. (21 percent compared to 16 percent)."

AFP writes, "Over the past year, increased operating cash flow appears to have played a significant role in increasing organizations' cash holdings; three-fourths of survey respondents report that it had either a significant impact or some impact on the increase in cash holdings. While a large majority of respondents (62 percent) anticipates their organizations' cash and short-term investments will remain the same in the next 12 months, 20 percent believe those investments will increase during that timeframe -- five-percentage points lower than a year ago -- and 19 percent believe such investments will decrease."

They comment, "The drivers anticipated to increase an organization's cash holdings in the next 12 months are increased operating cash flow, decreased capital expenditures and increased debt. The primary reasons for any decrease in cash holdings over the next year are increased capital expenditures, decreased operating cash flow and paid back/retired debt. Similar to last year, treasury and finance professionals continue to choose their organizations' banks based on their relationship with those banks, with 93 percent of respondents citing this as a determinant. The second most important determinant when choosing a banking partner is the credit quality of the bank."

Finally, the report adds, "The value placed on banks is highlighted once again by the large percentage of organizations that rely on their banks to obtain operating cash and short-term investment holding information. It is hard to predict if we will see a difference in how cash and short-term investments are being managed a year from now. Financial professionals will make their decisions based on economic conditions; if they feel confident about the economic environment, they may also feel more confident about taking some risks and changing the way they manage their organizations' cash and short-term investments."

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