HSBC Global Asset Management published the paper, "A Big Deal for Retailers this Black Friday – But What to Do with the Cash?" It explains, "For many retailers the months of November and December involve intense pressure and a focus on tight revenue and expenditure management. Hugo Parry-Wingfield, HSBC Global Asset Management, explains that, due to their high level of diversification, Money Market Funds are an investment product that retailers should consider keeping in their arsenal." We review HSBC's latest update below, and we also quote from a piece on DB (defined benefit) plans with comments from Northern Trust on cash.

The website Treasury Management International, which has the full HSBC article, explains, "As December creeps ever closer, for many in the workplace this means finalising year-end performance and setting plans, targets and budgets for the next year; 'top-down,' 'bottom-up' and 'stretch' become the business buzzwords of choice. However, for many retailers the months of November and December mean an intense pressure and focus on tight revenue and expenditure management, because for many around the world, this is the most expensive time of the year. That's right -- it's shopping season!"

It continues, "The retail sector relies heavily on big shopping events in the year with many depending on the key holiday periods to meet their targets. For those corporations used to more stable revenue flows, it can be a significant contrast. For example, the National Retail Federation (NRF) is expecting this year's holiday retail sales in November and December in the US to total up to $730bn, a staggering amount. And lest we fear any lull in consumer confidence, that's a predicted increase of around 4% compared with the same period in 2018. The NRF also estimates that this period is responsible for as much as 30% of a US retailer's sales for the entire year."

HSBC explains, "This period includes the phenomenon of discounted sale events prior to year end, and even more specifically the concept of very short or single-day discounted sales. An explosion of sales after Christmas, often starting on Boxing Day (26 December) or on New Year's Day were the norm in many markets including the US and the UK as recently as a decade ago. While these sales traditions still exist, we now have events such as Black Friday and Cyber Monday enticing consumers with discounted products. Black Friday, which started in the US, but now permeates in various forms to many other markets, is according to McKinsey, the top holiday shopping event in the US, Canada, and the UK."

They tell us, "Contrastingly, Singles' Day in China, which happens earlier in November than Black Friday and Cyber Monday, was the largest shopping event to ever happen globally in 2018. A total of RMB314bn ($45bn) was spent on goods and services in a 24-hour period. To add some perspective -- that's three times the combined value of Black Friday and Cyber Monday online sales in 2018. The immense popularity of Singles' Day shows no sign of abating with another record-breaking year in 2019."

HSBC also comments, "For retailers, a successful sales period means a sharp increase in their cash balances which, at a practical level, can be a mixed blessing. It is critical to place and deploy that cash as efficiently and as safely as possible. This cash may be used to reduce debt, to fund internal or external dividends and to invest in the business. However, there can be a lag for deploying this for its intended use. There may also be excess cash above the levels needed to meet the aforementioned obligations. Problems may present themselves if treasury or investment policies are geared more towards the lower average balances of the year rather than larger seasonal flows. For example, retailers will need to question if there are sufficient counterparty limits, counterparties for the sizeable spikes and whether sufficient diversification can be achieved."

The paper states, "Money market funds (MMFs) -- pooled investment funds that invest in short-dated money market instruments such as bank and government debt -- are well equipped to manage such cash flows and are an example of an investment product that retailers should consider keeping in their arsenal. MMFs typically provide daily liquidity and a high level of diversification. These factors can support the needs of retailers and other investors looking to have their balance professionally managed and spread across counterparties."

Finally, they write, "Those funds with a large scale of assets under management are especially well placed to be able to service investors with seasonal or temporary balance increases as well as more sticky balances, while the fund manager maintains investor concentration limits as an important risk management tool. Global retailers can also look to the truly global asset managers who operate with a consistent risk and investment framework. This ensures, for example, that the proceeds of Singles' Day RMB cash in China is invested to similarly high standards as their Black Friday or Cyber Monday USD cash in the United States, and in turn for GBP and EUR investment in Europe. So, we wish retailers a successful season and a happy end to the year."

In other news, PlanSponsor writes, "DB Plan Cash Flow Needs Are Greater Than Ever." This piece explains, "In these days of low interest rates, and following money market reform, investing strategies are needed to meet cash-flow needs from retiring Baby Boomers and pension risk transfer actions.... Peter Yi, director of short-duration fixed income and head of credit research at Northern Trust Asset Management (NTAM) in Chicago, says his firm is having conversations with DB plan sponsors about how they can be more thoughtful on optimizing cash holdings. 'We are challenging our client to rethink cash and more effectively and efficiently use it. For the time being, DB plans are holding more liquidity and less risk assets,' he says."

It continues, "Money market funds were at one time an effective cash preservation vehicle. NTAM believes the Securities and Exchange Commission (SEC) money market fund reforms requiring higher cash (or similarly liquid vehicle) ratios at daily and weekly intervals redefined 'illiquid' securities, restricted lower quality securities in fund makeup and stricter maturity limits on fund components, resulting in their income levels becoming extremely modest."

PlanSponsor quotes a Northn paper, which says, "Investors are developing a sharper understanding of the tradeoffs among safety of principal, income and access to funds in managing liquidity. Many now recognize a single product solution may no longer be viable. The regulatory and ultra-low rate environment is forcing them to be more open-minded about the broader menu of investment options available in today’s liquidity investing marketplace.... [W]hat most DB plan sponsors do is either raise money every quarter by selling assets from certain funds or maintain a short-term bond fund (duration of 2) and raise money from that."

The article adds, "DB plans don't want to hold too much cash -- if they are raising money once a quarter, they could have at least three months of cash on their balance sheet only earning 1.5% or 2%. [Yi] suggests combining cash and a short-term bond fund customized to the plan with inflows coming in and outflows going out -- a portfolio that provides money as needed month after month. 'If a plan has cash and a short-term bond fund, which most would, take those asset allocations and add some other fixed income allocation to create a special portfolio,' he suggests."

It explains, "The three segments, or portfolio buckets, plans need are Operational, Reserve and Strategic. Yi explains that Operational is the most critical bucket for immediate or very short-term liquidity needs (1 day to 30 days).... The Reserve bucket is for intermediate spending needs (up to 90 days), according to Yi. Investment vehicles used for this bucket offer investors a better balance between risk and reward -- e.g., separately managed accounts (SMAs), conservative ultra-short funds, and prime money market funds.... The Strategic bucket covers a DB plan's longer-term spending needs (six months to 18 months). Yi says investment vehicles are still high-quality but designed to have a better balance of risk and reward. DB plan investors turn to ultra-short bond investment vehicles."

Finally, PlanSponsor adds, "According to Yi, ultra-short product use has been growing. 'Low interest rates and how long they've been low has brought a lot of investors into ultra-short products,' he says.... With cash segmentation, Yi says the goal is to find the right allocation between the buckets. It will create a portfolio optimizing cash but with a better balance of risk and reward across cash holdings."

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