We wrote last week about the Association for Financial Professionals' new "2020 AFP Liquidity Survey," and quoted from the press release and the survey's summary report. Today, we excerpt more from the major sections on cash and money markets. The survey reports, "At 47 percent of organizations, investment policies call out and/or separate cash holdings used for day-to-day liquidity from the rest of the company's cash and short-term investment holding -- a five-percentage-point decrease from last year. Those policies include guidance stipulating the amount of cash holdings that is set aside for day-to-day liquidity versus other uses. The decline in the percentage of companies that have policies calling out cash holdings might be correlated with the lower percentage of organizations having written investment policies. The share reported in the current survey is closer to the 45 percent figure in 2018."
It continues, "Thirty-five percent of financial professionals report their organizations have neither a percentage nor dollar limit on short-term investment holdings by asset manager or fund. Eighteen percent of companies impose dollar limits while 27 percent restrict short-term investment with percentage limits; the remaining 20 percent have a mix of both dollar and percentage limits.... Percentage limits allow for the changes to be proportionate to the portfolio as it grows/shrinks, while dollar limits set specific levels of risk applicable to a fund or manager. What's interesting here is the dollar amount/balance of the fund is not taken into consideration necessarily to remove concentration of risk if a fund were to have large outflows, especially as early in the current pandemic crisis two investment managers provided liquidity/support to their money funds."
On "Rating Requirements for Money Funds," AFP writes, "A majority (83 percent) of organizations' investment policies requires money market funds be rated. Forty-three percent of organizations require at least one agency rating assign a AAA rating and 23 percent mandate that their money market fund earn a AAA rating from at least two agencies. Fund ratings are meant primarily to be liquidity driven and not credit driven -- a major difference in credit rating methodologies. The three major rating agencies differ in their general ratings criteria, so it is important to understand how they differ; an organization's written policy incorporates these differences."
A section titled, "Environmental, Social and Governance (ESG) Investment Parameters in Operating Cash," tells us, "The Principles for Responsible Investment (PRI) is an association that defines 'responsible investment as a strategy and practice to incorporate environmental, social and governance (ESG) factors in investment decisions and active ownership. Environmental factors include climate change, resource depletion, waste, pollution, deforestation. Social aspects are incorporated as human rights, modern slavery, child labor, working conditions, and employee relations. Governance deals with bribery and corruption, executive pay, board diversity and structure, political lobbying and donations, and tax strategy.'"
AFP explains, "Only 18 percent of respondents consider ESG investment parameters when managing operating cash, 68 percent do not consider ESG and 14 percent are unsure about taking ESG parameters into account. The share of those organizations that are considering ESG parameters is four percentage points higher than that reported in last year's report. Net investors (27 percent) and privately held organizations (20 percent) are more likely to consider ESG criteria than are other organizations."
They add, "Half of respondents impose the same investment ESG parameters globally as domestically while 34 percent do not impose them the same; 16 percent are unsure. A higher percentage of smaller organizations (those with annual revenue of less than $1 billion) (64 percent) and privately owned organizations (56 percent) impose the same investment ESG parameters globally as domestically. Organizations investing in ESG investments are investing in the following: ESG Money funds (cited by 38 percent of respondents), Separately managed accounts (24 percent), Individual securities (21 percent)."
On "Money Market Funds," AFP's Survey states, "There are various drivers that play a role in the selection of money market funds. The top three are fixed or floating NAV, yield and counterparty risk of underlying instruments. Fifty-six percent of survey respondents cite fixed or floating NAV as a primary driver, 38 percent cite yield and 37 percent cite counterparty risk of underlying instruments. In 2019 the top three drivers were fixed or floating NAV, yield and fund ratings."
They comment, "The change in the mix reflects two factors: the desire for prudent safety in terms of fixed NAV and diversification in times of stressed liquidity. We often see the changes in this mix from year to year, with the one exception that fixed or floating NAV continues to be the primary driver in the selection of a money fund. Equal this year to counterparty risk is the relationship aspect of investing. The fund sponsor being part of the bank relationship mix is equally important, further driving the need for treasury professionals to leverage their share of the wallet."
Discussing "Resources," AFP says, "Banks play a key role in supporting organizations in their cash and short-term investment strategies by providing them with critical information on economic indicators and trends. In the past few years, it has been challenging to accurately predict the economic environment, and organizations are more likely to look to their banking partners for sound advice. This year's survey results substantiate this claim; 94 percent of financial professionals identify banks as resources their organizations use for cash and short-term investment holding information. Other resources used by financial professionals include: Investment research from brokers/investment banks (cited by 40 percent of respondents), Credit rating agencies (35 percent), Money market portals (32 percent), Money market funds (31 percent). Over half the survey respondents (58 percent) would prefer to receive information from the above sources via email. Forty-three percent would like to receive this information from a combination of in-person meetings and electronically."
The survey also says, "The primary rationale for investing in U.S. Domestic Prime/Floating NAV Funds is yield (cited by 69 percent of respondents) followed by fund ratings/credit quality (46 percent). For privately held organizations, 80 percent of respondents note that yield is the primary rationale for investing in U.S. Domestic Prime/Floating NAV Funds as well. Other primary rationales respondents selected are diversification of underlying instruments (36 percent), ease of transaction process (31 percent) and fund sponsor as part of our overall bank relationship mix and support (24 percent). As noted earlier in this report, the current allocation to prime funds is five percent, so this perspective is probably more that of the opportunistic-type investor with a higher risk tolerance."
It continues, "For the 27 percent of organizations that do invest outside of the U.S. and in a European MMF (second only to bank deposits), euro-denominated debt is the second-highest rated currency after USD offshore. The most often-cited type of fund invested is low volatility NAV short-term MMF (26 percent). Forty-one percent of respondents are still researching a decision; that is a large contingency given the high allocation to euro-denominated vehicles. Nearly half of non-investment grade organizations and privately held organizations (49 percent) are still researching a decision, compared to 31 percent of net investors."
Finally, AFP adds, "Separately managed accounts were selected as a common alternative investment option that organizations consider to complement current investment selection (43 percent). Fifty-nine percent of privately held organizations also selected separately managed accounts, while only 29 percent of publicly owned organizations did so. This has been the primary alternative investment option after the establishment of Prime Funds since 2016. Extending maturities (31 percent), ultrashort funds (21 percent) and ETFs bond or cash strategies (21 percent) were other alternative investment cited by respondents."
