We wrote last week about the Association for Financial Professionals' new "2021 AFP Liquidity Survey," and quoted from the press release and summary. Today, we excerpt more from the major sections on cash and money markets. The survey reports, "At 54 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 seven-percentage-point increase 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 increase in the percentage of companies that have policies calling out cash holdings might be correlated with the higher percentage of organizations having written investment policies, most likely due to the higher balances held in cash and cash equivalents. The share reported in the current survey is closer to the 52 percent figure in 2019." (Register for AFP's upcoming webinar, "Liquidity After the Pandemic: Highlights from the 2021 AFP Liquidity Survey," which is July 13 from 3-4pm EDT and features AFP's Tom Hunt, Invesco's Laurie Brignac and Crane Data's Pete Crane.)
It continues, "Thirty-three percent of financial professionals report that their organizations have neither a percentage nor a dollar limit on short-term investment holdings by asset manager or fund. Eighteen percent of companies impose dollar limits while 28 percent restrict short-term investment with percentage limits; the remaining 21 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. Perhaps larger companies are actively managing their fund exposure more through the use of technology such as investment portals and are more comfortable with a more holistic view. Smaller companies may lack access to the technology and thus rely more on manual processes to validate."
On "Rating Requirements for Money Funds," AFP writes, "A majority (80 percent) of organizations' investment policies requires that money market funds be rated. Thirty-nine percent of organizations require at least one rating agency assign a AAA rating and 23 percent mandate that their money market funds 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, "ESG investing practices, which stand for environmental, social and governance, can include, but are not limited to, strategies that select companies based on their stated commitment to one or more ESG factors -- for example, companies with policies aimed at minimizing their negative impact on the environment or companies that focus on governance principles and transparency. ESG practices may also entail screening out companies in certain sectors or that, in the view of the fund manager, have shown poor performance with regard to management of ESG risks and opportunities. Funds that elect to focus on companies' ESG practices may have broad discretion in how they apply ESG factors to their investment or governance processes. Fund managers focusing on ESG generally examine criteria within the environmental, social, and/or governance categories to analyze and select securities for inclusion in their portfolio."
AFP explains, "Only 17 percent of respondents consider ESG investment parameters when managing operating cash, 64 percent do not consider ESG and 18 percent are unsure about taking ESG parameters into account. Net investors (20 percent), investment-grade organizations (20 percent) and larger organizations with annual revenue of at least $1 billion (20 percent) are more likely to consider ESG criteria than are other organizations. The percentage of organizations considering ESG investment parameters has increased from 14 percent in 2019 to 17 percent currently."
They add, "Fifty-seven percent of respondents impose the same investment ESG parameters globally as domestically while 22 percent do not impose them the same; 22 percent are unsure. A higher percentage of organizations that are net investors (58 percent) and publicly owned (63 percent) impose the same investment ESG parameters globally as domestically. Compared to last year's survey results, a larger share of companies is imposing the same investment ESG parameters globally as domestically."
On "Money Market Funds," AFP's Survey states, "There are various drivers that play a role in the selection of money market funds. The three factors that play the most important role are yield, fund ratings and fixed or floating NAV. Sixty-five percent of treasury and finance professionals cite fund yield as a primary driver (among the top three drivers), while 55 percent cite [fund ratings] and 45 percent cite fixed or floating NAV as having a significant role when selecting a mutual fund."
It comments, "To put some perspective on the weighting for type of money market funds, the vast majority of companies that invest in them choose Government money market funds three times more often than Prime funds. Government money market funds account for 17 percent of current allocations and Prime funds account for five percent. A logical conclusion is that the vast majority of organizations that viewed fixed or floating NAV as a dominant driver in the past now do not see that as a hurdle because the limited fund selections prevent organizations from investing in such funds."
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. The past year has been challenging for financial professionals in their being able 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: 90 percent of financial professionals identify banks as resources their organizations use to access cash and short-term investment holding information. Other resources used by treasury and finance professionals include: Investment research from brokers/investment banks (cited by 45 percent of respondents); Credit rating agencies (32 percent); Money market fund portals (30 percent)."
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 (36 percent). Other primary rationales noted by respondents are counterparty risk of underlying instruments (26 percent) and diversification of underlying instruments (20 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 those 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 and the same as Canadian dollars after USD offshore. The most-often cited type of fund invested is low volatility NAV short-term MMF (28 percent). Nearly half of respondents are still researching a decision; that is a large contingency given the high allocation to euro-denominated vehicles."
Finally, AFP adds, "Extending maturities is selected as common alternative investment option that organizations consider to complement current investment selection (37 percent), probably in response to the changing yield curve and in a more optimistic outlook environment for the rest of the year as the pandemic winds down, vaccinations roll out, unemployment declines and federal stimulus boosts the consumer sector. Separately managed accounts (34 percent), ultrashort funds (19 percent) and ETFs bond or cash strategies (19 percent) are other alternative investments cited by respondents."
