Earlier this week, the Association for Financial Professionals hosted its Annual Conference in person again for the first time since 2019. While the show was only about a third of its usual crowd of 5,000+, there was still a respectable showing among the corporate treasurer, cash manager, banker and institutional money market fund audience. (It was great to see so many money fund investors and professionals in person again!) Though the agenda was thin on money fund-related topics, there were several sessions of interest. The highlight was probably, "Are Zero Interest Rates Really Different This Time?," which featured State Street Global Advisors' William Goldthwait hosting a panel including Fastly's Michael Scott, Creative Artists Agency's Garima Thakur, and American Honda Motor Company's Kim-Kelly Lippert. We quote from this segment below. (See also our Nov. 8 Link of the Day, "ICD Hosts Treasury Tech Panel with Coca-Cola, Summit Utilities at AFP 2021" and our Sept. 27 Link of the Day, "AFP Conference Preps for Washington.")
Goldthwait asks, "What's top of mind for you as you go through your day-to-day routines?" Lippert comments, "For American Honda, we basically have a really very short portfolio. We have a very large OEM monthly payment that we make, and, in addition to that, we're considered the global liquidity provider for the company. To achieve the liquidity, we invest mostly in money market funds and bank deposits. We have a few year-old time deposits, and, for a pickup in yield, we take advantage of very selective direct purchases. But our strategic cash is managed mostly at parent level at Honda Motor."
She continues, "Even with the with our super short portfolio, we do try to raise our overall return. As I mentioned, we invest mostly in money market funds and in bank deposits. Our first allocation that we do goes to our bank deposits ... for two reasons. One is, we're supporting our ECR [earnings credit rates]. And in addition to that, we're supporting our bank relationships. We have quite a bit invested with our Japanese banks. They tend to pay very good rates and also are encouraging [us to give] them more cash. The deposits don't fluctuate that much through the month, so they enjoy that."
Lippert tells us, "As with all rates, the ECR rates have declined. We try to manage that as well as we can. In addition to that, we negotiate regularly with our banks. The second allocation that we have goes to our government money market funds, that's our primary source of liquidity.... We want it in very liquid and conservative investments. We [try] squeezing a little bit extra out of it, so we invest through a portal. On that portal, we look at a lot of different attributes, and one of those are the daily factors. Some are paying a full 3 basis points, but some are paying 2.6 or 2.5 bps that ... round up to 3 bps. We look at that to try to ... squeeze that little bit extra out of it to help raise the yield."
She adds, "We also have an allocation to high quality prime funds from managers we know well, and we stay informed of the risks and characteristics of the funds. We capture the tech credits that are paid by the funds for trading through the portal, and that is one thing we use to reduce our treasury workstation annual bill. So basically, in a very competitive yield environment, very low yield environment, we analyze our investment options very carefully. We manage down to that little, tiny basis point, and basically try to produce the best overall returns."
Thakur responds, "I think for my company and for a lot of corporates right now ... it's a question of, 'How far on the yield curve can you go?' either based on investment policy or capital allocation needs. How much can you increase yields incrementally by doing that and what is the risk you want to take as a management team? For us, we've decided, no, we don't want to do that. We want to stay on the short end, very similar to what Kim said."
She says, "So we're focused on money market funds, primarily government. We don't want to deal, frankly, with the floating NAVs, so we're staying very, very conservative. The yields not spectacular, we all know that, but it's better than zero, just leaving the cash in an operating bank account. Of course, there's an element of ECR. At a minimum, we want to make sure that we're offsetting that. Then we think of any excess cash beyond that, 'What can be ladder out?' Even if it's, you know, 90 days, 30 days."
Thakur also tells us, "That's where an interesting strategy of using tier-2 banks comes in. It's the relatively smaller or regional banks that are interested in deposits in this environment and are willing to partner with us. In some cases, [you get] yields ranging in this environment 15 to 30 bps ... with an MMDA, a money market deposit account. You can agree, getting 30 bps right now is something that would make your CFO smile. So we're doing those types [of things]. Now there's an element of counterparty credit risk.... But if yield optimization is top of mind and you want to diversify your counterparty credit risk, it's a good option to start looking at those as well."
Scott then comments, "At Fastly, our philosophy around cash is really centered around capital preservation, liquidity and yield, in that order.... That's been a constant. In this environment, we haven't felt pressured to overextend for yield or credit quality. We haven't looked to use duration to try to chase yield. Our duration is really informed by our liquidity profile, and cash segmentation is really an important framework for us as well. In this low interest rate environment ... the opportunity cost for keeping a liquidity buffer is just that much lower."
He explains, "So we've been more conservative by keeping more operating cash kind of within that zero to 3-, zero to 6-month bucket. That follows two main goals, similar to what Kim and Garima talked about. Number one is working with our primary operating banks around the earnings credit, so we maximize that to offset our fees. Then any excess is going into stable net asset value, government money market funds."
Finally, Scott adds, "Then for our reserve or longer-term strategic cash, we're a small team at Fastly, so we utilize separately managed accounts. We really view those managers as an extended part of our team, getting that expertise research and professional portfolio management there. Within that portfolio, ESG is really critical for us. That's an important part of our selection criteria as we think about our investment holdings."
