The Association for Financial Professionals, a group representing corporate treasurers, published its "2023 AFP Liquidity Survey" last week. (See AFP's press release, "Survey: Organizations' Cash and Short-Term Allocation to Bank Deposits Drop to 47%, Lowest in Four Years," and our June 14 Link of the Day, "AFP Releases Liquidity Survey.") The cover letter to the report says, "Invesco is very proud to partner once again with the Association for Financial Professionals (AFP) to sponsor the 2023 AFP Liquidity Survey Report, the 18th annual exploration of current and emerging corporate cash management trends. This marks our fourth year underwriting this informative research, and liquidity investors once again continued to face a remarkable – and quickly changing -- investment landscape, from aggressive monetary tightening by central banks around the globe to sharply higher stock and bond market volatility to the collapse of several high-profile banks." (Reminder: For those attending our Money Fund Symposium this week, June 21-23, conference materials have been posted to our "Money Fund Symposium 2023 Download Center." See you all in Atlanta on Wednesday!)
Invesco's Laurie Brignac explains, "This year's survey identifies a number of interesting, high-level themes: Corporate liquidity reserves remain near record highs, taking advantage of rapidly rising yields and principal safety in the uncertain market environment.`Cash allocations have been shifting from bank deposits to money market funds in response to the 2023 banking crisis <b:>`_. Caution remains a dominant theme, as companies continue to navigate inflationary pressures, slowing global economies and elevated uncertainties around macro risks." (Note: Brignac will also give the keynote at this weeks' Money Fund Symposium along with Invesco's Tony Wong.)
AFP's Introduction tells us, "To understand current and emerging trends in organizations' cash and short-term investment holdings, investment policies and strategies in the current economic environment, the Association for Financial Professionals (AFP) conducted its 18th annual AFP Liquidity Survey Report in March 2023. The survey generated 222 responses which are the basis of this report. Results from this survey will provide treasury and finance professionals with critical benchmarks on short-term investment holdings and strategies. AFP thanks Invesco for underwriting the 2023 AFP Liquidity Survey Report for the fourth consecutive year. The Research Department of AFP designed the survey questionnaire, analyzed the survey results and produced the report and is solely responsible for its content."
Discussing "Cash and Short-Term Investments/Securities," the AFP says, "A similar percentage of respondents report larger cash and short-term balances in the U.S. over the past 12 months (through March 2023). Thirty-six percent of corporate practitioners report an increase in their organizations' cash holdings within the U.S. in the past 12 months -- just one percentage point lower than the 37 percent reported in the 2022 AFP Liquidity Survey Report. The share of those respondents reporting a decrease in their companies' cash holdings within the U.S. rose by 6 percentage points -- from 17 percent in last year's survey to 23 percent in the current survey. This result suggests organizations do not feel the need to hold tightly onto cash balances, signaling some cautious optimism. Forty one percent of respondents indicate that there was no significant change in their cash and short-term balances within the U.S. over the past 12 months, a decrease from 46 percent last year."
They write, "Sixty-two percent of respondents indicate that in the past 12 months their organizations' investments outside the U.S. were unchanged -- slightly higher than the 57 percent last year. Twenty-four percent report an increase in cash and short-term balances, lower than the 33 percent in last year's survey. Fourteen percent report a decrease -- higher than the 10 percent in last year's survey. Here too, organizations appear willing to invest and increase outlays outside of the U.S."
AFP's report continues, "Nearly 60 percent of organizations hold some amount of cash outside of the U.S. -- similar to the 62 percent reported last year. Seventy-three percent of publicly owned organizations hold cash outside of the U.S.; 24 percent of these companies hold at least half of their cash outside the U.S. Sixty-two percent of large organizations -- those with at least $1 billion in annual revenue -- hold cash outside the U.S., significantly higher than the 50 percent of organizations with annual revenue less than $1 billion that do so. These findings suggest that larger companies are more likely to have cash in their operations outside the U.S. than are smaller companies."
The survey also tells us, "Changes in cash holdings are driven by various factors. Sixty-eight percent of respondents report that increased operating cash flow has had either a significant impact or some impact on the increase in their organization's cash holdings in the past 12 months -- a 14-percentage-point decrease from the 82 percent in last year's survey. Other drivers contributing to increased cash holdings at organizations include pandemic planning and contingencies (cited by 47 percent of respondents), increased debt outstanding/accessed best markets (44 percent) and acquired company/subsidiary/launched new operations (42 percent)."
On the topic of "Objectives of Cash Investment Policy," the survey says, "Organizations are continuously working to balance their desire for safety and liquidity against a competitive rate of return. Safety continues to be the most-valued short-term investment objective for 63 percent of organizations -- unchanged from last year's survey. It is not surprising that organizations are continuing to choose safety over liquidity given the current economic environment, inflationary pressures, numerous interest-rate increases by the Federal Reserve, a potential banking crisis and geopolitical concerns. Thirty-three percent of survey respondents indicate that their organizations' most important objective is liquidity -- slightly lower than the 34 percent reported in 2022, but one percent higher than the 32 percent reported in 2021.... Yield continues to be the least important objective of an organization's cash investment policy. The share of organizations ranking yield as most important has increased by one percentage point -- from three percent in 2022 to four percent in 2023."
AFP comments, "Fifty-seven percent of organizations with 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 four-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. Over 60 percent of respondents from organizations with annual revenue less than $1 billion and privately held organizations call out/separate cash holdings, while 43 percent of respondents from publicly owned organizations call out/separate cash holdings."
They also state, "Twenty-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.... A majority (83 percent) of organizations' investment policies requires money market funds be rated. Thirty-three percent of organizations require at least one rating agency assign a AAA rating, and 36 percent mandate that their money market funds earn a AAA rating from at least two agencies."
AFP explains, "Companies maintain their investments in relatively few vehicles. Organizations invest in an average of 2.7 vehicles for their cash and short-term investments -- more than the 2.5 reported in 2022 and 2021. Most organizations continue to allocate a large share of their short-term investment balances -- an average of 79 percent -- in safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. This is just two percentage points lower than the 81 percent reported in 2022, the highest figure on record since AFP began tracking the data. The typical organization currently maintains 47 percent of its short-term investments in bank deposits. This allocation is 8 percentage points lower than the 55 percent reported last year, lower than the 52 percent reported in 2021 and the 51 percent in 2020. This year's allocation is similar to percentages reported in 2019 (46 percent) and 2018 (49 percent)."
They tell us, "The larger shares of short-term investments allocated to bank deposits in the past three years were likely pandemic (COVID-19) driven. During the pandemic, companies were focused on liquidity planning and cash flow from operations. While one can interpret this shift in the past year as a result of the economy having gained more stable footing after the liquidity crisis during the pandemic, it may also be due to bank failures in the first quarter of 2023; organizations are more focused on concentration risk of their deposits. Organizations are trying to avoid any challenges they may face if their deposits are not accessible -- and so may have started diversifying their investments."
AFP adds, "The allocations in Government/Treasury money market mutual funds increased by four percentage points to 18 percent in the past year; the allocation is higher for larger, publicly held companies and net investor companies than for other organizations. Investment allocations to Treasury bills also increased -- by two percentage points -- and this allocation is more common for companies with annual revenue less than $1 billion and those that are net investors and investment grade than for other organizations. These shifts in investment vehicles signal that organizations continue to be cautious and are leaning towards allocating their investments in those vehicles which offer stability and safety in the current uncertain economic environment. Allocations to agency securities increased two percentage points to four percent since last year. The change in bank deposits is largely due to the obligations of the U.S. Government and its agencies, a flight to quality and the objective to diversify their deposits away from their banks."
Finally, AFP comments, "The anticipated changes in investment mix are more likely to be observed in Government/Treasury money market funds; 38 percent of respondents anticipate an increase and only 8 percent expect a decrease. Other investments likely to be impacted by shifts in an organization's investment mix are Treasury bills and bank deposits. As stated earlier, the increase in the investment mix towards Government/Treasury money funds and Treasury bills signals a flight to quality from organizations' bank exposures. But in addition, as money funds' durations shrink, there is additional yield to capture as rates are expected to increase and the shorter maturities will capture the rise in rates more quickly. The 25 percent anticipated decrease in bank deposits reflects the decreasing confidence in banks post-banking crisis. One of the advantages money funds have over bank deposits is transparency and reporting -- money funds absorb rate increases while bank deposits are subject to earnings credit rates or interest rates. Bank deposits did not move in step with Fed Funds rate increases over the last year as did money funds, thus explaining the shift to money funds. Additionally, the transparency in reporting that money funds offer is another reason for the move to money funds <b:>`_."
