How are Companies Investing their Surplus Cash?

J.P. Morgan Global Liquidity Investment PeerViewSM recently conducted a survey of 400 CIOs, treasurers and other senior decision-makers.

When I perused the JPM liquidity survey, I couldn’t help to wonder how treasurers in this day and age of low interest rates, floating money market funds, a commercial paper market that has declined, and banks with market values below book values invest surplus cash.

This has become even more relevant since reform has also hit the European money market fund sector.   Corporate treasurers must now live in a world where all money market funds do not have a constant net asset value. In the USA, these reforms went live Oct 2016. In Europe, the timing is July 2018 for new funds and January 2019 for existing funds.

Here are some of the key survey findings:

Investment in money market funds still strong

Despite the new reforms in the USA (and now Europe) nearly 40% of respondents cited money market funds (MMFs) as their chosen vehicle for money moved off a bank balance sheet—by far the most popular placement. In addition, 20% of respondents mentioned increasing allocations to floating funds.

Investment policy changes

More respondents are updating their investment policies. Notably, 48% of respondent policies now permit floating NAV funds, up from 32% in 2015. That’s a sizable change, but note, 52% do not.  More than 75% said it takes a moderate or significant effort to change investment policies.

Shifting rate environment, search for yield

Nearly two-thirds of respondents said they will select money market funds for their cash investments if bank deposit rates lag.

Keener need for cash segmentation

Cash segmentation is increasingly important. More than 70% of respondents can forecast their cash flows out for a month or longer.

Moving back into prime funds

Only 37% of U.S.-based respondents are currently invested in a prime money market fund, down from 63% in 2015. A majority transitioned assets to a government money market fund in the wake of new SEC 2a-7 rules. Over 50% of U.S. investors who transitioned assets from a prime to a government MMF cited comfort level with floating NAV and gates/fees as the primary factor in reconsidering prime. Among respondents who transitioned assets out of prime MMFs, nearly half would consider moving back if prime offered an excess yield of between 15 basis points and 50 basis points.

From a risk / reward tradeoff perspective, an extra 15bps to 50bps is the price of both illiquidity and floating cash values. Is that sufficient?  I truly dont know, but we do know its entirely situational.

Where was the discussion on Investing in your own or others’ Supply Chain?

This survey missed this key question. There was nothing about investing in your own supply chain via dynamic discounting or reverse factoring, or using asset managers to invest in other companies supply chains.

Given the strong cash positions of certain industry sectors, and the need for non bank funding for short term assets given the banks receding balance sheets, this is an area that needs to be explored deeper. There is no reason why a John Deere could not use an asset manager to invest short term funds in other corporate payable obligations with the investment guidelines that are appropriate for them.  John Deere’s treasury group would not have the resources to evaluate these assets themselves (unless they hired staff, and I doubt that will happen), but they can use fiduciaries like asset managers to do this for them.

Considering the risk in Prime funds, investing in other corporate supply chains should be a viable option. The JPM survey did indicate respondents wanted to consider new investment solutions, including floating NAV funds and more customized portfolios, so I look forward to next year’s report exploring this deeper.

You can download the report, which was done via online survey, here

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