Treasurers Willing to Take Risks to Achieve Yield, Finds Survey

JP Morgan Asset Management has revealed the trends from its 13th annual Global Liquidity Investment Survey, which is carried out in conjunction with the Association of Corporate Treasurers (ACT). The survey has collated the views of a record 487 treasurers around the globe and reveals that the demand for yield has increased, bringing with it a greater appetite for risk, as they seek to navigate the current low risk interest rate environment with high levels of surplus cash.

The survey took place from July to September this year against a backdrop of renewed volatility in global financial markets. As the eurozone debt crisis escalated, the US credit rating was downgraded and fears mounted that the world may be heading back into recession. Nonetheless, the survey reveals that risk appetite among corporate treasurers continues on the path of gradual recovery that was noted in last year’s survey. Furthermore, surplus cash levels are at historic highs and continue to grow, but treasurers are less satisfied with the returns they are able to obtain on their cash balances.

After the financial crisis, preservation of principal became the main focus for treasurers, but last year’s survey saw the beginnings of a renewed appetite for yield – and the trend has continued this year. The key findings of the survey are:

  • The appetite for yield is returning: after several years of extremely low yields, treasurers are becoming frustrated with the returns they are able to access on their cash investments. Return on investment is now the key metric for measuring investment success (64% this year versus 48% in 2010), with preservation of principal dropping to second place (58% this year versus 62% in 2010). A greater proportion of treasurers are now looking for higher yields and they are more willing than last year to take on additional risk to achieve them.
  • Liquidity is still key: liquidity is the biggest concern in treasury departments today, and is also the most important consideration for those who segment their surplus cash. However, more than a quarter of treasurers would now be prepared to sacrifice daily liquidity for higher yields – a marked increase versus last year.
  • Risk remains in focus: risk management is now the third-highest area of importance for the treasury department, moving up from fifth in 2010. Counterparty risk is a key concern, with the financial strength of the institution now the most important criterion for treasurers when selecting a primary bank, overtaking the quality of relationship management (50% this year versus 62% in 2010) for the first time.

Robert Deutsch, head of global liquidity at JP Morgan Asset Management, said: “This year has been a challenging year for treasurers as they walk a ‘tightrope’ between their appetite for yield on one hand and their caution about risk on the other – a delicate balance that was summed up by one treasurer as ‘managing the margin: getting the best return for minimum/zero risk’. Treasurers are increasingly recognising that the decision to seek out additional yield cannot be taken in isolation. It will touch on many areas of investment policy and an organisation’s overall approach to the investment management process. Rather than targeting a particular yield at the outset, it is increasingly critical that treasurers begin to implement a segmentation strategy when analysing their cash balances in order to determine appropriate risk return considerations and investment solutions.”

The survey also found:

  • Banking relationships have increased further: treasurers increased their number of banking relationships again in 2011, continuing a trend that began amid the start of the credit crisis back in 2007. This continued increase suggests treasurers may still be diversifying counterparty risk, while others may have been forced to use more banks for the services they require as some providers have retreated from the market place.
  • There are marked regional variations in terms of segmentation: only 45% of treasurers in Europe, Middle East and Africa (EMEA) are segmenting their surplus cash, compared with 69% in Asia. Of those that do segment their cash, 74% employ different strategies for each segment. Treasurers in EMEA are least likely to employ different strategies for each segment, at 70%. In comparison, 84% of North American treasurers employ different strategies.
  • Cash flow forecasting is not the priority it once was: cash management (e.g. cash concentration, liquidity management) replaced cash flow forecasting as the key area of importance for treasury departments in 2010, and took the top spot again this year. Accurate cash flow forecasting fell in importance as a measure of success in both 2010 and 2011. This may be a consequence of the higher levels of cash on corporate balance sheets in recent years, with treasurers currently not needing to place the same importance on cash flow forecasting that they did in the past, when balances were lower. It may also be that treasurers have improved their processes and now have greater comfort in their ability to forecast flows.
  • Regulatory change is not yet a significant concern: so far, treasurers appear relatively sanguine about the potential for regulatory change, with only a very small number of respondents citing issues related to regulation as the biggest challenge they face in the next year. However, with two thirds of treasurers unwilling to consider investing in fluctuating net asset value funds if regulatory change makes stable value money market funds unavailable, it is possible that regulation may have a greater impact than treasurers currently anticipate.

Deutsch concluded: “While forthcoming regulatory change might have a bigger impact than many expect, we remain optimistic that money funds will be a viable investment for corporate treasurers going forward. We are in the process of actively working with the regulators and are confident the right regulatory measures will be implemented.”


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