Perhaps not surprisingly, the treasurers at the ‘
Risk Annual Summit 2013
‘ viewed matters through an exclusively risk management lens, agreeing that there is no single, correct solution to their challenges – or the
banking crisis in Cyprus
, for that matter, which was front and centre in a lot of attendees minds.
In the end, the treasurers that I met at the Summit agreed that the eurozone crisis is far from over, despite the European Central Bank (ECB) bond-buying programme launched last year which did initially calm the situation. The events unfolding in Cyprus will test the European Union (EU) and the ECB and other regulatory and finance bodies have much work ahead of them.
Treasurers Discuss Short-term Investments
During the Summit I served on a panel of experts with three treasurers from prominent companies across Europe. Our topic for discussion was investment options in the low interest yield environment for treasurers. The panel was moderated by Kirill Ilinski, an investment manager based in London.
It was interesting to hear that the challenges of the European treasurers on the panel are very similar to the challenges I hear about in the US from participants at the Corporate Treasurers Council (CTC) roundtables across America. First and foremost is that short-term investing is conducted primarily through a risk management framework. Allocating cash balances to short term investments aimed to preserve principal is paramount for these treasurers. They found no reason to stretch for yield if the risk was not worth it.
One Dublin-based treasurer on the panel with operations across Europe said his treasury group sweeps all of their cash out of the eurozone countries on a daily basis to mitigate currency exposure to the euro. They sweep their funds to investment products based in Sweden where the headquarters is located and concentrate their short-term investments there.
Kirill asked the treasurer why it was worth putting all of his short-term investments in one country (sovereign risk) rather than diversifying it across Europe. The treasurer’s answer was simple: The trade-off for the exposure to the euro was worth it to concentrate the company’s cash in Sweden.
Another panelist from a Moscow-based company with trading operations in London said he focused primarily on finding alternatives to his company’s current investment selection. For him, tri-party repo is becoming an investment solution as the opportunity to trade in a multitude of securities offers them the preservation of principal and the transparency of the underlying securities. Figuring out which of their 30+ banks to do tri-party repo with is his challenge at present. He found this strategy a viable alternative to money market funds (MMFs), as the underlying investments and counterparties associated with money funds were not as transparent.
The last treasurer on the panel is based in London and works in the airline industry. His company looks at cash a different way in determining its operating needs. The company keeps its operating cash on hand on a per aircraft basis of £4m. On any given day the treasury team moves balances to segmented accounts over and above that threshold as a rule of thumb. They are also looking at tri-party repo for their cash balances as well. This treasurer commented that his company’s latest use for cash has been to buy back company debt, as they see a far better return to the shareholders as a use of cash . The company has amassed a £1.5bn balance of cash investments and manages it with just three treasury team members.
Kirill asked the treasurer if he would consider outsourcing some of his company’s investment management and, like many treasurers, the treasurer commented that it depends on the circumstance. He noted that many times it comes down to costs and as their cash balances ebb and flow with the business cycle it’s often impractical.
Kirill also made an interesting point: If he were to take on £1.5bn in funds with only a three-person team, it would be very difficult for him to stay in business as an investment manager! This is often where treasury is different but very similar across organisations. One of the common themes we see regularly is that treasury is often very thinly staffed so it’s no wonder many treasurers seek safe and prudent investments to maintain return of principal versus return on principal – no matter where they are located.
Tom Hunt, CTP, is Director of Treasury Services at the Association for Financial Professionals (AFP). This article first appeared on www.afponline.org