Safety first the investment mantra for US corporates

Treasury and finance professionals in the US remain “cautiously optimistic” with safety still a priority, reports the Association for Financial Professionals (AFP) in its latest annual Liquidity Survey.

The 2017 edition of the AFP survey, underwritten by State Street Global Advisors (SSGA) and released earlier this month, finds that although the Federal Reserve has been gradually raising short-term interest rates over the past 18 months, the investment policies of US organisations aren’t yet focused on yield.

“Indeed, a general feeling of apprehension is reflected in companies’ heavy reliance on bank deposits as their investment vehicle of choice,” the survey notes. “Fifty-three per cent of all corporate cash holdings are still maintained at banks – that is slightly lower than the 55% reported last year.”

Two in three of the organisations polled identified safety as their most important short-term investment objective, as evidenced in the fact that 76% of their short-term cash in bank deposits, money market funds and Treasury securities.

Allocations in money market funds (MMFs) continued to shift from prime funds to government funds, further demonstrating the emphasis on safety and the adverse impact of money fund reform on prime funds as investment vehicles.

“With the final stage of money fund reform implementation [by the US Securities and Exchange Commission (SEC)] in October 2016, investors sentiment was leaning towards stable net asset value (NAV) MMFs,” the survey notes.

“As a result, the market saw a massive shift of balances from prime funds to government or Treasury-backed funds. Floating NAVs, along with gates and fees, did not sit well with corporate treasurers who needed to provide preservation if principal and liquidity in an environment where yield is not a priority.”

A sizeable minority (41%) of survey respondents said their organisation had stopped investing in prime funds as a result of the SEC’s money fund reforms and currently had no plans to resume investing in such funds. Others are adopting a ‘wait and see’ approach; 23% said they would consider investing in prime funds if the NAV doesn’t move very much and 20% would consider it should the spread between prime funds and other investments become “significant”.

“Money fund reform continues to have adverse impacts on institutional investors, depriving them of a proven, effective cash management tool,” said AFP president and CEO, Jim Kaitz. “The flight from prime funds is also starving the economy of a critical source of short-term capital for large businesses.

“Despite these changes, many businesses are expanding globally, increasing their cash flow, and beginning to make strategic investments to fuel future growth. These are positive developments for the economy.”

Unchanged objectives

The 2017 survey was conducted in April and generated 683 responses. It found that one in three financial professionals reported that their organisation’s cash holdings had increased over the past 12 months, while 51% said they had remained stable and 18% reported a decrease. The respective percentages were broadly similar to those in last year’s survey.

Fifty-six per cent of finance professionals said that their organisation’s investments outside the US hadn’t changed over the past 12 months against 58% in the 2016 survey.

Among the organisations with non-US cash holdings, 29% had increased them over the past year and 15% had decreased them – again similar figures to those reported last year.

“While we’ve witnessed significant shifts in the landscape of cash management over the past year, clients clearly continue to adhere strongly to the investment objectives of safety of principal and liquidity,” said Yeng Felipe Butler, head of SSGA’s global cash business.

Among those survey respondents who expect their organisation to increase its cash holdings over the next 12 months, 79% say it will be as a direct result of increased operating cash flow. Meanwhile, 39% of respondents who expect to decrease their cash holdings in the ahead say they will do so primarily because of increased capital expenditures.

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Mark Carney Bank of England