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Investment is & will always be driven by liquidity, risk, return & COMMON SENSE

The Investment Track presentation and discussion at the Association of Corporate Treasurers Annual conference in Glasgow, led superbly by ACT’s Martin O’Donovan, contained some great pearls of wisdom and advice, including:

  • investment is and will always be driven by liquidity, risk, and return
  • investment is common sense, it is all about balance
  • if it is not clear and obvious, don’t do it
  • in investment think like a treasurer, act like a CFO
  • what you can do and should do in investment, depends very much on the type of business you are in
  • general investment policy, comments included
    • conservative investment policy driven by their board
    • Statoil have a capex mountain for re-investment in the business, prefunded from the low interest rate market
    • in cash and equivalents looking for higher quality
    • many companies have adjusted all investment thresholds down from AA to A to BB, etc. to be able to continue to invest
    • opportunity cost needs to be factored into policy to ensure there is enough free cash to be able exploit opportunities to invest in the business
    • accurate cash flow forecasts are an essential part of any investment policy
    • all corporate treasuries on panel invest short, e.g. even Statoil has an average investment of 58 days 
    • need to factor in the impact of the new regulatory environment, such as Basel III, where banks are looking for certain types of cash, and at year end some may actually charge negative % rates/holding fees
    • boards tend to be ultra conservative, and unless they understand an instrument they should not invest in it
  • dynamic investment policy, i.e. changing range of investment instruments, comments included:
  • our range of investment instruments change depending on how much liquidity is available to invest
  • we have been given a remit to use a range of products, range of rating bands, range of % allocations within each instrument; we then look for investment opportunities within this framework
  • it is essential to look at short-term rating of banks and other institutions, not just their long-term ratings
  • as Repo market matures, panelists felt it could become restricted by lack of collateral
  • new Money Market Funds regulations - VNAV, etc. - are unlikely to come in for several years
  • Repos are being used as an alternative to a term deposit.

The panelists then gave their overall tip(s) for improving cash investment. these included:

  • Robert Eilertsen, Head of Group Treasury Markets, Statoil: in derivatives trading need to manage the collateral requirements in your overall cash management 
  • Gary Slawther, Treasurer, OCTAL Petrochemicals: know your own business so that you make sure that whatever you do with your cash is appropriate to your business model
  • Jim Fuell, Head of Global Liquidity EMEA, J.P. Morgan: there is a level of dislocation in the short-term investment market, much of it driven by regulation, the tradition receptacles for managing cash no longer work; so corporate treasurers need to start thinking about alternatives
  • Mark Hudson, Head of Treasury, Direct Line Insurance: review regularly, understand the products and the change in the market and its impact on the business
  • Katherine O’Brien, Vice President Treasury, AWAS: ensure there is liquidity to meet business needs, and strategically look at how can keep cash to a minimum to be able save on your debt costs
  • Alastair Sewell, Senior Director, Fund and Asset Manager Rating Group, Fitch Ratings: do look at the ratings, but also look at the nuts and bolts of how the ratings are put together, and their research.

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