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Most companies need to change asset allocation policies to cope with new normal

Got even more surplus cash than last year? Cannot get any yield on your spare cash? Using a wider range of investment asset classes? Having to look at new asset allocation strategies to generate more yield? Regulatory change the biggest problem in investment?  You’re not the only one as SunGard’s 5th annual cash investment survey (of 54 corporates - 46% in North America, 37% from Europe) shows. In today’s cautious world, as you would expect, there were few surprises but corporate treasury’s general approach to investment does seem to be changing.

General investment strategy

There has been a shift from the preservation of capital five years ago to a greater focus on yield.

Changes in corporate cash investment strategy

Source & Copyright©2015 - SunGard  

Continued use of MMF even though looking at other asset classes

The other major trend has been the impact of regulatory change - Basel III and the changes to money market funds. Although all corporates are feeling the impact of  Basel III - less banks willing to take their deposits, etc. - few plan to reduce their use of Money Market Funds even with the new SEC reforms, as the table below shows.

Anticipated change in MMF investment post-MMF reforms

Source & Copyright©2015 - SunGard

Meanwhile, many respondents also anticipate diversifying their cash investment portfolio across a wider range of instruments away from MMFs, as this figure shows:

Source & Copyright©2015 - SunGard

Although over 40% of respondent found that there is an insufficient range of suitable investment instruments available. 

Vince Tolve, executive vice president for SunGard’s global trading business, believes that this will create a widening spread between government and prime funds which will create interesting opportunities for treasurers who have the right tools to effectively and efficiently invest in prime. “The movement of cash from prime funds with a fluctuating NAV into government funds will put downward pressure on government rates, while prime funds buying less corporate debt will drive up yields and increase returns generated by prime funds,” said Tolve.

Cash surpluses growing and the big challenges

For the majority of corporate respondents, surplus cash on balance sheets continued to grow, some by as much as a third. The primary reason for holding surplus cash was financing investment/M&A. Regulatory changes, of different kinds, were the biggest challenges in investment.

Most significant cash investment challenges

Source & Copyright©2015 - SunGard 

Investment conclusions

The one surprise in this report was how the reliance on MMF will continue, even with the new SEC changes on how they operate. However, the regulatory restrictions are here to stay, so corporates will have to consider using other asset classes. To do this many company’s asset allocation policies will require fundamental review, but as Tolve explains, “This is not easy to do, because treasurers will need to evaluate what changes need to be made to investment policies, in light of regulatory and risk tolerance, and get board approval on those changes. But this is a good thing, as treasurers play a more strategic role in the business.”

CTMfile take: Using the new technologies and systems, treasuries are producing more accurate cash flow forecasts which require less overnight liquidity. This is creating opportunities for treasurers to take some modest risk in return for a competitive yield.

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