Corporate treasurers favor money market funds
JPMorgan Asset Management (JPMAM) reveals emerging trends from its ninth annual Global Cash Management Survey, completed in 2007 and carried out in conjunction with The Association of Corporate Treasurers (ACT).The Survey shows that the trend of recent years towards fewer banking relationships unexpectedly reversed this year, for both primary and secondary relationships. One potential reason for this change is likely to have been the credit market turmoil, which may have prompted cash managers to cast their nets wider in search of better yield and services, and to spread risk. The importance of yield to respondents remains constant and the most important factor when selecting a primary bank has also changed, from credit facilities which took the top spot in 2006 to the quality of relationship management, customer service and support being viewed as most important in 2007. Last year, a much greater proportion of corporate treasurers are using asset management, trade finance, consultancy and advisory, risk management and pension services. In each area, utilisation of these services increased by at least 10%.
Concerns over accurate forecasting and the impact of M&A dominate worries: Good forecasting was respondents’ biggest concern about managing cash positions, while merger and acquisition activity developments within their own companies caused worries about treasury departments.
Tradeoffs for higher yield
The survey asked treasurers what additional risk they would be willing to take on when seeking higher yield. The overall results showed that respondents were most willing to take on additional duration risk and least willing to take additional foreign exchange risk. However, when comparing the responses received before September with those received later on, it was noticeable that those who completed the Survey from September onwards were more willing to take foreign exchange risk, even more prepared to take duration risk, but were less willing to take credit risk. Furthermore, when questioned about investment timing, 67% of respondents also indicated that they would be willing to consider an earlier cut-off time if it meant delivering a higher yield. In terms of AAA-rated money market funds, 33% of respondents ranked yield top. This reflects a change in sentiment since 2006, when reputation/brand was considered to be the most important factor. In 2006, 28% ranked yield as most important, putting it in second place behind reputation/brand, which achieved the top ranking from 35% of respondents.
Money market funds are the most used pooled investments: Despite the average allocation to money market funds declining from 80% in 2006 to 71% in 2007, they remain the most used vehicle across all regions and by every market cap.
Largest proportion of cash holdings are in Euro: 39% of surplus cash is held in Euro, while the proportion in Sterling, the favourite in 2006, fell from 44% to 18%. This is probably due to a change in the regional mix of respondents as last year the percentage of corporate treasurers from the UK who completed the survey has fallen from 49% to 23%, while the percentage of respondents from Central and Eastern Europe has increased. Euro and US Dollar denominated investments for surplus cash average one month, while those in Sterling average two and a half weeks.
Most popular external service is cash pooling: The proportion of respondents using external providers for cash pooling has increased by about 20% since 2006, making it the most common external service. In 2006 the most popular external service, foreign exchange execution, fell to third place.
Commenting on the survey findings Robert Deutsch, Head of Global Liquidity for JPMorgan Asset Management said, "With the ongoing crisis in the credit markets we will continue to see an aversion to risk and a need for greater transparency across all aspects of a Corporate Treasurers function. As the survey showed, this should continue to drive: the need for better systems, an increased focus on risk management, and should also continue to favor conservative investment vehicles such as money market funds and bank deposits."
Richard Raeburn, Chief Executive of the ACT said, “At a time of volatility in financial markets it is particularly interesting that the survey's results confirm a move towards more rather than fewer bank relationships but an increasing emphasis on the quality of those relationships; this focus lies at the heart of good treasury management through good times and bad.”
The future for cash management
Consistent with 2006, the impact of the Single European Payment Area (SEPA) was seen as the key future development in cash management. Respondents also predict that automation, globalisation and online based solutions will increase in the future.
Currently, 29% of cash management structures are purely global. While this is consistent with the 2006 survey, it does not reflect the significant increase that respondents forecasted in that survey. There has, however, been a 10% increase to 41% in global oversight with regional autonomy structures. Last year treasurers again predicted a large increase in global cash management structures in the future, which suggests that respondents expect change to occur at a faster pace than has so far actually occurred.
Respondents were also asked which money market and pooled investment instruments they are considering for future use. On the money market side, this revealed a positive outlook for short-dated government bonds and short-dated corporate bonds, which could be another reflection of an increasing emphasis on yield.