Yield in the Post-crisis World
Jim Fuell, J.P. Morgan - 23 Nov 2010 From GTnews .com25 -11-10
Corporate treasurers are slowly regaining the appetite for yield. But how can treasurers combine
their desire for yield with their focus on liquidity and security? And where should they look for
returns in this low-rate environment without significantly
The annual J.P. Morgan Global Cash Management Survey,
conducted for the 12th consecutive year in summer 2010 with the
support of the Association of Corporate Treasurers (ACT), suggested
that the lessons of the financial crisis will not be easily forgotten. The
emphasis looks set to remain on liquidity, credit quality and counterparty stability for some time, although
as company balance sheets recover from the crisis, treasurers’ priorities are gradually evolving.
Amid the severe dislocation of credit markets and the high profile banking failures experienced during the
financial crisis, liquidity became paramount for corporate treasurers. In the 2009 survey, when treasurers
were asked about concerns in their treasury department, liquidity was the most commonly cited response,
and a year on, it remains the biggest concern.
Treasurers also continue to focus on counterparty risk. Among the criteria treasurers use to select a
primary bank, the bank’s financial strength gained in importance for a second consecutive year, now
ranking almost equally with the quality of relationship management and customer service. When selecting a
pooled investment, too, the financial strength of the provider has become more important to treasurers.
However, while liquidity and security undoubtedly remain the highest priorities, the survey pointed to the
beginnings of a recovery in risk appetite, and suggested that after two years of very low yields, treasurers
may be starting to look for improved returns from their cash investments. The majority of treasurers
responding to the 2009 survey were content to receive returns in line with Libor from their surplus cash.
This year, however, an increased proportion of treasurers said they were looking for Libor+ returns.
Segmenting Liquidity Needs and Maximising Return
But how can treasurers balance the need for liquidity with a greater appetite for yield? The answer may lie
in cash segmentation. Before the financial crisis, many corporate treasuries segmented their cash into
multiple tiers, allowing them to meet their liquidity requirements and also maximise returns:
Cash typically used for daily operating needs, may be subject to unforeseen volatility.
Requires preservation of principal.
Investment horizon of 12 months or longer.
Fairly static, same-day access not needed.
Cash set aside for possible acquisition, stock repurchasing and research and development
Balances trapped in highly regulated jurisdictions or with repatriation-related tax issues.
Cash collateral tied to credit agreements or derivative contracts.
No forecast use in the short term
Cash on balance sheet that has not been historically used
Investment horizon of one year or longer
Figure 1: Segment Cash by Liquidity Needs and Risk Profile
In the aftermath of the unprecedented money market dislocation experienced during the credit crisis, many
treasury departments began to require the same focus on principle preservation and daily liquidity for all of
their cash, rather than only for the operating cash portion of their portfolio. This resulted in the dramatic
flight to quality witnessed in 2008 and 2009, which saw huge inflows into AAA-rated money market funds
Despite low yields, the safety of principle and high degree of liquidity offered by AAA-rated liquidity funds
mean they continue to be an excellent option for the most liquid cash balances of corporate treasury
departments. However, as short-term fixed income markets continue to improve, many treasurers are again
recognising the benefits of cash segmentation, and are asking whether additional returns are possible from
the investment of cash balances with a longer investment horizon and higher tolerance for volatility.
Recognising that different portions of the cash portfolio may suit different investment horizons reduces the
reliance on the overnight and very short end of the money market curve, which remains very crowded.
Cash tiering may be particularly beneficial today given the high levels of cash many companies are
currently holding. In the survey, more than half of treasurers said that surplus cash on their organisation’s
balance sheet is higher now than in the previous year, which reflects a general trend for stockpiling of cash
since the height of the crisis. We may see some of this cash begin to be put back to work through M&A and
capital investment in the coming year, but we may also see a greater appetite for using some of this
surplus cash to earn higher returns.
Finding Yield in the Low Rate Environment
Achieving higher returns in the current environment remains challenging. Amid persistent uncertainty about
the pace and sustainability of the global recovery, interest rates in developed markets look set to remain at
the current record-low levels for some time. This low rate environment, combined with the flight to quality
by investors looking for safety of principal, has driven yields to historically depressed levels.
However, MMF managers are recognising the appetite for products that are able to seek yields in excess of
AAA-rated funds, and are providing innovative solutions to address this need. For companies who are able
to forecast cash flows with some degree of certainty and identify pockets of cash with no anticipated short-
term use, managed reserve strategies may provide a solution for maximising returns.
Balancing Risk and Return
Managed reserve products combine careful risk management with the ability to source returns in excess of
those offered by MMFs. They are available as pooled funds, and are also seeing increasing uptake as
separately managed accounts, which offer the advantage of fully customised portfolios that allow clients to
define their own parameters for security, returns and liquidity based on their risk tolerance and cash flow
Because managers work closely with their corporate clients to understand their expected cash flows,
managed reserve products are able to seek higher returns than AAA-rated MMFs. There needs to be a
liquid market for the securities, and a laddered portfolio helps to ensure that unexpected cash needs can
also be met. Principal protection is paramount and is achieved by managing risk through credit analysis,
diversification and a limited maturity spectrum.
The focus is first on principal protection and liquidity. Once these are achieved, a suitable level of return
can be sought by adding incremental credit risk and interest rate duration. Returns in managed reserve
products may fluctuate and should be assessed over a longer investment horizon than traditional liquidity
Of course, to take on any additional risk in their cash portfolios, corporate treasury departments need to
make sure they are able to perform accurate cash flow forecasting. Managed reserve products should only
be considered for balances that are not expected, to a high degree of certainty, to be needed for at least a
year. If all these requirements are met, this type of product may serve as a useful complement to traditional
liquidity funds, allowing treasurers to balance their focus on risk management with their renewed appetite
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