The U.K.-based publication TMI, or Treasury Management International, recently published the results of a survey sponsored by Northern Trust Asset Management entitled, "Through The Liquidity Lens: Corporate Treasury Trends In Short-Term Investments." The piece summarizes, "Rising rates were the number one concern impacting their short-term investment decisions for 41% of survey respondents, while 15% selected inflation.... ESG and DEI (Diversity, Equity, Inclusion)-driven investments are on the rise. According to the survey findings, 21% currently invest in ESG-focused MMFs and 38% plan to. An additional 22% currently invest in green/sustainable deposits and 42% intend to over the coming 12 months.... Despite the clear benefits, 45% of survey respondents do not use an investment portal. The major reason for not harnessing portal technology is not investing in MMFs (44%), but 13% say resources are also an issue. The most popular portal choice is that provided by banks – with 22% of treasurers leveraging this technology."
The summary tells us, "Forty-nine respondents were completely unconcerned by MMF regulation – which is being revamped on both sides of the Atlantic to ensure resilience. Nevertheless, seven respondents chose regulatory uncertainty as their main investment concern for 2023. Recent regulatory updates show promise in terms of softening any unintended consequences of regulation, however.... Survey respondents not currently investing in MMFs explained that human resource constraints were a significant barrier to doing so (for 9%). Similarly, a lack of time is impeding 9% of respondents from exploring sustainable and responsible investment options. Reviewing investment policies is also challenging for many overstretched treasurers, with 16% only managing to review their policy every few years."
The update explains, "While respondents are split on how their interest rate views affect their investment strategy ..., what is clear cut is the shifting popularity of some traditional short-term investment vehicles. Only 12% of respondents plan to invest (more) in bank deposits over the coming 12 months. While, to some extent, this reflects the relative ubiquity of bank deposits already (with 82% of respondents currently invested), there are other influences afoot. [Northern's Dan] Farrell and [Dan] LaRocco both point to the fact that interest rate rises are not always being reflected quickly in bank deposit rates. There may also be lingering concerns around counterparty risk, sparked by the Silicon Valley Bank crisis – leading treasury teams to seek greater diversification."
Farrell notes, "In early 2023, on the back of the banking crisis, we certainly witnessed a flight to quality as there is more focus among investors to really do their due diligence around where risks might lie in their cash investments. As a result, we saw significant inflows into Money Market Funds (MMFs). And while the impact of the banking crisis has calmed down, many corporate investors have opted to stay in MMFs."
The survey says, "Indeed, 21% and 22% of respondents are looking to invest in stable and floating net asset value (NAV) MMFs respectively over the coming year. Ultra-short/short-term bond funds are also growing in popularity among the search for yield, with over one-quarter (26%) interested in using them. And according to Farrell, these instruments may be of increasing interest to treasurers as rates begin to fall. Sustainable investments, meanwhile, are poised to receive most attention from treasury teams over the coming year, with 38% looking to invest in ESG focused MMFs and 42% intending to enter green/sustainable deposits."
On respondents' heavy concentrations in bank deposits, it comments, "Farrell and LaRocco both find this surprising and somewhat concerning, especially given the fact that elsewhere in the survey 47 respondents said rising credit/default risk is their main concern in 2023. Nevertheless, Farrell understands where treasurers may be coming from. 'Often, corporate investors are more comfortable with what they know, especially if they do not have the time or resources to spend looking at investment options. So, bank deposits seem like a safe choice for them. But by being so concentrated in a single or small number of banks, investors can unintentionally create more risk. This is where diversified funds such as MMFs have a critical role to play in helping to mitigate those challenges.'"
LaRocco explains, "MMFs can offer benefits to investors whether rates are rising or falling. 'In a rising rate environment, MMFs are beneficial because of their flexibility in portfolio construction. Fund managers actively refine their portfolios to optimise returns. One strategy they deploy is significantly shortening the weighted average maturity [WAM] of the investment portfolio, within the permissible range of 0 to 60 days. This adjustment allows for cash to be reinvested every month, ensuring rate rises are captured and relayed to investors. And when rates are falling, fund managers can purchase securities with longer maturities to stagger the effects of the rate reduction. By retaining higher yields over an extended period, MMFs can provide more appealing returns compared with short-term bank deposits in a falling rate environment."
The TMI paper states, "While some investors may be hesitant to invest in MMFs in part due to regulatory concerns ..., Farrell says that fund providers have market experts who can guide investors through these changes. 'In addition, each MMF has a dedicated portfolio management team, which further reduces risks for investors – whether rates are rising or falling – since active management is constantly carried out. In other words, the wider potential benefits of diversifying away from bank deposits into MMFs are not to be overlooked."
Discussing "Investment policy restrictions," the study says, "When talking about diversification, or lack thereof, there is a natural link to investment policies which – whether rightly or wrongly – prohibit the use of certain instruments. Many survey respondents have highly restrictive investment policies. For example: 27% are not permitted to invest in stable NAV MMFs; 34% cannot invest in floating NAV MMFs; 31% cannot invest in ultra-short bond funds; and, 8% cannot invest in ESG instruments."
It explains, "Often these restrictions stem from the fact that investment policies are outdated, says Farrell.... 'Many of the restrictions on MMFs stem from the last round of regulatory action several years ago – and things have moved on, so policies need to as well. As such, we recommend that investors review their policies at least every couple of years to ensure they remain suitable for the current environment and are not prohibiting the potential for greater returns."
TMI writes, "Despite the clear benefits on offer, 45% of survey respondents do not use an investment portal – not even one provided by a bank, although this is the most common tool among 22% of participants.... The major reason for not investing in portal technology is not investing in MMFs (44%), but resources are also an issue for 13% and the same number believe their investable cash balance is not large enough to justify implementing a portal. Interestingly, just over one-quarter of respondents (26%) prefer to trade directly rather than use a portal.
Finally, LaRocco adds, "As the regulators have concluded, throughout the pandemic and the recent banking crisis, MMFs have proven themselves to be extremely resilient. In fact, when the SVB collapse was first reported, we saw significant outflows from bank deposits into MMFs, demonstrating that investors believe these funds to be a safe haven. This is in no small part thanks to the robust regulatory standards MMFs must adhere to."
