A rising interest rate environment and higher-quality cash forecasts provide the opportunity for treasurers to derive value (in real terms) from their available liquidity.
Treasurers' thoughts are changing in terms of priorities. In the latest AFP Liquidity Survey,
Despite these survey results, anecdotal evidence suggests that even with interest rates rising by a factor of almost 10 over the last two years, many treasury teams have not reviewed their investment management policies. Instead, organisations have continued to rely largely on the same policies to prioritise security and liquidity of funds through bank deposits and money market funds – investing typically on an overnight basis for instant access. According to Jason Macdonald, Head of Liquidity Product at Barclays, a number of organisations are only just beginning to consider yield on an equal footing with security and liquidity. Yet by keeping to the status quo, many treasury teams are failing to unlock the opportunities for adding value from their cash management strategy, as the real value of cash continues to be eroded by inflation.
Depending on the nature of the business, the cost of maintaining such a strategy can have a significant impact in terms of potential revenues in the current high-inflationary environment. Through a combination of a revised investment policy, better use of technology, and making more of cash forecasts, treasurers may be in a position to materially improve the real returns on their available liquidity.
While there may be clear benefits for treasurers exploring alternative investment approaches, factors within organisations may discourage changes to investment management policies. For example:
By keeping to the status quo, many treasury teams are failing to unlock the opportunities for adding value from their cash management strategy
So what should treasurers be seeking out to generate more value from their investments?
Most organisations will use either money market funds or bank deposits (both overnight and longer) for their surpluses and in some cases may use only one of them. Alternatives such as managed/mandated investment strategies and repos continue to be considered relatively niche products. However, treasurers may discover added value by building a wider portfolio of investment products rather than restricting themselves to bank deposits and money market funds (especially in the light of turbulence in the financial markets in 1H 2023). And it can extend to investing some of their excess liquidity further out than overnight – especially if the cash forecasts can support this and they are comfortable with the accuracy of the forecasts.
Of course, all investments – including money market funds and bank deposits – present risks; when considering security, liquidity and yield there is a balancing act to find the optimum investment strategy and risk exposure with which the organisation is comfortable.
One of the first steps is to initiate conversations with bankers and asset managers to help formulate a portfolio of investment strategies. Initially, this would require treasurers to go through a qualitative and quantitative checklist to understand:
With these factors established, it should be possible to develop alternative investment strategies that incorporate a balance of liquidity and yield while preserving security, and build more diversity into the investment instruments used. These potential solutions can then be reviewed against the organisation’s governance framework to ensure that any revised investment management strategy remains consistent within it.
Technology is a key enabler, providing more flexibility, agility and transparency for investment management processes. It can be a particularly powerful tool for smaller treasury teams or those with little capacity to build change, with a wide range of software solutions and platforms available. These can enable a more dynamic investment strategy that:
Finally, organisational buy-in for such change in policy is crucial to success. It is essential to build confidence not only within the treasury team, but also with the chief financial officer and the wider board, to make sure all are comfortable with adopting a different approach to managing surplus liquidity.
With a revised and more dynamic investment management strategy in place, treasurers can extract additional value from their existing cash forecasting processes. They can use the forecast to inform investment decisions across a range of instruments and counterparties, from a liquidity as well as a yield perspective within an overall security envelope.
The macro-economic environment makes this a good time to review investment strategies and check if you can unlock additional value from your surplus cash.
Barclays Bank PLC is registered in England (Company No. 1026167) with its registered office at 1 Churchill Place, London E14 5HP. Barclays Bank PLC is authorised by the Prudential Regulation Authority, and regulated by the Financial Conduct Authority (Financial Services Register No. 122702) and the Prudential Regulation Authority. Barclays is a trading name and trade mark of Barclays PLC and its subsidiaries. Find out about the Financial Services Register.