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| label2 = Martin O’Donovan
|  data2 = Deputy policy and technical director
The Association of Corporate Treasurers


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| colspan="2" style="text-align:center;" | [[File:Black_rock_logo.png|200px|link=http://www.blackrock.com/cash|alt=Sponsored by BlackRock]]
|}


==Introduction==
==Introduction==
After more than six years from the start of the financial crisis we have been through a credit and banking crisis, a sovereign debt crisis, the euro crisis and a major process of re-regulation of financial services. While the peaks of turbulence are past, the consequences are still very much with us. And it is not all bad. When times were hard, the benefits of running a well-managed professional treasury department became even more apparent. Efficient cash management and prudent investing became more important than ever.
Corporate treasury has become strategically more important for organisations since the financial crisis, with liquidity and risk at the forefront of investor importance. Corporates have built higher cash reserves in order to deal with volatile markets and to enable themselves to be more flexible. Many have taken advantage of the low interest rate environment and pre-funded their borrowing needs. However, monetary policy and regulations are creating new dilemmas for corporate treasurers when it comes to investing cash.
Larger companies are in the privileged position that bank or bond funding is once again readily available even if more generally the banks’ capacities for making new loans have undoubtedly become restricted. Private equity owned companies have always been acutely aware of the need for cash generation and tight controls on cash management. That lesson has been learned across the board. Companies revised their cash forecasts, partly to see what levers could be pulled to save cash, and partly because these forecasts needed updating to reflect the continuing downturn in the economy. Reducing gearing was the order of the day, new acquisitions were reined back, working capital was thrown into the spotlight to be managed more tightly and cash was allowed to build up to provide future financial flexibility. The lessons learned from the financial crisis will have a long lasting benefit in the fields of cash management, forecasting and investing.
 
Understanding the working capital cycle and taking control of it became a priority; in many companies this had been a neglected area. Making full use of the available accounts receivable and accounts payable technologies, getting on top of reconciliations, reducing admin and errors, tightening Days Sales Outstanding, claiming supplier discounts and improving cash flow and its forecasting will all be a permanent legacy of those critical times.
==Challenges cash investors currently face==
Cash management is no longer considered to be low risk. Cash management investments, particularly money market funds, have been subject to increased scrutiny from regulators globally. Cash investments are at the precipice of potentially major regulatory reform in Europe and have already been subject to changes in the United States. Investors have been affected by low interest rates and a shrinking supply of short-term securities. Regulatory change in the broader financial markets could lead to a direct impact in the cash market. For example, banks are increasingly turning away cash balances that adversely impact their Liquidity Coverage Ratio (LCR). This is a required metric introduced by Basel III regulations, in favour of stable balance, and deposit accounts with withdrawal notice.
 
Central bank policy has kept interest rates low globally resulting in money market instrument rates trending lower and in some cases, into negative territory. This presents a unique challenge for cash investors, many of whom cite preservation of capital as their primary objective. Many clients are looking for alternative solutions to traditional cash investments as a result of these conditions.
 
Despite these challenges, BlackRock believes there are strategies that cash investors can embrace to succeed in today's environment. These strategies include strong partnerships, more flexible and dynamic strategic cash allocations, enhanced governance and, above all, a comprehensive understanding of risks and opportunities. BlackRock offers insights into these strategies below.  
 
==So what do I do with my money? Understanding the options available to cash investors==


==Forecasting==
Since the start of the financial crisis, the need for alternative cash solutions has increased and there is no longer a 'one-size-fits all' approach. Once thought of as a low risk asset class, the cash market may now be considered as multi-faceted, complex and subject to higher risk. The overarching objectives of risk-managed cash investing are still capital preservation and liquidity, but these can be applied differently across cash investment strategies. For all cash investments, BlackRock's approach is to apply rigorous credit and risk analysis. This approach has allowed cash clients to consider diverse investment options to meet their various needs. The following sections detail some of the options available today to cash investors, recognising that each client has unique liquidity needs.  
Spare cash generated may be invested in suitable instruments or may be used to payback debt. Either way, stage one in the process is to revisit the cash forecasts and plans in order to be realistic in the new environment. Old assumptions may not apply. If we have all learned one thing from the credit crisis, it is that you need to plan for the unexpected shock. All forecasts will need to be stress tested with some extreme assumptions.


==Managing==
==Constructing an investment policy==
Whether wanting to reduce debt or to use cash for investing, managing cash flows cannot be neglected. Companies are taking action to chase up debtors (or help debtors and themselves in “supply chain finance” initiatives) and collect the cash. They are looking to make more effective use of any pockets of cash around their group companies. Where small floats are left in subsidiary accounts, these are being reduced. Cash pooling systems are being tightened up with more frequent repatriation of balances, or simply by bringing more companies into the system. For a large group, it is truly amazing what cash can be generated as if from nowhere.
Many treasurers are evolving their investment policies to be more dynamic and flexible to adapt to changing markets. It is prudent to review these policies regularly in order to embrace new opportunities and the evolving markets. An investment policy should define the overall objectives of the company's investment strategy and within this framework the following should be considered:
The crisis has reminded companies not to take access to funding for granted. If banks are somewhat less inclined to have fully committed credit facilities sitting unused then treasurers have no choice but to pre-fund their needs; this can mean having both borrowings and cash on the balance sheet at the same time. Treasurers and their boards now regard a certain amount of inefficiency in pre funding or over funding, along with the cost of carry, as a cost that has to be borne. In the overall scale of things, it is often thought a cost worth bearing.
* '''Cash flow and liquidity needs'''. Effective forecasting of liquidity needs may help to increase returns over one-dimensional cash investing within a cash portfolio. A diverse investment approach may increase returns and reduce the cost of liquidity.  
* '''Risk tolerance'''. It is necessary for an investor to determine their tolerance levels of interest rate and credit risk, and to assess what these mean for return volatility.
* '''Target returns and benchmark'''. Agreeing on a target benchmark will ensure the investment goals are well defined and clearly understood. Benchmarks should reflect the risk tolerance and the nature of the mandate.
* '''Permissible investments'''. An investor should identify the security types the mandate can hold and the rating limits that align with the mandate's risk profile.
* '''Diversification limits'''. Investors should articulate exposure limits to certain asset classes, sectors or individual issuers that are consistent with their risk appetite.


==Segmenting==
Phase three is segmenting the funds, and here the new emphasis is on flexibility and therefore keeping investments more liquid or invested for shorter periods. Now might be the best time to make opportunistic acquisitions so that a company does not want to be locked into long-term and inflexible deposits. Added to this, a shorter maturity presents less risk that the counterparty will get into financial trouble during the investment’s life.
The counter argument is that given how low interest rates have been then perhaps it is reasonable to seek a yield pick-up through investing further down the maturity curve. Interestingly, this is not something that has been happening to any great extent. The logic is that flexibility and reducing credit risk trumps any small yield pick-up. This demonstrates that for non-financial companies holding cash and generating income from it is not an end in itself, but rather the cash is there to be used more profitably in the business.
Low interest rates are a feature that has prevailed far longer than first expected. To combat recession and encourage economic recovery the authorities in the major economies have provided monetary stimulus using quantitative easing as the key tool to inject cash into the financial system. Central banks have, in a manner of speaking, been printing money in order to purchase government bonds and thus depressing rates, even out to the longer-term maturities. At the short-term end interest rates have, for brief periods, even gone negative, meaning that the banks in effect charge a fee for holding customer deposits safe. When rates are low to start with, banks that are rated relatively safe can be swamped with deposits that they cannot profitably use for on-lending, so instead must discourage via negative rates.
Perversely, the very banks that are low risk and attractive to treasurers will very often not wish to gross up their balance sheets through taking deposits. The new Basel III leverage ratio can be a limiting factor on grossing up for some banks, even pushing those banks to consider imposing limits on cash left in operational accounts.


==Investment policy==
==Cash segmentation policy==
An investment policy encapsulates how a company’s risk appetite translates into practical objectives and rules. Counterparty credit risk is no longer purely theoretical – it is a very real risk. If, pre-crisis, a company was prepared to mark a limit for a single A-rated bank, it is probably still happy to do business with such a counterparty. What has changed is that companies may have reduced the limits per bank so as to force a greater degree of diversification of investments, or have introduced a new rule such as ‘no more than 10% of funds with any one name’, subject to exceptions for modest amounts. But companies operate in the real world and the choice of well-rated banks open to them has diminished. Maybe companies have to accept dealing with lower rated institutions? Reducing risk through diversification is an alternative and the use of money market funds for easy diversification continues to be popular.
Given the prevailing market environment, liquidity will come at a premium. It is therefore important that cash investors conduct a thorough evaluation of their cash needs and determine their risk profile. Effective forecasting of liquidity needs and assessment of risk tolerance creates the opportunity to achieve higher levels of risk adjusted returns within a cash portfolio. Below is a sample strategy that demonstrates one such approach.  
The counterparty limit set for a bank (which covers all forms of credit exposure, not just liquid funds investments) will usually be derived from an approach that starts with the credit ratings of the banks, supplemented by other information. Limits are set so that the expected loss from a credit event, while regrettable, is not disastrous, since no policy can be designed to be event-free under all circumstances. An important step is to ensure that you know which legal entity within a bank group you are dealing with and which has a rating. If you are dealing with more than one entity in a banking group, set an overall bank group credit limit as well as limits for individual legal entities (and even branches – see next section). But bank risk is about to become a lot more complicated and highly dependent on the structure of the banking group involved.


==Bank recovery, resolution and bail-in==
[[File:Cash_investing_in_a_new_world_fig_1.png|823px|center]]
The crucial role of banks in keeping any economy alive has meant that in recent times there has always been some sort of implied state support for banks, particularly if those banks are large and systemically important for the jurisdiction concerned. This has been borne out in practice as states stepped in to support or rescue their banking sectors. But sentiment has changed. It is no longer politically acceptable for governments just to pick up the bill for rescuing a bank. In some cases the sheer size of the banking sector as compared to its host state means it is not practical either.
 
A failing bank can traditionally survive if it is recapitalised with new capital from its own shareholders or in extremis from the government. The theme being explored now, and indeed beginning to be implemented, is to create a legal regime that will allow the cost of rescuing and recapitalising a failing bank or shutting it down to be placed back with the creditors of that bank. There needs to be a mechanism to share the pain so as to allow the bank to survive and to protect retail depositors. If, for example, bond investors have lent the bank £100 then if the bond-holders’ claim is written down to £70 this creates £30 of new capital in the bank balance sheet. This is termed “bail-in”. It contributes to restoring solvency of the bank but of course does not generate any new liquidity. It must be hoped that with the bank’s stronger capital position, the market or central bank will be prepared to give access to liquidity.
==Investment options==
The problem is to devise a fair set of rules around bail-in and the starting point is an assumption that retail depositors should not suffer bail-in, or at least not up to certain limits. A bank that is funded heavily by retail deposits was normally regarded as safer than one heavily funded from the wholesale markets, on the presumption that retail deposits are stickier. In the event of a problem, wholesale funding will quickly be withdrawn and dry up whereas retail money is slow to be withdrawn. In the new world of bail-in, the perverse result is that a bank with most of its funding from retail deposits will have to bail in its few bond-holders and wholesale depositors to a far larger extent – so a disproportionate risk falls on wholesale depositors, making them even more like “hot money”, withdrawn at the first signs of trouble. This is aggravated if retail deposits or the guarantee scheme they benefit from are ranked above wholesale deposits in bank resolution.
 
Then, in a bank group there are further complications and risks from bail-in. Will the creditors being bailed in be at the parent or holding company level or at the operating subsidiary level? And will a problem with a sister subsidiary in a banking group, if it cannot be resolved within that subsidiary, trigger a bail-in in a solvent member of the group.
AAA rated money market funds (MMFs)
Foreign branches of banks raise particular problems. Will depositors be treated similarly to those at the home country branches? The home-country’s retail depositor insurance does not usually apply but the host-country’s scheme may. Will the head office support wholesale depositors? Is the branch required by the host country to be “ring fenced” from the rest of its legal entity with local capital and liquidity demanded? Enquiry has to be made individually for each foreign branch. Branch credit ratings (e.g. Fitch National Ratings) are only occasionally available.
MMFs are mutual funds that invest in short-term debt instruments. They provide the benefits of pooled investment, allowing clients to invest in a diverse and high quality portfolio. Like other mutual funds, each investor in a money market fund is considered a shareholder of the investment pool. MMFs are managed within rigid and transparent guidelines to seek preservation of capital, liquidity and competitive yields and may have the following benefits.
The implications for investing corporate cash with banks, be that directly through deposits or indirectly via a money market fund, are very significant. Any credit assessment will need to build in consideration of the exact entity you are dealing with, the make-up of its funding mix, the hierarchy of preference for the different funding providers, any ring fencing and the entity’s relationship with and risk from other businesses in the same group, and any applicable local regulations.
* '''Diversification'''
If counterparty risk is a big concern then mitigating this through taking collateral is a possibility. It sounds rather self-defeating for the bank to take a deposit and then give back an equivalent amount of collateral, but the point is that the collateral can be a longer-term asset that the bank wants to continue to hold and that can be put to good use supporting immediate liquidity. This form of secured deposit is known as a repo or repurchase agreement (strictly speaking a reverse repo) and is beginning to be used by some larger companies, and is set to become more usual.  
MMFs invest in a wide range of issuers and money market instruments, adhering to the basic principles of portfolio management.
* '''Credit risk'''
AAA rated MMFs are required to adhere to rigid credit standards to ensure the portfolio is invested in high quality assets and represents an acceptable level of risk. Assets are ring-fenced from the investment manager and the investor's exposure is to the diversified underlying holdings.
* '''Liquidity'''
MMFs are designed to provide investors with daily liquidity, offering a flexible investment solution that requires no minimum commitment period or penalties for redemptions.
Within the AAA rated MMFs space, there are funds that offer exposure to governments by investing in government paper and government backed repurchase agreements. There are also funds that invest in highly rated short-term money market instruments, often termed Prime Funds.
 
===Unrated money market funds===
Unrated MMFs provide investors with the opportunity to invest in a portfolio of, including but not limited to, similar high quality assets that are held in an externally rated MMF without the constraints of credit rating agency guidelines. Corporate treasurers typically look to the rating agencies for investment quality guidance. The rigid rating constraints placed on rated MMF portfolios may prevent managers from utilising the full MMF guidelines at their disposal. By simply removing the rating, a MMF is able to invest in the same securities but with a slightly longer duration or higher concentration. In a supply-constrained environment, this flexibility may translate into an increase in yield for investors.
   
   
==Implementation==
Credit analysis and review is not absent in unrated funds. BlackRock's approach is to consider external ratings as a preliminary screen in our own independent credit review. BlackRock uses the ratings as a starting point in its assessment of an investment and they help BlackRock formulate its own independent credit opinion about an issuer or a specific investment instrument. Just as each rating agency may upgrade or downgrade issues, BlackRock's credit analysts apply an independent assessment of each security throughout the period that it is held.
Everyone, right down to the private investor with money in his/her bank account, is now acutely aware of the risk of default. The heightened risks and awareness mean that the monitoring and reporting of counterparty exposures has become a more frequent exercise for company treasury departments. Although most companies already keep track in real time as part of the dealing process, new end-of-day reports are being created for senior management along with other related information.
 
===Ultra Short Bond Funds===
As part of the European Securities and Markets Authority (ESMA) guidelines, the most commonly used liquidity funds are referred to as 'Short-term Money Market Funds'. ESMA has also defined a set of guidelines for 'Money Market Funds' with a slightly longer duration. These funds are often known as Ultra Short Bond Funds and typically include the following features:
 
* Longer investment horizon than short-term money market funds (6-12 months)
* Fluctuating Net Asset Value (NAV)
* Maturity limits (fixed): 397 days
* Maturity limits (floating): 2 years
 
These funds may have the potential for higher returns as compared to short-term MMFs and often have a total return objective.
 
Separate accounts
Separate account strategies represent a unique way to achieve investment objectives for all types of cash. A separate account is a segregated portfolio of short duration assets managed by an investment manager on behalf of a client. A separate account differs from a MMF in that the investor directly owns the portfolio of assets rather than owning a share in a pool of assets. Separate account investors have the ability to customise the portfolio to their needs and investment guidelines while leveraging the trading, portfolio management and credit analysis of a professional investment manager.
 
Separate accounts are appealing to investors for a number of reasons, one being the possibility of obtaining a higher yield compared to that of a money market fund, but without a significant increase in risk. Working with an external investment manager offers significant benefits, most notably access to specialised credit, risk and portfolio management resources. It is the combination of these resources working to achieve a client's specific investment policy needs that represents the true value of investing in a separate account.
 
Comparing options: MMFs vs. Separate Accounts
 
{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%;"
|-
| '''Money Market Funds'''
| '''Separate Accounts'''
|-
| style="background:#f2ebef; vertical-align:top"|
* Commingled, regulated mutual funds
* Daily liquidity with stable NAV
* Professionally managed, diverse funds benefit from economies of scale
* Competitive yield
* Late day trading deadlines
* Expenses – all inclusive
 
| style="background:#f2ebef; vertical-align:top"|
* Custom portfolios with dedicated portfolio and client service teams
* Client-specific guidelines and investment constraints
* Liquidity requirements based on customer’s cash flow projections
* Flexibility within a risk controlled context
* Custom reporting provided
|}
 
 
===Treasury outsource===
Recognising that treasury teams are often relatively small and resource constrained, there is sometimes an argument to outsource certain treasury functions, one of those being the day-to-day investment activity. Outsourcing physical investment may provide the advantage of constant dialogue between a cash portfolio management team and issuers and brokers as well as the unique market access available to them.
 
===Exchange traded funds (ETF)===
As the market evolves, investors are increasingly forced to look outside the conventional treasury 'box' of investment products. Exchange traded funds (ETFs) are pooled funds which track an index and trade on an exchange, offering treasury investors a suite of investment opportunities.
 
ETFs provide investors with the opportunity to gain access and exposure to specific parts of the market, in a manner that is fully transparent and well diversified. Indices are constructed with clear and transparent parameters to represent the risk and return characteristics of a given sector or credit profile. In tracking a fixed income index, an ETF seeks to provide a more liquid and cost-efficient alternative to directly purchasing the bonds, which would achieve the same risk adjusted return. Treasury investors can utilise ETFs to gain specific market exposure to government or corporate bonds in the 0-5 year space, at a competitive price, whilst still maintaining attractive T+2 or T+3 liquidity.  
 
==Understanding the risks in cash investing==
In today's complex and fast-changing markets, prudent risk management is more important than ever. Understanding the risks associated with an investment can help to ensure it is appropriate for each portfolio. A summary of the main risks inherent in cash investing is included below:
 
{| border="1" cellpadding="5" cellspacing="0" class="infotable" style="float:right; background:#fff; min=width:100%; width:100%"
|-
| '''Primary risks'''
| '''Definition'''
| '''Factors'''
|-
| style="background:#e9d7e0"|Credit Risk
| style="background:#e9d7e0"|Risk that a security’s value will change due to a ratings downgrade or, in a distressed case, default of the security
| style="background:#e9d7e0"|
* Rating downgrade
* Default
|-
| style="background:#f2ebef"|Interest Rate Risk
| style="background:#f2ebef"|Risk that a security’s value will change due to a change in interest rates or the shape of the yield curve
| style="background:#f2ebef"|
* Change in the level of interest rates
* Change in shape of the yield curve
 
|-
| style="background:#e9d7e0"|Liquidity Risk
| style="background:#e9d7e0"|Risk that arises from the difficulty of selling an asset; security cannot be bought or sold quickly enough to prevent or minimise a loss
| style="background:#e9d7e0"|
* Secondary market availability
* Provide liquidity for securities
 
|-
| style="background:#f2ebef"|Spread Risk
| style="background:#f2ebef"|Risk of change in value of a security due to a change in the relative spreads in the market
| style="background:#f2ebef"|
* Hybrid of credit and liquidity risk
|}
 
==The role of an asset manager in cash investing==
The term “asset manager” is often misunderstood. Asset managers act as fiduciaries to their clients by investing assets on their behalf. Asset managers invest within the guidelines specified by their clients for a given mandate. This will take into consideration the risk appetite of the client. As part of the financial services sector, asset managers are characterised by a business model that is fundamentally different than that of other financial institutions, such as commercial banks, investment banks, and insurance companies.
Asset managers do:
* invest on behalf of clients
* generally rely on a stable fee-based income stream
* have oversight and regulation at both the manager and mandate levels (in the US and EU regulatory regimes and elsewhere)
Asset managers do not:
* invest with their own balance sheets (other than seed capital or small co-investments)
* employ balance sheet leverage
* guarantee investor principal, and there is no government guarantee or backing
 
==Why BlackRock for cash management?==
BlackRock was founded as a stand-alone investment management company and is focused on providing asset management and risk management services to clients. The firm brings together expertise across capital market sectors, asset allocation, portfolio management, financial modelling, and risk management disciplines. BlackRock's fiduciary culture differentiates it from sell-side firms.
 
An integral part of BlackRock's fiduciary culture is its core belief that rigorous risk management is critical to the delivery of high-quality asset management services. Today, portfolio managers throughout BlackRock have access to proprietary technology which enables them to make more informed decisions. These tools can analyse individual securities, aggregate a portfolio of securities, and analyse and compare that portfolio and its risk characteristics to an index or another relevant benchmark.
 
BlackRock's cash management capabilities have been built around our clients' greatest needs and BlackRock strives to deliver these investment capabilities to help clients meet the challenges of today. In a cash environment that grows ever more complex, this is a responsibility that has never been more important.
 
 
 
 
 
 
 
 
<font style="font-size:11px">This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.
 
Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.
 
Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
 
This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.


==Conclusion==
© 2014 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
Experienced treasurers have always maintained that when it comes to investing temporary company cash, the priorities are Security, Liquidity and Yield (SLY) in that order of importance. They have been proved right again and again and this will continue to be the treasurer’s mantra, even if the practicalities of achieving it have become a lot more complicated.
</font>


[[Category:Book_Export]]
[[Category:Book_Export]]
[[Category:Sponsors]]
[[Category:Black_Rock]]

Revision as of 11:35, 4 September 2014

Cash management
Treasurers Handbook
   
Sponsored by
Sponsored by BlackRock

Introduction

Corporate treasury has become strategically more important for organisations since the financial crisis, with liquidity and risk at the forefront of investor importance. Corporates have built higher cash reserves in order to deal with volatile markets and to enable themselves to be more flexible. Many have taken advantage of the low interest rate environment and pre-funded their borrowing needs. However, monetary policy and regulations are creating new dilemmas for corporate treasurers when it comes to investing cash.

Challenges cash investors currently face

Cash management is no longer considered to be low risk. Cash management investments, particularly money market funds, have been subject to increased scrutiny from regulators globally. Cash investments are at the precipice of potentially major regulatory reform in Europe and have already been subject to changes in the United States. Investors have been affected by low interest rates and a shrinking supply of short-term securities. Regulatory change in the broader financial markets could lead to a direct impact in the cash market. For example, banks are increasingly turning away cash balances that adversely impact their Liquidity Coverage Ratio (LCR). This is a required metric introduced by Basel III regulations, in favour of stable balance, and deposit accounts with withdrawal notice.

Central bank policy has kept interest rates low globally resulting in money market instrument rates trending lower and in some cases, into negative territory. This presents a unique challenge for cash investors, many of whom cite preservation of capital as their primary objective. Many clients are looking for alternative solutions to traditional cash investments as a result of these conditions.

Despite these challenges, BlackRock believes there are strategies that cash investors can embrace to succeed in today's environment. These strategies include strong partnerships, more flexible and dynamic strategic cash allocations, enhanced governance and, above all, a comprehensive understanding of risks and opportunities. BlackRock offers insights into these strategies below.

So what do I do with my money? Understanding the options available to cash investors

Since the start of the financial crisis, the need for alternative cash solutions has increased and there is no longer a 'one-size-fits all' approach. Once thought of as a low risk asset class, the cash market may now be considered as multi-faceted, complex and subject to higher risk. The overarching objectives of risk-managed cash investing are still capital preservation and liquidity, but these can be applied differently across cash investment strategies. For all cash investments, BlackRock's approach is to apply rigorous credit and risk analysis. This approach has allowed cash clients to consider diverse investment options to meet their various needs. The following sections detail some of the options available today to cash investors, recognising that each client has unique liquidity needs.

Constructing an investment policy

Many treasurers are evolving their investment policies to be more dynamic and flexible to adapt to changing markets. It is prudent to review these policies regularly in order to embrace new opportunities and the evolving markets. An investment policy should define the overall objectives of the company's investment strategy and within this framework the following should be considered:

  • Cash flow and liquidity needs. Effective forecasting of liquidity needs may help to increase returns over one-dimensional cash investing within a cash portfolio. A diverse investment approach may increase returns and reduce the cost of liquidity.
  • Risk tolerance. It is necessary for an investor to determine their tolerance levels of interest rate and credit risk, and to assess what these mean for return volatility.
  • Target returns and benchmark. Agreeing on a target benchmark will ensure the investment goals are well defined and clearly understood. Benchmarks should reflect the risk tolerance and the nature of the mandate.
  • Permissible investments. An investor should identify the security types the mandate can hold and the rating limits that align with the mandate's risk profile.
  • Diversification limits. Investors should articulate exposure limits to certain asset classes, sectors or individual issuers that are consistent with their risk appetite.


Cash segmentation policy

Given the prevailing market environment, liquidity will come at a premium. It is therefore important that cash investors conduct a thorough evaluation of their cash needs and determine their risk profile. Effective forecasting of liquidity needs and assessment of risk tolerance creates the opportunity to achieve higher levels of risk adjusted returns within a cash portfolio. Below is a sample strategy that demonstrates one such approach.

Investment options

AAA rated money market funds (MMFs) MMFs are mutual funds that invest in short-term debt instruments. They provide the benefits of pooled investment, allowing clients to invest in a diverse and high quality portfolio. Like other mutual funds, each investor in a money market fund is considered a shareholder of the investment pool. MMFs are managed within rigid and transparent guidelines to seek preservation of capital, liquidity and competitive yields and may have the following benefits.

  • Diversification

MMFs invest in a wide range of issuers and money market instruments, adhering to the basic principles of portfolio management.

  • Credit risk

AAA rated MMFs are required to adhere to rigid credit standards to ensure the portfolio is invested in high quality assets and represents an acceptable level of risk. Assets are ring-fenced from the investment manager and the investor's exposure is to the diversified underlying holdings.

  • Liquidity

MMFs are designed to provide investors with daily liquidity, offering a flexible investment solution that requires no minimum commitment period or penalties for redemptions. Within the AAA rated MMFs space, there are funds that offer exposure to governments by investing in government paper and government backed repurchase agreements. There are also funds that invest in highly rated short-term money market instruments, often termed Prime Funds.

Unrated money market funds

Unrated MMFs provide investors with the opportunity to invest in a portfolio of, including but not limited to, similar high quality assets that are held in an externally rated MMF without the constraints of credit rating agency guidelines. Corporate treasurers typically look to the rating agencies for investment quality guidance. The rigid rating constraints placed on rated MMF portfolios may prevent managers from utilising the full MMF guidelines at their disposal. By simply removing the rating, a MMF is able to invest in the same securities but with a slightly longer duration or higher concentration. In a supply-constrained environment, this flexibility may translate into an increase in yield for investors.

Credit analysis and review is not absent in unrated funds. BlackRock's approach is to consider external ratings as a preliminary screen in our own independent credit review. BlackRock uses the ratings as a starting point in its assessment of an investment and they help BlackRock formulate its own independent credit opinion about an issuer or a specific investment instrument. Just as each rating agency may upgrade or downgrade issues, BlackRock's credit analysts apply an independent assessment of each security throughout the period that it is held.

Ultra Short Bond Funds

As part of the European Securities and Markets Authority (ESMA) guidelines, the most commonly used liquidity funds are referred to as 'Short-term Money Market Funds'. ESMA has also defined a set of guidelines for 'Money Market Funds' with a slightly longer duration. These funds are often known as Ultra Short Bond Funds and typically include the following features:

  • Longer investment horizon than short-term money market funds (6-12 months)
  • Fluctuating Net Asset Value (NAV)
  • Maturity limits (fixed): 397 days
  • Maturity limits (floating): 2 years

These funds may have the potential for higher returns as compared to short-term MMFs and often have a total return objective.

Separate accounts Separate account strategies represent a unique way to achieve investment objectives for all types of cash. A separate account is a segregated portfolio of short duration assets managed by an investment manager on behalf of a client. A separate account differs from a MMF in that the investor directly owns the portfolio of assets rather than owning a share in a pool of assets. Separate account investors have the ability to customise the portfolio to their needs and investment guidelines while leveraging the trading, portfolio management and credit analysis of a professional investment manager.

Separate accounts are appealing to investors for a number of reasons, one being the possibility of obtaining a higher yield compared to that of a money market fund, but without a significant increase in risk. Working with an external investment manager offers significant benefits, most notably access to specialised credit, risk and portfolio management resources. It is the combination of these resources working to achieve a client's specific investment policy needs that represents the true value of investing in a separate account.

Comparing options: MMFs vs. Separate Accounts

Money Market Funds Separate Accounts
  • Commingled, regulated mutual funds
  • Daily liquidity with stable NAV
  • Professionally managed, diverse funds benefit from economies of scale
  • Competitive yield
  • Late day trading deadlines
  • Expenses – all inclusive
  • Custom portfolios with dedicated portfolio and client service teams
  • Client-specific guidelines and investment constraints
  • Liquidity requirements based on customer’s cash flow projections
  • Flexibility within a risk controlled context
  • Custom reporting provided


Treasury outsource

Recognising that treasury teams are often relatively small and resource constrained, there is sometimes an argument to outsource certain treasury functions, one of those being the day-to-day investment activity. Outsourcing physical investment may provide the advantage of constant dialogue between a cash portfolio management team and issuers and brokers as well as the unique market access available to them.

Exchange traded funds (ETF)

As the market evolves, investors are increasingly forced to look outside the conventional treasury 'box' of investment products. Exchange traded funds (ETFs) are pooled funds which track an index and trade on an exchange, offering treasury investors a suite of investment opportunities.

ETFs provide investors with the opportunity to gain access and exposure to specific parts of the market, in a manner that is fully transparent and well diversified. Indices are constructed with clear and transparent parameters to represent the risk and return characteristics of a given sector or credit profile. In tracking a fixed income index, an ETF seeks to provide a more liquid and cost-efficient alternative to directly purchasing the bonds, which would achieve the same risk adjusted return. Treasury investors can utilise ETFs to gain specific market exposure to government or corporate bonds in the 0-5 year space, at a competitive price, whilst still maintaining attractive T+2 or T+3 liquidity.

Understanding the risks in cash investing

In today's complex and fast-changing markets, prudent risk management is more important than ever. Understanding the risks associated with an investment can help to ensure it is appropriate for each portfolio. A summary of the main risks inherent in cash investing is included below:

Primary risks Definition Factors
Credit Risk Risk that a security’s value will change due to a ratings downgrade or, in a distressed case, default of the security
  • Rating downgrade
  • Default
Interest Rate Risk Risk that a security’s value will change due to a change in interest rates or the shape of the yield curve
  • Change in the level of interest rates
  • Change in shape of the yield curve
Liquidity Risk Risk that arises from the difficulty of selling an asset; security cannot be bought or sold quickly enough to prevent or minimise a loss
  • Secondary market availability
  • Provide liquidity for securities
Spread Risk Risk of change in value of a security due to a change in the relative spreads in the market
  • Hybrid of credit and liquidity risk

The role of an asset manager in cash investing

The term “asset manager” is often misunderstood. Asset managers act as fiduciaries to their clients by investing assets on their behalf. Asset managers invest within the guidelines specified by their clients for a given mandate. This will take into consideration the risk appetite of the client. As part of the financial services sector, asset managers are characterised by a business model that is fundamentally different than that of other financial institutions, such as commercial banks, investment banks, and insurance companies. Asset managers do:

  • invest on behalf of clients
  • generally rely on a stable fee-based income stream
  • have oversight and regulation at both the manager and mandate levels (in the US and EU regulatory regimes and elsewhere)

Asset managers do not:

  • invest with their own balance sheets (other than seed capital or small co-investments)
  • employ balance sheet leverage
  • guarantee investor principal, and there is no government guarantee or backing

Why BlackRock for cash management?

BlackRock was founded as a stand-alone investment management company and is focused on providing asset management and risk management services to clients. The firm brings together expertise across capital market sectors, asset allocation, portfolio management, financial modelling, and risk management disciplines. BlackRock's fiduciary culture differentiates it from sell-side firms.

An integral part of BlackRock's fiduciary culture is its core belief that rigorous risk management is critical to the delivery of high-quality asset management services. Today, portfolio managers throughout BlackRock have access to proprietary technology which enables them to make more informed decisions. These tools can analyse individual securities, aggregate a portfolio of securities, and analyse and compare that portfolio and its risk characteristics to an index or another relevant benchmark.

BlackRock's cash management capabilities have been built around our clients' greatest needs and BlackRock strives to deliver these investment capabilities to help clients meet the challenges of today. In a cash environment that grows ever more complex, this is a responsibility that has never been more important.





This material is for distribution to Professional Clients (as defined by the FCA Rules) and should not be relied upon by any other persons.

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: 020 7743 3000. Registered in England No. 2020394. For your protection telephone calls are usually recorded. BlackRock is a trading name of BlackRock Investment Management (UK) Limited.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2014 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, SO WHAT DO I DO WITH MY MONEY, INVESTING FOR A NEW WORLD, and BUILT FOR THESE TIMES are registered and unregistered trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

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