This is the first of four stories examining how CFOs are investing short-term cash in a climate of near-zero interest rates and shifting monetary policy. The other three are Money-Market Funds Meet Their Waterloo, which looks at the latest money-market fund regulatory reforms; Beyond Money Funds: Other Places to Park Cash, which explores replacement cash investment products; and Avoiding the Pendulum Portfolio, which explains how to move away from “risk-on, risk-off” investing behavior.


Nearly five years ago, the iPad was a rumor, Bernie Madoff was still defrauding investors and the S&P 500 sat south of 1,000. Much has changed since then, but in short-term cash investing, much has not. A near-zero federal funds rate and the Federal Reserve’s loose monetary policies pushed down investment yields to rock bottom in 2008, and they’re still there, if not lower. For companies with “excess” cash on their balance sheets, it’s been a long half-decade of nothing.

Most companies don’t have to earn much on their excess cash, but near-zero is grating on some CFOs. “People are getting antsy,” says Bruce Lynn, managing partner of the Financial Executives Consulting Group. “They have all this cash on the balance sheet and it’s earning market rates, but market rates are so low.”

Echoes Ted Ufferfilge, managing director in the short-term fixed income group at JPMorgan Chase: “The longer we are in this environment, the more people who are frustrated getting zero — and that includes the corporate treasurer.”

After much hand-wringing, some finance departments are maneuvering to capture at least some yield on their cash again. They are exposing their portfolios to risk for the first time since the financial crisis. That was unheard of three years ago, when the CFO’s mantra was “safety and preservation of capital.”

Data shows that over the last three quarters, companies have allocated more of their portfolios to corporate and municipal bonds, asset-backed securities and other kinds of fixed-income instruments that carry risk. Meanwhile, for various reasons, traditional instruments with close to negative real yields, such as money-market funds and government agency bonds, are out of favor. (Corporate holdings of money-market funds declined to 16 percent of investments in 2013, from 30 percent as late as 2011, according to an Association for Financial Professionals survey.)

Smart investing, or another ill-advised grab for yield? Are CFOs once again assuming a role that is outside their realm of expertise — and taking risks that shareholders don’t pay them to take?

The Fed’s Push
Frustration aside, low capital investment and financial-market trends are tugging at idle corporate cash. For one, Corporate America has a superabundance of liquidity. After capital expenditures, acquisitions, debt payments, increased or special dividends, stock buybacks, pension fund contributions and the occasional quarter of negative cash flow, non-financial companies held a record $1.8 trillion in cash and liquid assets at the end of 2012, according to the Fed.

For another, the once-in-a-lifetime liquidity in the financial markets is flattening the yield curve, making it hard to earn anything on the short end, where companies normally like to stay in case they need immediate liquidity. (Two-year Treasury notes recently yielded 0.26 percent.) The infusion of money by central banks is also fueling issuance of longer-term corporate debt. The abundance of easily raised bond debt causes default rates of non-financial companies to fall, making finance departments more comfortable investing in other company’s bonds.

Finally, non-interest-bearing corporate cash accounts have finally lost their luster as a parking place for cash. This trend may sound minor, but it’s altered some companies’ investing outlooks.

Publicly held WellCare Health Plans used to keep the bulk of its cash in operating accounts, but at some point the balance became more than enough to cover banking fees through earnings credits, says Goran Jankovic, treasurer of the managed-care services company. And WellCare’s bank, like other financial institutions, was charging it a 12-basis-point “recoupment” fee for each dollar in the account. “Once you cover your fees, you have to look at your net return from the earnings credit,” Jankovic says.

Eighty percent of WellCare’s more than $1.6 billion in balance-sheet cash is still highly liquid. It has to be that way because the company pays Medicaid and Medicare plans in a short time frame. But its cash holdings are now earning some yield, spread among such short-term fixed-income instruments as money-market funds; federally insured cash accounts, which offer above-average bank interest; and a small managed-account piece (about $125 million). WellCare’s financial adviser actively manages that last bucket and invests in instruments with a maturity of up to three years.

Quest for Yield
Oneida Nation Enterprises, which operates several profitable businesses in central New York state, including a casino, also has more than enough cash in operating accounts to cover its banking fees, says vice president of finance Bob Fetterman. While the organization, a part of the Oneida Indian Nation, keeps “a high degree of liquidity” because of some outstanding litigation, it wants some yield, says Fetterman. “When you are getting zero and then find out you can get 75 basis points, that’s just a huge benefit.”

Over the last few years, the organization has gone on a journey from investing in short-term government notes to focusing on optimizing earnings credits to buying corporate debt as interest rates plunged. As Fetterman describes it, Oneida Nation has started to “loosen up” on credit quality. It has changed its portfolio allocation first from 50 percent in A-rated corporate bonds and 50 percent in Treasuries to 100 percent in A-rated corporates. Just lately, it migrated to 25 percent in BBB-rated corporates and 75 percent in A-rated corporates. “B’s [BBB-rated bonds] can turn very quickly, so we have our investment-management company monitoring them every day,” Fetterman says.

Sinking yields on corporate debt have the organization eyeing large-cap stock dividend funds, but Fetterman is very cautious about investing in these because of the significantly higher risk of volatility.

It’s not just small and middle-market organizations that are taking chances to earn some income. “The companies with billions of dollars on their balance sheets have been taking a lot more interest-rate and credit risk with their money,” says Ufferfilge.

Payments-transfer giant Western Union is not chasing yield by any means, says Scott Scheirman, the company’s CFO; regulators require it to maintain cash and investment balances in certain business units to satisfy money-transfer obligations. But the company is earning what he calls a “modest” return by investing “settlement cash” — money transfers and other payment transactions awaiting redemption. Those funds are going into AA-rated or better municipal securities. The portfolio has a duration of a little over a year, and “we get a little bit of yield and safe return of capital,” Scheirman says.

Safety First
But the bulk of corporate cash investing is still highly conservative. People are divided on whether to take more risk, says Ufferfilge. “For every 10 companies we talk to, at more than half a member of the board just won’t let them do anything with their cash other than put it in money market funds or Treasuries,” he says, “because that board member was sitting on the board of a company that got burned in the financial crisis.” They convince the company that a pickup of 20 to 80 basis points just isn’t worth it, says Ufferfilge.

Another sign of caution: although companies are expanding the universe of instruments they invest in, they have yet to return to more exotic securities, especially structured ones. “Investment policies have been rewritten the last couple of years to eliminate ‘exotic ideas,’” says Lynn, “either to cut the asset class entirely or reduce the allocation.”

Indeed, available data suggests that companies are not taking on huge amounts of credit risk. Instead, they are more inclined to increase duration risk — the sensitivity of the price of a fixed-income investment to a change in interest rates. Of course, with a policy of sustained low interest rates and quantitative easing, that’s exactly the behavior the Federal Reserve is encouraging.

The permission to invest in longer-maturity debt actually gives treasurers a lot more choices and a lot more supply, says Joe Benevento, global head of liquidity management at Deutsche Bank. “A longer-duration portfolio opens up your universe to more credit — non-financial corporate debt, insurance company issues and even sovereign debt,” says Benevento. It can also diversify a company’s portfolio, he adds.

Two years ago, with the building industry still ailing, Jason Hayek, CFO of Pepperdine, a general contractor, was told by the owner to find a way to preserve the company’s cash —cash that in good times would have gone to financing new projects. The construction market was in dire straits, with firms bidding on projects at cost, “not even trying to make money,” says Hayek. “That’s the way you go out of business.”

So Hayek and the owner socked away the company’s cash for five years in jumbo certificates of deposit at a credit union. The CDs return is 2.5 percent, and the interest covers all of the firm’s office overhead, including salaries, “so we don’t have to worry about chasing an [unprofitable] job,” Hayek says.

As insurance, Hayek divided the cash into 15 different accounts, so that if the company had to access funds, it would pay an early-withdrawal penalty and lose the interest on only a portion of the funds. Hayek calculated that even if the company eventually had to break all the CDs, it would turn a profit if it could hold off doing so in the first 20 months. After two and a half years, the company hasn’t had to withdraw money from any of the accounts.

Pepperdine’s strategy is not something many companies could do. Nonetheless, bankers think there are companies leaving money on the table by not going further out on the yield curve.

JPMorgan, for example, offers a “managed reserve” strategy that uses various instruments to beat money market funds by 25 to 50 basis points. The interest-rate duration is one year or less, with 40 percent of the portfolio maturing within six to nine months, says Ufferfilge, and the portfolio is designed to avoid a negative return in any one quarter.

Some CFOs may scoff at the incremental income from picking up 50 basis points on a $100 million, says Ufferfilge. But they need to look at the return over three to five years, not one. “Does $500,000 of interest income in one year make a difference to your EPS [earnings per share]? Maybe not, but $500,000 a year for five years is meaningful interest income,” he says.

Today, Tomorrow and Beyond
A big assumption lies behind this new cash-investing strategy: A company has the ability to segment its cash holdings into what’s needed today versus what may be needed in a year or two. How much is reserve cash and how much operating cash? How liquid does the reserve cash need to be? Many companies are doing this already. Western Union, for example, divides its cash into liquid, core and strategic portfolios.

WellCare CFO Jankovic sums up that kind of strategy this way: “We want to make sure we have liquidity at all times, that we are in the proper asset classes and that we are tiered — that we have available cash for daily and intermediate obligations.”

But segmenting cash — determining what’s tactical and what’s strategic—isn’t easy. “How much do I need to run my business?” asks Lynn. “A lot of companies don’t think about what their cash flow from operations should be, or don’t have a target, or don’t know how much cash they need to keep the lights on.”

Even if a company can identify portions of its cash holdings that can be invested in longer-duration securities, there are three big caveats. 

1. Increasing a portfolio’s weighted average maturity eventually hits a point of diminishing returns. While taking the risk of going out to nine months might earn a company a commensurate reward, increasing maturities from nine months to two years or more might not, at least in the current market. “It’s emblematic of all the cash in the system,” says Ufferfilge. “As investors take on more duration and move down in credit quality, the result is the curve gets flatter and flatter.”

2. No matter how rock-solid longer-maturity debt may seem, it’s technically more of a credit risk than Treasuries or even money-market funds.

3. Although CFOs probably don’t need reminding, they have a fiduciary duty to invest corporate cash prudently. Investment policies rewritten after 2008 constrain many treasury departments, but that’s probably for the best. A company may sell off a subsidiary and have $500 million sitting on the balance sheet for a year or two years, “and it has a problem trying to earn a decent return on that,” says treasury consultant Lynn. “But shareholders are not looking for it to bet that $500 million on number nine.”

CFO Jankovic puts the goal differently: “If I miss my return benchmarks by two or three basis points, I still have my job. If I lose money, you probably wouldn’t be talking to me.”


This is the first of four stories examining how CFOs are investing short-term cash in a climate of near-zero interest rates and shifting monetary policy. The other three are Money-Market Funds Meet Their Waterloo, which looks at the latest money-market fund regulatory reforms; Beyond Money Funds: Other Places to Park Cash, which examines replacement cash investment products; and Avoiding the Pendulum Portfolio, which explains how to move away from “risk-on, risk-off” investing behavior.

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