This is the third of four stories examining optimum approaches to investing short-term cash. The other three are Better Than Nothing, which profiles companies that are capturing yield on their cash again; Money-Market Funds Meet Their Waterloo, which describes why the latest money-market reforms might spark fund outflows; and Avoiding the Pendulum Portfolio, which introduces a new way to avoid large swings in risk tolerance.


If treasurers and CFOs hold true to their word, and the Securities and Exchange Commission requires some money-market funds to trade with a floating net-asset value (NAV), plenty of corporate cash could flee those money funds. In the 2013 Liquidity Survey by the Association for Financial Professionals, released in June, 22 percent of the 885 responding finance executives said a floating NAV would cause them to cease investing in MMFs and eliminate all their current MMF holdings.

After being pulled out of MMFs, excess corporate cash could find a home in some investment vehicles that to date treasurers have used sparsely. The average company actually invests in fewer short-term investment vehicles (2.7 on average) than its corporate policy allows (4.6 on average), the AFP survey found. But the average policy also precludes any instruments that add substantial liquidity, credit and market risks to a short-term portfolio. For example, the AFP found that only 22 percent of cash investment policies allow separately managed funds and 23 percent investment in asset-backed securities.

There are some intriguing possibilities for companies that want greater returns than they would get moving cash back into plain-old bank accounts. But as Moody’s Investors Service noted in a recent paper on money market reform, while such instruments may “improve an investor’s return profile … they shift away from serving an investor’s primary need for same-day liquidity.”

Here are some of the most likely alternative cash products that corporates will invest in once MMF reforms are enacted:

Bank deposits. These feature directly negotiated yield, maturity and terms. But (1) “investor is fully exposed to the credit risk of the bank and (2) bank deposits do not benefit from asset diversification,” says Moody’s Investors Service.

Separately managed accounts. Tailor-made for the company, these accounts are “isolated from the liquidity risk related to a commingled fund, because there are no other investors that can redeem their holdings and have the first-mover advantage,” says Moody’s. “However, if there is an unexpected need for cash, assets have to be sold, as the separate account is its sole source of liquidity and does not benefit from the pooling of several investors.”

Cash-plus funds and short-duration bond funds. Pooled investment vehicles offer a wide variety of choices, but they typically have greater credit and duration risk, “as well as an inferior liquidity profile,” says Moody’s. The settlement period can be anywhere from the transaction date plus one day to the transaction date plus five days.

Enhanced cash funds. These products tend to have a duration of six months to one year, and hold securities such as long-term fixed and floating-rate government agency bonds, corporate bonds and asset-backed securities. According to a briefing paper by Northern Trust Global Investment, the overall portfolio rating tends to be in the A to AA range. Enhanced cash funds are slightly less liquid than money markets, according to bond manager PIMCO. “They often are most suitable for what are, in effect, more permanent cash positions, or as a component of a portfolio’s cash allocation,” says the “Investment Basics” section of the PIMCO web site.

Cash exchange-traded funds (ETFs). 

Because cash ETFs are listed on exchanges, investors can easily track daily prices and trade volumes. But ETFs also expose a company’s cash to share-price deviations from book value. They come with a variety of risk profiles, and usually offer settlement of transaction date plus two days, says Moody’s.


This is the third of four stories examining optimum approaches to investing short-term cash. The other three are Better Than Nothing, which profiles companies that are capturing yield on their cash again; Money-Market Funds Meet Their Waterloo, which describes why the latest money-market reforms might spark fund outflows; and Avoiding the Pendulum Portfolio, which introduces a new way to avoid large swings in risk tolerance.

, , ,

Leave a Reply

Your email address will not be published. Required fields are marked *