Thank you to those of who attended last week's Money Fund Symposium in Baltimore! We had another record turnout (about 450 in total), and we appreciate the support of our sponsors and the efforts of our speakers. We hope to see you all in Boston next year (June 23-25) for our 2014 Symposium! Watch for more news coverage and excerpts from speeches in coming days, and look for the Powerpoints and audio recording to be posted to our Subscriber Content page later this week.... In other news, we mentioned the release of the 2013 AFP Liquidity Survey at Symposium last week, but today we cover the 38-page report in more detail. AFP's 2013 Survey says in its "Introduction," "Treasury departments remain cautious with their organizations' short-term cash and investment holdings, intent on ensuring safety of principal and liquidity. Five years after the financial crisis, this cautious posture is understandable since there are few opportunities for yield. The short-term investment landscape continues to be defined by low-return and relatively flat yield curve as the Federal Reserve keeps interest rates low, pegged to unemployment and inflation targets in the near term. In this environment, corporate cash levels -- both domestically and in international operations -- also remain high." (Note: Crane Data's Peter Crane will be participating in an AFP Webinar, "Making the Most from the 2013 AFP Liquidity Survey Results" on July 16 from 3-4pm Eastern.)
AFP tells us, "[C]ompanies still remain heavily invested in bank deposits -- half of corporate cash resides in bank deposits. Some asset classes saw increased restrictions under corporate investment policies in the past year. But in a sign of how uninspiring short-term investment alternatives truly are, preference for bank deposits held steady despite the expiration of unlimited FDIC insurance under the Transaction Account Guarantee (TAG) program at the end of 2012. Treasuries indicate that higher yielding investment opportunities and greater corporate spending would be the most likely factors to shrink their companies' high proportion of cash in bank deposits."
They write, "Companies' short-term investment strategies may also shift if recently released proposals from the U.S. Securities and Exchange Commission (SEC) for reform of money market funds (MMFs) are enacted in the future. Proposed changes include floating of the net asset value (NAV) for prime institutional funds as well as imposition of liquidity fees and "gates" on redemptions. Implementation of one or both of these proposals may cause organizations to stem their investment in MMFs and liquidate some, if not all, of their current MMF holdings, further curtailing short-term investment options. One question for the future is, would any such withdrawals flow to banks or would they go elsewhere?" [Note that most of the survey was conducted before the SEC's proposals, which were much milder than the market expected, were released.]
AFP explains, "To gauge these and other current and emerging trends in organizations' cash and short-term investment holdings, investment policies and strategies, the Association for Financial Professionals (AFP) conducted its eighth annual Liquidity Survey in May 2013. The survey generated 885 responses which are the basis of this report. Results from this survey report can provide financial professionals with critical benchmarks on short-term investment holdings and strategies. AFP thanks RBS Citizens for underwriting the 2013 AFP Liquidity Survey. The Research Department of the Association for Financial Professionals, which designed the survey questionnaire, analyzed the survey results and produced the report, is solely responsible for the content of this report."
Among the survey's Key Findings: "Forty percent of survey respondents report that their organizations held greater cash balances during the first quarter of 2013 than in the first quarter of 2012. Fewer than one in four indicate their organizations reduced cash and short-term investment balances during that same period, while there was no significant change for 39 percent of respondent organizations. Key reasons why companies built up cash balances include: Generation of higher operating cash flow (cited by 54 percent of survey respondents) [and] Accessing debt markets (17 percent)."
It continues, "Fifty percent of short-term investment balances are maintained in bank deposits, essentially unchanged from the 51 percent reported in the 2012 survey and the highest share reported since AFP began conducting the Liquidity Survey. As recently as the 2008 survey, the average bank deposit allocation was 25 percent. Seventy-four percent of all cash balances are maintained in banks, money market funds and Treasury securities. Safety is the driving principle of organizations' investment strategies, but liquidity has gained ground. More than two-thirds of respondents (68 percent) indicate that safety is the most important short-term investment objective for their organizations compared to the 29 percent of respondents that indicate their organizations' most important cash investment policy objective is liquidity (versus 22 percent in 2012)."
AFP adds, "Three in four organizations have a written document defining their policies for short-term investments. Beyond bank deposits, the most widely cited permissible investment vehicles are Treasury securities, money market funds and commercial paper. On average, organizations permit 4.6 investment vehicles beyond bank deposits for their short-term investment portfolio, a slight increase from the average 4.3 vehicles reported in the 2012 survey. Organizations invest in an average of 2.7 vehicles for their cash and short-term investment balances, a figure up slightly from the 2.4 reported in the 2012 survey. For 65 percent of organizations, short-term investment portfolios are maintained in investments with maturities of 30 days or less. Four out of five respondents do not anticipate any change in the tenor of their organizations' investment portfolios over the next year."
Finally, the survey says, "In light of possible rule changes involving money market funds (MMFs): Up to 65 percent of organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs currently in their short-term investment portfolios as a result of requiring NAVs to float. Fifty-six percent of organizations would be less willing to invest in MMFs and/or would reduce/eliminate their holdings of MMFs in their short term investment portfolios should fund companies limit redemptions or charge fees for full redemptions of MMF holdings." Look for more coverage of the survey later this week.
