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Thursday, 18th April 2024
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Money market funds: most popular instrument for treasurers - survey Back  
Three major cash management themes were identified in this year’s JPMorgan Asset Management’s Global Cash Management Survey - treasurers continue to demand high levels of security, the search for higher yields remains strong, and money market funds are increasingly seen as the most effective method for managing cash.
The JPMorgan Asset Management Global Cash Management Survey is now in its seventh year. It aims to provide a benchmark for treasurers and other cash investors to evaluate their liquidity management processes, and understand their market position in relation to their peers. In total, 310 qualifying responses were received for this year’s survey. The survey was completed by treasurers from a wide range of companies, from smaller organisations (13 per cent have a market cap of less than $500 million), to very large multinationals (almost a third of respondents indicated that they had a market capitalisation of over $5 billion).

Security
The survey shows that treasurers continue to demand investment-grade credit ratings for their cash investments, with very few respondents prepared to invest in securities or funds with a credit rating below BBB.

The desire for security appears to have become even stronger recently, with a big fall recorded in the number of treasurers prepared to invest in unrated securities or funds. This year, for example, just 3 per cent said they invested in unrated money market funds, compared with 27 per cent of treasurers in the 2003 survey.
Robert Deutsch, head of global cash at JPMorgan Asset Management, says that the fall in demand for unrated funds doesn’t appear to have been caused by any change in investment guidelines – as more than a quarter of respondents with investments in money market funds said they could invest in unrated funds if they wanted to.

‘Perhaps the increase in risk aversion may be due to concerns over rising interest rates. Certainly, higher rates, particularly in the UK and the US (and now also in Europe), mean that treasurers can get more respectable returns on their cash deposits without reducing the quality of their investments,’ he adds.
Yield

The survey’s results show that, although treasurers continue to target a higher credit rating on their cash investments, they also continue to target high returns. More than a quarter of treasurers globally, according to the survey, are looking for returns in excess of London Interbank Offered Rate (Libor), although the majority seem to target London Interbank Bid Rate (Libid). These return expectations were similar for treasurers investing directly and for those using money market funds.

However, treasurers are unwilling to increase credit risk in order to boost potential returns despite their clear desire to obtain competitive returns. Only 21 per cent of respondents to the survey said they would be willing to increase credit risk to boost performance. This unwillingness could be due to investment guideline restrictions, but the current rising interest rate environment in the US and Europe may be causing treasurers to rein in their risk budgets.

Instead of lowering the credit quality of their portfolios, treasurers are investing their cash for longer to improve potential returns, with some 41 per cent of respondents saying that they were willing to invest over longer time periods in order to increase yields. This willingness to invest for a longer time horizon is reflected in an increase in the usage of yield-enhanced funds, which have a slightly longer average duration than standard AAA-rated liquidity funds, allowing them to target higher returns (see Figure 1).

Money market funds
Another key survey finding was the continuing growth in popularity of money market funds as a cash management tool at the expense it seems of bank deposits. Although bank deposits are still used by most treasurers (51 per cent), the figure is down from last year’s survey, where they were used by 67 per cent of respondents, and much lower than the 72 per cent recorded in the 2003 survey.

On average, treasurers allocate 51 per cent of their surplus cash to bank deposits, 20 per cent to direct investments and 29 per cent to pooled investments. There were some regional differences, with US respondents using significantly more direct investments (37 per cent) and pooled investments (48 per cent) than European or Asian-based respondents. The greater use of pooled investments, such as money market funds, in the US is unsurprising, given that bank deposits are not regularly used by US investors for their cash investments. Instead, US cash investors have traditionally used money market funds for their excess cash requirements (see Figure 2).

Across all regions, however, the growing appetite for money market funds is evident from the survey’s results. For example, we asked treasurers not using pooled investments if they would consider them in the future. Of those that were considering investing in pooled funds, money market funds were most popular, at 72 per cent.
Yield-enhanced funds also look set for increased usage in the future, with more than a third of respondents saying they were considering investing in these products, even though only 3 per cent of respondents were currently allocating cash to them.

Bank relationships
On average, respondents to the survey had approximately five primary banking relationships and approximately nine secondary relationships. The main banking services used by treasurers, regardless of size or location, were cash management services, credit facilities and foreign exchange. The provision of credit facilities was also given as the most important criteria for treasurers when selecting a primary bank, closely followed by a full range of commercial banking services.

Management
When asked how they manage cash, the Survey revealed a clear trend towards global management, with or without regional autonomy (see Figure 3). In the 2004 Survey, this trend towards global cash management was also the case, although more respondents this year have now implemented global strategies. Interestingly, if respondents’ predictions are accurate, in the future only 11 per cent of treasurers will have cash management structures that allow for some level of local autonomy.

What does the future hold?
The survey asked respondents about their key cash management concerns for the future, whether they thought external providers could be doing anything differently to assist them, and what they thought the key developments would be in the industry over the next five years.

In terms of concerns, the ability to improve cashflow forecasting was mentioned by several respondents, particularly as a way of improving yields while maintaining the highest credit quality. These responses are certainly consistent with the desire for security and yield expressed throughout the survey. Treasurers gave many suggestions for how external providers could improve their services. Among these suggestions, it is clear that treasurers are looking for flexible products, in terms of cut-off times, fees and services offered, and simpler, more effective systems and portals.

A theme which emerges from the answers we received on future industry developments was the belief that automated and internet-based solutions would become the norm for cash management going forward.

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