Managing cash beyond money market funds

By Odhiambo Ocholla

Asset managers have a solution for companies looking for a more advanced way to park their surplus cash.

But do corporate firms have the problem in the first place? This is a regular challenge for most companies.

How do they get a return on their short-term cash while still keeping it available to them?

Add a strict set of risk management guidelines that the board has laid down, and the finance manager is faced with a tricky trade-off.

Not so long ago, most companies preferred solution to this problem was the bank deposit. By spreading deposits across several institutions, the company was able to limit risk exposure to any particular bank, and even get a little yield.

But as the banking industry becomes more competitive, banks are shunning expensive deposits in favour of cheap retail deposits, thus corporates are faced with fewer institutions over which they could spread their cash with good returns on their deposits.

Money market funds

Enter the money market fund. Most companies are familiar with this basic investment vehicle.

The money market fund provides companies with security, liquidity and some yield. But as corporates become increasingly sophisticated investors, they are looking beyond investments like money market funds.

Thenext stage companies graduate to is tailored portfolio. By placing the company asset book in the hands of the asset managers, companies can place its longer-term cash in a range of funds with different liquidity, maturity and risk profiles.

The beauty of tailored portfolio management is that its custom is designed to the very specific requirements of customers, in terms of risk and reward, reporting, diversification and credit quality.

The difference between this and the money market funds is that in the tailored portfolio, fund managers sit down with a client and identify with them the benefits of running their own tailored portfolio.

Companies can manage their liquidity by hiring Asset managers to manage a portion of those assets with very specific objectives, which gives the company the opportunity to get a better return on their short-term cash and to try out new investments.

Services of fund manager

So why should the corporate hire the services of fund managers? It comes down to time and reward. By hiring the professional Asset managers, the company can, in theory, gain access to a larger pool of investment expertise that will produce a better return than its in-house operation.

But it’s important to note that anyone can achieve high returns, but how much risk are you taking to achieve these returns and will they fall within the very strict guidelines that have been laid down by the board?

There is a basic management question at the heart of this. For the company finance staff, is time spent investing corporate cash time well spent?

Going out into the marketplace and searching for a couple of extra basis points may not be the best use of their time when they could be allocating their time to looking at the higher value functions such as cash forecasting.

Not all companies may be comfortable with the idea of allocating the entire idle company’s cash to the fund managers.

As a first step, the company can entrust a small portion, around five per cent of the company’s asset book to the asset managers and see how well they perform.

This approach also offers the company an opportunity to benchmark the performance of their own internal team.

The most likely route most companies would take if they were to go into the asset management world would be through a money market fund.

Outsourcing won’t suit every company because not all have a cash surplus and fewer have a cash surplus large enough to merit the asset managers’ attention.

But for those that do have a large surplus and are already familiar with investment vehicles such as money market funds, the segregated account approach is a logical next step towards managing longer-term cash.

Companies may also prefer to invest surplus cash themselves. However, if one doesn’t have the in-house resources to be able to properly research the various types of short-term investments, it’s probably worthwhile to hire the services of asset managers.

—The writer is an Investment Banker. Email: nyabolla@gmail.com