CORPORATE INVESTMENT. for Treasury & Accounting Professionals RESULTS AND ANALYSIS. conducted by

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1 CORPORATE INVESTMENT for Treasury & Accounting Professionals conducted by RESULTS AND ANALYSIS

2 INTRODUCTION at U.S. corporations face numerous investment and accounting challenges: historically low interest rates; impending regulatory reforms; high investment performance expectations despite inviolable liquidity requirements; pressure to provide accurate and timely information to internal and external stakeholders; and more. Forward-thinking organizations are constantly seeking new and better ways to not only meet these challenges, but also elevate executives, and treasury and accounting professionals can draw on benchmarking data to gain insight into other like-kind organizations, drive improvement in their own organizations, and enhance The 2014 Corporate Investment Benchmark Survey was designed with these objectives in mind. CONTENTS Introduction 1 Survey Demographics 2 Portfolio Demographics 3 Investment and Regulatory Environment 6 Investment Strategy 8 Operational Processes and Staffing 12 Conclusion 19 provided their impressions of the current investment environment, key accounting and reporting processes, and investment allocations. The following report delivers a detailed overview of the investment accounting and reporting environment for corporations, and provides key market information that institutional investors can use for industry benchmarking. Key Survey-Related Concerns The Investment Environment 29.1% In one keystone survey question, respondents were asked to identify their biggest investmentrelated concerns. While the open-ended responses to this question varied, they were clustered in four (20.3%), and executing on strategy (15.2%) (Fig. 1). This report examines the survey results in the context of these key concerns. Operational Efficiency 27.8% Risk and Compliance 20.3% Executing on Strategy 15.2% Fig Corporate Benchmark Survey Results 1

3 Survey Demographics SURVEY DEMOGRAPHICS Treasury and accounting professionals from nearly every type and size of corporation across the U.S. responded to the survey over a two-month period in late More than 400 Treasury 41.7% 400+ Respondents 18.2% CFO (Fig. 2). Other 14.2% 25.9% Accounting Fig. 2 (Fig. 3). The survey drew participants from a wide and diverse group of industries (Fig. 4). The hardware and equipment (11.9%), software and computer services (11.6%), healthcare Treasury Staff 22.0% Treasurer 9.7% Assistant Treasurer 10.0% Non-Finance Executive 2.0% Portfolio Manager 3.0% Other 5.7% Industry Consultant 2.7% Auditor 0.8% Financial Services 13.7% Tech Hardware & Equipment 11.9% Software & Computer Services 11.6% Healthcare Equipment & Services 6.3% Pharmaceuticals & Biotech 6.3% Support Services 5.1% Construction & Materials 4.8% Survey Demographics Breakdown Type of Industry 30 Industries Represented 18.2% CFO 12.7% Accounting Staff 13.2% Controller 40.3% All Others Fig. 3 Fig Corporate Benchmark Survey Results 2

4 PORTFOLIO DEMOGRAPHICS As expected, investment portfolio sizes varied greatly from portfolios with less than $100M were the most widely represented in the survey (41.1%) (Fig. 5). The second-most widely represented set of respondents (19.4%) was organizations with portfolios ranging from invest in a combination of money market funds (MMFs) and individual securities (e.g., bonds, MMFs (Fig. 6). historically common asset classes topped the list (Fig. 7). MMFs were the most common The next tier of asset types included mortgage-backed securities (25.0%), asset-backed and futures (5.5%). < $100M 41.1% $100M-$500M 19.4% $500M-$1B 10.0% $1B-$5B 17.3% $5B-$10B 4.7% $10B-$20B 1.8% $20B-$50B 3.5% > $50B 2.3% Size of Investment Portfolio Money Market Funds (MMFs) and Individual Securities (e.g., Bonds, Commercial Paper) 68.2% Assets Currently Invested In Mortgage-Backed Securities 25.0% Asset-Backed Securities 24.5% Liquidity Portfolio Structure 31.8% Money Market Funds 95.5% Government Agencies 67.7% Corporate Debt 55.5% Certificates of Deposit 53.2% Mutual Funds 20.9% Common Stock 17.7% Commercial Paper 49.1% Municipal Bonds 38.6% Forwards 10.5% Fig. 5 Money Market Funds (MMFs) Only Tier 1 Tier 2 Fig. 6 Preferred Stock 9.1% TIPS 9.1% Options 8.6% Tier 3 Futures 5.5% Fig Corporate Benchmark Survey Results 3

5 Target duration was widely distributed (Fig. 8); 25.3% indicated 1-3 months, 30.1% indicated Target Duration 3-12 months, 24.5% indicated months, and 20.1% indicated more than 24 months. 1-3 months 25.3% Respondents organizations were almost evenly split between companies with treasury, accounting, or investment operations in a single country (52.2%), and those with operations in 3-6 months 9.2% 6-9 months 10.0% 9-12 months 10.9% 30.1% (Fig. 9). operates in six or more countries, revealing additional accounting challenges that we will explore later in the report months 16.6% months 7.9% >24 months 20.1% 24.5% Fig. 8 Operations in How Many Countries? Six or More 19.0% comfortable investing directly in individual securities (such as bonds, commercial paper, and more) or separately managed accounts (SMAs), and often hire one or several investment managers to achieve higher yields, and gain more nuanced liquidity control. Five 3.1% Four 3.7% Three 11.9% Two 11.0% 47.8% 52.2% One Fig. 9 How Many Outside Managers? (Fig. 10). While those numbers are likely correlated Five or More 17.1% 15.3% None to investment portfolio size, it s fair to presume that some organizations may simply have more outside managers because they prefer to segment their portfolios to mitigate risk, or generally Four 12.4% 17.6% One require a more tailored investment strategy. Three 18.2% 19.4% Two Fig Corporate Benchmark Survey Results 4

6 We asked respondents who use asset managers to identify what reasons they have for not hiring additional asset managers (Fig. 11). The open-ended question yielded a number of hire additional investment managers. However, many simply indicated that their current roster current needs. Reasons for Not Hiring Additional Asset Managers INVESTMENT POLICY AND APPROVALS COST PORTFOLIO SIZE TRUST LIQUIDITY NEEDS MORE TO MANAGE NO NEED EXTRA WORK INVOLVED GENERAL BANKING RELATIONSHIPS STAFF LIMITATIONS ADMINISTRATIVE BURDEN COMPLEXITY SATISFIED WITH EXISTING STRUCTURE ALREADY HAVE TOO MANY INEXPERIENCE CASH FEES BALANCES Fig Corporate Benchmark Survey Results 5

7 INVESTMENT AND REGULATORY ENVIRONMENT Results from The 2014 Corporate Investment Benchmark Survey revealed corporate investors concerns about the persistent low interest rate environment and the strategic and operational The low-yielding environment is the biggest concern. indicated that the current challenging investment environment was their top concern (see Fig. 1, pg. 1) revealing a genuine uncertainty about whether the low interest rate environment not just the environment itself, but its implications on their corporate investment strategies: While corporations liquidity requirements and investment strategies vary, treasury and accounting Interest Rate Outlook 17.2% 24.7% 17.9% 2.0% professionals deal with universal investment and regulatory challenges. When asked about their Short Term (<1Year) Medium Term (1-3 Years) Long Term (3+ Years) rates will remain about the same in the short term (less than one year) (Fig. 12). However, three- 82.8% 75.3% 80.1% Increase About the Same Decrease Fig Corporate Benchmark Survey Results 6

8 The changing regulatory environment is impacting investment considerations as well. More than ever before, corporations are faced with a changing regulatory environment that puts greater decisions and downstream accounting and reporting. While the spotlight is often on MMF reform, treasury and accounting teams have to pay attention to much more than that. (Fig. 13). 44.1% indicated a similar level of concern over tax reporting regulations. Respondents expressed a lesser degree of concern (those who (65.0%). corporate treasuries and investors. According to the survey results, while just over a third Level of Concern Regarding: Not Concerned Somewhat Concerned Concerned Very Concerned Extremely Concerned US GAAP Tax Reporting Dodd-Frank Money Fund Reform IFRS UK GAAP Canadian GAAP 0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Fig. 13 Concern with Announced MMF Reform 10.1% High Concern 44.9% Somewhat Concerned 36.1% Neutral (36.1%) remain neutral about the announced reforms, 55% are highly concerned or somewhat (Fig. 14). A majority of survey respondents indicated that their auditor is their most trusted source for 8.9% Not Concerned Who Advises You on Regulatory Changes? Fig % 55.1% themselves (55.1%) (Fig. 15). 47.5% 44.9% 27.9% 24.7% 20.3% Auditor Regulatory Body (e.g., Website) Peers Asset Manager Custodian Vendor Consultant Fig Corporate Benchmark Survey Results 7

9 INVESTMENT STRATEGY desired returns on MMFs and other traditional investments. As the leading provider of integrated the portfolio allocations of thousands of corporations, and we ve seen institutional investors We re concerned about managing return expectations in a low interest rate environment. employ a myriad of investment approaches to address these challenges. Some corporations are staying the course, reducing their short-term revenue expectations by investing mostly in low- investing approaches, or by hiring asset managers to administer separately managed accounts (SMAs). What Asset Types Are You Considering Investing In? To better understand corporations macro-level investment strategies, we asked respondents a series of questions about their appetite for new investment types and their willingness to Money Market Funds 11.8% Government Agencies 10.0% Corporate Debt 11.8% Certificates of Deposit 8.2% Tier 1 The likelihood that organizations are considering historically preferred asset classes is low, presumably because they are already investing in them in high proportions (Tier 1). Tier 2 asset Commercial Paper 12.7% Municipal Bonds 11.4% Mortgage-Backed Securities 6.8% Asset-Backed Securities 12.3% Mutual Funds 4.5% Tier 2 (12.3%) represented the security type mostly likely to be considered, followed by municipal Common Stock 2.7% Forwards 3.6% (Fig. 16) registered the highest percentage of respondents considering (5.5%), followed by options. Preferred Stock 2.7% TIPS 5.5% Options 4.5% Futures 2.7% Tier 3 Fig Corporate Benchmark Survey Results 8

10 function for many corporations. They are designed to be stable, low-risk, cash-equivalent pursued (see Fig. 6, pg. 3). why they only invest in MMFs. Respondents provided three primary reasons for deploying a Why Do You Only Invest in MMFs?* 1. Daily Liquidity 2. Preservation of Capital 3. Simplified Accounting Top MMF Reform Concerns Fig. 17 MMF-only investment approach, including: daily liquidity for the entire portfolio, preservation of (Fig. 17). However, with a persistent low interest rate environment providing historically low returns, plus are evolving. Although reforms are not as drastic as originally proposed, changes are inevitable. the upcoming reform that most concerned respondents, followed by the potential downstream most commonly mentioned areas of concern among corporations only invested in MMFs (Fig. 18). However, when asked whether MMF reform would impact their investment strategies, indicated that they anticipated somewhat of an impact, and that they planned on decreasing their allocation to MMFs in the future (Fig. 19). PRINCIPAL LOSS ADDED ACCOUNTING COMPLEXITY IMPLICATIONS COMPLIANCE REPORTING UNCERTAINTY GATES FEES LIQUIDITY FLOATING SHORT-TERM NAV PRICING VOLATILITY YIELD How Will MMF Reform Impact Your Investment Strategy? 52.6% No Impact Business as Usual 37.7% Somewhat We Anticipate Decreasing Our Allocation 9.7% Significant We Anticipate Changing Our Structure Fig. 18 Fig. 19 * Respondents who indicated they are not considering moving investments into SMAs Corporate Benchmark Survey Results 9

11 So, despite concern about impending MMF changes, many organizations indicated Are You Considering Moving Into SMAs? reluctance to consider alternative strategies, such as direct investing or hiring outside asset a move into SMAs (Fig. 20). 11.9% indicated that they planned to move into SMAs within one year, and another 9.0% indicated they would, but not for at least another year. No 79.1% 11.9% Yes: Within One Year 9.0% Yes: But More Than a Year Out We asked this same set of respondents to identify the key reasons that keep them from Fig. 20 (Fig. 21). 34.4% Reasons You are Not Pursuing SMAs* 31.2% Best Practices Tip: While SMAs are not for everyone, with the right tools and resources to administer their complex accounting and analytics, they can potentially provide institutional investors with the ability to achieve higher investment yields and the flexibility to meet liquidity goals. Unfamiliar with SMAs Strategy Doesn t Align with Business Objectives 19.7% 18.0% Perceived as a Riskier Strategy Don t Have Enough Staff to Deal with Operational Burden 14.8% Board Pushback 13.1% Don t Understand Accounting and Analytics Implications 11.5% Other Fig. 21 and risk analysis. Among respondents top investment-related concerns, approximately one in performance, and risk (see Fig. 1, pg. 1). * Respondents who indicated they are not considering moving investments into SMAs Corporate Benchmark Survey Results 10

12 Best Practices Tip: Organizations should be able to know portfolio status at any time, and instantly receive notifications if investments exceed prescribed exposure limits. Compliance monitoring based on daily accounting data can provide you with the confidence that your portfolio complies with investment policies. performance, but to help measure risk as well. The majority of survey respondents (66.2%) indicated that they use either one or two benchmarks to measure the performance of investment (Fig. 22). three benchmarks, while 15.9% use four or more benchmarks. While one in ten (10.1%) change benchmarks multiple times during the year, most respondents wait at least a year or more to change them (Fig. 23). more years. 36.9% don t change their benchmarks at all. Controlling risk, and at the same time structuring a portfolio that is able to earn a decent yield, is a top concern. How Many Benchmarks Do You Use to Measure Performance? % % % 4 6.6% 5 3.3% % 66.2% 15.9% How Often Do You Change Benchmarks? 10.1% < 1 Year 9.4% Every Year Fig. 22 Best Practices Tip: Treasury teams need to be able to easily disseminate portfolio performance information to stakeholders. Leading accounting and reporting platforms can calculate insightful performance data (e.g., multiple return types, benchmark comparisons, etc.) based on accurate and timely investment data, providing these teams with vital insight and transparency into portfolio performance. 18.1% Every 1-3 Years 10.1% Every 4-5 Years 15.4% >5 Years 36.9% Do Not Change Benchmarks Fig Corporate Benchmark Survey Results 11

13 OPERATIONAL PROCESSES AND STAFFING burden. They re being asked to aggregate and reconcile investment information more quickly, close We re concerned that reports are still manual in nature. the books faster, and decrease the turn time when preparing monthly/quarterly reports, all without professional, when describing top investment-related concerns. This concern is shared by many invest in new technology and software solutions to help automate manual processes and improve for risk. However, survey data revealed that many corporations no matter what type of investment What Are Your Top Investment-Related Concerns? investment-related concern, pointing to the acute data management, accounting, reporting, and (see Fig. 1, pg. 1) RESEARCH TIME MANUAL PROCESSES ACCURATE REPORTING TRANSPARENCY STAFF TURNOVER COMPLIANCE TIMELY SECURITY INFORMATION SYSTEM ERRORS (Fig. 24). Fig Corporate Benchmark Survey Results 12

14 To gauge how accounting and treasury professionals feel about their operational processes, we (Fig. 25). Nearly Are You Playing Offense, Defense, or Neutral When It Comes to Investment Operations? 61.7% Neutral (Some Inefficiencies and Some Manual Processes) 32.1% Playing Offense (In Control, Efficient, Have Automated Processes, etc.) 6.2% Playing Defense (Out of Control, Inefficient, Many Manual Processes, etc.) The results revealed that while treasury and accounting teams acknowledge there are some Fig. 25 teams are still dealing with persistent operational challenges that merit further exploration. critical time periods: month end, quarter end, and year end. When we asked respondents how long it takes them to close the books at each of these time periods, we expected that monthly processes would take a fair amount of time, but that quarter- and year-end closes would take complete these activities. to closing the books every month, but require more time at quarter- and year-end (Fig. 26). The majority of respondents (69.6%) indicated that it takes them a day or less to complete the monthly 50% 40% 30% 20% 10% Time: How Much Time Do You Spend Closing the Books? Monthly Quarterly Year End hours hours hours days days days Monthly Close 69.6% Quarterly Close 62.4% Year-End Close 68.9% Fig Corporate Benchmark Survey Results 13

15 at month end. Quarterly and yearly close processes take longer, because there s more data to aggregate and reconcile, and because there s closer scrutiny on regulatory reporting. 62.4% indicated it takes two days or more to close the books at the end of the quarter, and nearly one (see Fig. 26, pg. 13). For associated month-end processes such as creating monthly journal entries and auditing create monthly journal entries, and nearly a quarter (23.9%) indicated that it takes them two days entries (Fig. 27). Creating Monthly Journal Entries Auditing/Reconciling Monthly Journal Entries How Much Time Do You Spend: hours hours hours days days days 36.7% 19.9% 14.8% 12.2% 5.1% 6.6% 71.4% 35.4% 21.2% 14.6% 10.1% 7.1% 6.1% 71.2% Fig. 27 Best Practices Tip: Daily processing, validation, and reconciliation of investment accounting data provides corporations with audit-quality month-end data and reporting every day of the month. As a result, end-of-themonth processes are much less of a production and close times at all period ends can be dramatically improved. How Much Time Do You Spend on: 40.1% of respondents indicated that it can take up to a day to prepare these reports, over half (51.2%) indicated that it takes more than two days and 16.2% indicated that it takes more than (Fig. 28). Board Packages and Management Reports Creating Financial Statement Disclosures hours hours hours days days days 10.7% 15.2% 14.2% 21.3% 13.7% 16.2% 40.1% 11.8% 16.9% 12.8% 12.8% 11.8% 16.9% 41.5% Fig Corporate Benchmark Survey Results 14

16 (see Fig. 28, pg. 14). To Whom Do You Provide Investment Reporting? 72.0% Not only are treasury and accounting teams tasked with closing the books and providing period-end reporting, they are also responsible for disseminating portfolio information to key 47.1% 43.4% 41.3% 34.9% 34.9% constituents within and outside the organization. Survey results indicated that corporate treasury (Fig. 29). When asked to identify to whom they 21.2% CFO Treasurer/ Assistant Treasurer Accounting Dept. CEO/ President Controller Investment Committee Tax Staff Fig. 29 When asked about the key challenges treasury and accounting teams face when preparing (Fig. 30). These challenges typically extend and repeat themselves across multiple departments, and contribute to a vicious preparing period-end reports and investment packages. Key Challenges in Preparing Investment Packages 43.1% Waiting for Data to Become Available 36.0% Manual Data Entry 33.3% Aggregation of Data from External Sources (Custodians) 28.8% Recalculating and Verifying Data Accuracy 23.5% Aggregation of Data from Internal Sources (Accounting) Fig Corporate Benchmark Survey Results 15

17 Best Practices Tip: A world-class investment accounting and reporting solution can simplify the process of compiling accurate data and assembling investment reports across multiple departments. Today s automated and integrated solutions eliminate the burden of manual data entry and repeated data aggregation processes, yet remain flexible enough to deliver customized data to key constituents. How Do You Handle the Following Functions? To learn more about organizations operational processes, we asked respondents how and with what tools they handle core treasury and accounting functions such as cash management, trade execution, investment accounting, portfolio performance and risk analytics, and investment policy compliance monitoring. The results indicated that corporations are more likely to use web-based systems for some functions, but less sophisticated tools for others. Cash Management Treasury Workstation Trade Execution Platform Investment Accounting Portfolio Performance & Risk Analytics Investment Policy Compliance Monitoring Spreadsheets Rely on Asset Manager Rely on Custodian Consultant Installed Software Web-Based Software Other 26.5% 57.1% 33.6% 24.3% 44.7% 42.5% 40.6% While some organizations still use spreadsheets for certain core treasury functions, corporations are most likely to rely on web-based solutions for investment accounting 0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Fig. 31 monitoring (40.6%) (Fig. 31). Spreadsheets were the most common method for cash management corporations mostly rely on their asset manager (33.6%), or use web-based software (24.3%). departments face when performing core functions, and the impediments that keep them from Corporate Benchmark Survey Results 16

18 manpower (25.5%) (Fig. 32). departments, we asked survey respondents about their investment accounting and reporting resources. The results indicated that nearly 60% of all organizations require two or three What Are Your Key Impediments to Completing Key Operational Projects? 25.5% 17.0% 14.2% Staffing Complexity Manual Processes 10.4% Legacy Systems 9.4% Delays from Providers 3.8% Accuracy 19.8% Other Fig. 32 (Fig. 33). 22.5% indicated How Many Employees Dedicated to Investment and Reporting Tasks? involved with investment accounting and reporting. The hiring outlook for corporate treasuries remains stable-to-optimistic. 60.9% of respondents (Fig. 34). 36.0% indicated operations, and it is often cited as a key reason why treasury and accounting teams cannot accomplish core tasks more quickly % % % 4 6.4% % Hiring Outlook 59.9% Fig. 33 processes to devote to core accounting and reporting tasks, we asked how respondents would spend an extra hour in their day. Some indicated that they d have more time for professional 60.9% Stable (Stay Much the Same) 36.0% Optimistic (We Expect to Grow) 3.1% Adverse (Downsizing) Fig Corporate Benchmark Survey Results 17

19 (Fig. 35). Best Practices Tip: Key employee risk, which exposes organizations to inefficiencies if a departing employee takes essential knowledge about data and processes with him or her, is a common problem. Putting processes and systems in place and standardizing practices to ensure that efficiencies remain, even if there is turnover within your team, is important. Many corporate finance departments perform internal employee rotations so more employees have a comprehensive understanding of all key department processes. What Would You Do with an Extra Hour? STAFF OUTDOORS COACHING AT HOME READING ANALYZING DATA WITH MY KIDS ANSWERING BRAINSTORMING AT THE GYM AUTOMATING PROCESSES LONG-TERM ON THE BEACH STRATEGIZING LEARNING A NEW LANGUAGE IMPROVING RELAXING INEFFICIENCIES Fig. 35 INVESTMENT RESEARCH Which Auditors Do You Use? PricewaterhouseCoopers (PWC) 30.8% ON THE GOLF COURSE (Fig. 36).. Ernst & Young 23.9% Other 17.0% KPMG 16.4% Deloitte 11.9% What Are Your Biggest Auditing Challenges? Fig. 36 (Fig. 37). Scrutiny 1.4% Classification 1.4% SOX Compliance 1.4% Accuracy 2.9% Revenue 2.9% Compliance 2.9% Accuracy 2.9% Cost 4.3% Complexity 4.3% Other 7.1% Audit Turnover 7.1% 17.1% Educating Auditors 15.7% Administrative and Data 11.4% Time Constraints 8.6% None 8.6% Pricing Fig Corporate Benchmark Survey Results 18

20 CONCLUSION The 2014 Corporate Investment Benchmark Survey was designed to deliver a comprehensive review of the current investment projections. With this, participants can better evaluate their own treasury and accounting operations, and benchmark their a wait-and-see approach or a proactive strategy change environment are despite pressure from information more frequently than ever before. Time must be spent analyzing trusted data, not manually entering or processing enable these improved processes are imperative Corporate Benchmark Survey Results 19

21 , the market-leader in investment accounting and reporting, helps thousands of corporations around the world improve their overall investment operations processes. Clearwater has modernized investment accounting and reporting, replacing manual, Excel-based processes with an automated, web-based approach. Clearwater provides corporate treasury and accounting teams with the tools to eliminate manual processes, reduce close times, improve internal reporting and communication, maximize performance, reduce risk, and pursue their desired investment strategy. About Clearwater Analytics Clearwater Analytics is the leading provider of web-based investment accounting, reporting, and reconciliation services for corporate treasuries, insurance companies, and investment managers. Clearwater aggregates, reconciles, and reports on over $1.3 trillion in assets across 25,000+ accounts daily. For over a decade, Clearwater has helped thousands of corporate clients, such as Cisco, Facebook, Oracle, SanDisk, Starbucks and Yahoo!, streamline their investment and accounting operations. The company remains committed to continuous improvement of the solutions it is providing to current clients, while encouraging prospective firms to rethink how they approach their investment accounting and reporting challenges Corporate Benchmark Survey Results 20

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