Comparing New Investment Alternatives: Tony Carfang Ian Rasmussen

Transcription

1 Comparing New Investment Alternatives: Products and Strategies Tony Carfang Ian Rasmussen 0

2 Corporate Cash Levels US Corporate Cash UK Corporate Cash Corporate Cash ($T) $2.5T Corporate Cash ( T) T Source: Federal Reserve, Treasury Strategies Source: UK Office for National Statistics, Treasury Strategies Eurozone Corporate Cash Japan Corporate Cash Corporate Cash ( T) Corporate Cash ( T) T 270T Source: European Central Bank, Treasury Strategies Source: Bank of Japan, Treasury Strategies 1

3 Corporate Cash Levels US Corporate Cash UK Corporate Cash Corporate Cash ($T) $2.5T R² = Slope = $21.9B/Q Corporate Cash ( T) T R² = Slope = 7.1B/Q Source: Federal Reserve, Treasury Strategies Source: UK Office for National Statistics, Treasury Strategies Eurozone Corporate Cash Japan Corporate Cash Corporate Cash ( T) R² = Slope = 25.1B/Q Corporate Cash ( T) T 270T R² = Slope = 1.2B/Q Source: European Central Bank, Treasury Strategies Source: Bank of Japan, Treasury Strategies 2

4 Corporate Cash as % GDP by Region Country/Region December 2000 December 2017 United States 9% 13% Eurozone 12% 23%* United Kingdom 22% 36% Japan 36% 49% *Eurozone corporate cash data lags other regions so data reflects September 2017 Source: Treasury Strategies estimate 3

5 Instrument Attributes Today Prime MMF Treasury MMF T-Bills/ Repo Bank DDA Ultra-Short Bond Funds Direct CP SMAs In-House Mgt High relative yield x x x x x Daily liquidity x x x x x x Ultra-low risk x x x x Low minimum transaction size x x x x x Low fees x x x x x x x Diversification x x x x Convenience x x TMS connectivity x x x x Portfolio accounting x x x x x Professional management x x x x x Source: Treasury Strategies 4

6 A New Landscape for Cash Management Rising Rates Issue Bank Balances Lagging Earnings Credit Rates Bank Balances Balance Assessment Fees Challenges and Opportunities Rising rates in the U.S. create opportunities for greater returns. However, they increase the importance of cash forecasting and treasury automation. Get the maturity and credit right is paramount. Idle bank balances are no longer worthless. But market rates are rising more rapidly. Watch out for this little known account analysis expense item. Continuing Effects of Money Fund Regulations Repatriation Uncertain Future of LIBOR Assets that left Prime MMFs still remain in Govt. MMFs or bank deposits. The is an opportunity cost. Tax respite. But questions for you: How much to repatriate? Relocate? Leave in place? What to invest in? Being phased out in its current form by Need to re-evaluate LIBOR indexed debt, investments, derivatives, etc. 5

7 Earnings Credit Rates Lag Market 6

8 Earnings Credit Rates Vary Widely Based upon actual experience of NDepth users with annual revenue of $500M - $50B 7

9 Deposits vs. Activing Investments ECR generally applies to all DDA balances You don t need to initiate any transactions No forecasting necessary Intraday liquidity Give up on yield Source: NDepth, Treasury Strategies 8

10 Balance Assessment Fees are a BIG DEAL Source: NDepth, Treasury Strategies 9

11 What Treasurers Are Doing in 2018 Corporate Treasury Priorities Cash forecasting Financial risk management, FX Treasury management systems Treasury functional organization Balance sheet optimization Corporate Treasury Benchmarking Desires Bank service fees Treasury staffing levels and skill sets Best practices Financial risk management, FX Balance relationship management

12 Cash Management Options Increasing PRODUCT COMMENT VALUATION REDEMPTION RESTRICTIONS REGULATED RESTRICTED ACCESSIBILITY Bank demand deposit Bank Basel III Constraints Stable No Yes No Time/certificates of deposit Bank Basel III Constraints Stable Yes Yes No Private money funds Newer for treasurers, low utilization Stable (generally) By contract No Yes (large clients) Ultra-short bond funds More utilization Floating NAV Some Yes No Short-duration ETFs Low utilization by treasurers, differing investment standards Floating NAV No Yes No Separately managed accounts Traditional option, increased usage for corporates segmenting cash Book/Market value No, investor may bear gain or loss No No Retail prime MMFs MMF reg constraints, declines. Natural person = retail investor Stable NAV Yes, fees & gates Yes Yes (retail only) Inst. prime MMFs Most MMF reg constraints, declines Floating NAV Yes, fees & gates Yes No Short maturity prime MMFs Manager prime fund designed to mitigate MMF reg concerns. Low utlilizaton Potentially stable Yes, but potentially less likely Yes No Government MMFs Primary option as treasurers re-allocate cash Stable NAV No Yes No Structured bank deposits FDIC insured bank deposits above $250,000 Stable NAV Yes (T+1) No Yes (Max $100mm per Tax ID) Direct investments in money market instruments Increasing importance in CP market, for investors that have measurable cash flows Book/Market value No, but investor bears losses on sale No Some 11

13 Continued Strong Utilization of Bank Deposits. Will This Change in Rising Rates? $ Billions Cash and Checking Time and Savings Deposits Money Market Funds Source: Fed, Z1. L102 12

14 MMF Reform Created Significant Change in Short-term Markets Preference for Government Funds, Prime Asset Concentration: Post MMF reform, over $1 trillion flow into government funds AUM stable. Recently, steady flows into prime some concentration of prime assets in largest institutional funds. Largest Institutional Prime Funds $ Billions 1,800 1,600 1,400 1,200 1,000 Govt Institutional Prime Institutional Fund Name Assets ($mils) JPMorgan Prime MMF 37,931 State Street Money Market 11,716 BlackRock Liquidity:TempFund 11,415 Fidelity Inv Prime MMP 11,075 Federated Instit Prime Oblig 8,819 UBS Prime Master Fund 7,666 Wells Fargo Heritage MMF 6,933 Dreyfus Cash Management 6, /16 6/16 9/16 12/16 3/17 6/17 9/17 12/17 3/18 Source: Fitch, imoney Net $ Billion /1/ /1/2017 1/1/2018 3/1/

15 Prime and Government Fund Yields Reflect Market Conditions Money Market Funds 7-Day Gross Yields (%) Government Institutional Prime Institutional /16 11/16 2/17 5/17 8/17 11/17 2/18 Money Market Funds 7-Day Net Yields Government Institutional Prime Institutional (%) /16 11/16 2/17 5/17 8/17 11/17 2/18 Source: Fitch, imoney Net 14

16 Fund Flows Compared to Spreads Prime Fund Assets Growing as Net Spreads between Prime and Government Money Funds Between 20 and 35 bps Spread Cumul. Prime Fund Flow Net Yield Spread 0.40% 0.35% 0.30% 0.25% 0.20% 0.15% 0.10% 0.05% 0.00% ($Bil) Source: Fitch, imoney Net 15

17 Increased Focus on Prime Institutional Money Fund Liquidity Conservative Liquidity Management Strategies: Prime fund managers continue to maintain weekly liquidity buffers above the 30% regulatory threshold to assuage investor concerns about the liquidity fees and redemption gates features that went into effect with reform. Weekly Liquidity Dependent on Investor Base: Of 30 institutional prime funds reviewed, average weekly liquidity over a 30-day period was approximately 50%, although funds weekly liquidity targets vary depending on investor base Minimum Liquidity Requirement Individual Fund Source: CraneData, Fitch Note: Data from 11/24/2017 to 1/8/

18 MMF Portfolio Maturity General Decline Aligns with Rising Rates Weighted Average Maturity - Days # Days 60 Prime WAM Gov WAM /01/2013 7/01/ /01/2013 3/01/2014 7/01/ /01/2014 3/01/2015 7/01/ /01/2015 3/01/2016 7/01/ /01/2016 3/01/2017 7/01/ /01/2017 3/01/2018 3/01/2013 7/01/ /01/2013 3/01/2014 7/01/ /01/2014 3/01/2015 7/01/ /01/2015 3/01/2016 7/01/ /01/2016 3/01/2017 7/01/ /01/2017 3/01/2018 # Days Weighted Average Life - Days Prime WAL Source: Fitch, imoney Net

19 Review Institutional Prime Funds NAV Performance: Meet Investment Objectives? Shadow NAVs Near $1, Consistent and Stable: Since reform implementation, 95% of observations in daily changes in institutional prime fund NAVs have shown no movement. 5% of observations showed that NAV moved up or down by 1 basis point (bp) and in almost no instances NAV moved by 2 bps or more in one day. Fitch s Rating Criteria for Prime MMFs Focuses on Portfolio Risks: Primary rating factors for money funds and other liquidity products evaluate liquidity, credit, and market value risks in portfolios and not secondary factors such as NAV volatility. Daily Changes in Institutional Prime Money Market Fund NAVs No. and % of observations across 38 funds No Move 95% (4,268 observations) 3+ bps up 0% (2 observations) 2 bps up 0% (3 observations) 1 bp up 3% (137 observations) 1 bp down 2% (92 observations) Source: Crane Data, Fitch 2 bps down 3+ bps down 0% 0% (5 observations) (1 observation) 18

20 Review Institutional Prime Funds NAV Performance: Meet Investment Objectives? NAV Volatility Minor Post-Reform: NAVs for the four largest institutional prime MMFs show minor volatility MMF Reform Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 MMF Reform 10/3/2016 3/3/2017 7/26/ /15/ MMF Reform Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 MMF Reform Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 19

21 Review Alternative Products: Understand Varying Degrees of Risk Across New Investments Structuring cash between strategic and operating is increasingly important when considering differing risk profiles of prime MMFs and short-term bonds. 20

22 Review Investment Guidelines: Ensure Effective Cash Deployment Investment guidelines need to reflect changing market: Regulation, proliferation of new products, low yields and shifts in rating coverage change cash management drastically, Review use of credit ratings for credit and counterparty risks: Investment guidelines that do not include Fitch ratings are a competitive disadvantage compared to peers due to less flexibility, less supply, less opportunities Structured Finance Fitch +1 Issuance Banks and Corporates Fitch +1 Issuance ($ bn) 350 ($ bn) Industry Standard Investment Language: Investments must be rated A/A/A2 or higher on the longterm scale and/or F-1/A-1/P-1 or higher on the short-term scale by at least two of three said rating agencies (Fitch Ratings, S&P, or Moody s). Money market funds must be rated equivalent of AAA by at least two of three said rating agencies (Fitch Ratings, S&P, or Moody s). 21

23 Review Investment Tools: Ensure Portfolio Risks are Aligned with Investment Goals Case study: Investors are focused on money fund liquidity but not all MMF AAA ratings are the same at assessing this risk. Which Approach is More Aligned with Your Concerns? Fitch AAAmmf Rating: Liquidity Risk is Essential Component of Criteria Money Market Fund Ratings (assigned to money market funds and other cash management products) are an opinion on a fund s capacity to fulfil its investment objectives of providing ready liquidity and preserving principal. S&P AAAm Rating: Does Not Address Liquidity Fees and Redemption Gates A money market fund rating is a forward-looking opinion about a fixed-income fund s ability to maintain principal value (i.e. stable net asset value and to limit exposure to principal losses due to credit risk. We generally do not lower ratings to Dm when the manager of any fund suspends redemptions for up to five business days. Additionally, if a fund elects to impose a 2% redemption fee this is a credit positive. 22

24 Contact Us Ian Rasmussen Senior Director Fitch Ratings Tony Carfang Managing Director Treasury Strategies, A Division of Novantas Tony_Carfang@TreasuryStrategies.com 23

25 About Treasury Strategies Treasury Strategies, A Division of Novantas, is the leading treasury consulting firm. Armed with decades of experience, we ve developed solutions and delivered insights on leading practices, treasury operations, technology, and risk management for hundreds of companies around the globe. We serve corporate treasurers, their financial services providers and technology providers for the complete 360 view of of treasury. Solutions: Assessment / Optimization / Selection / Implementation Global Cash and Liquidity Management Cash Forecasting Financial Risk Management Treasury Organization Leading Practices Review and Benchmarking Connect With Us Payments Strategy Bank Relationship Management Technology Business Requirements and Gap Analysis Technology Selection, Implementation and Optimization Treasury Change Management and Resource Support

26 Fitch s Commitment to Investors Through Changing Cash Landscape Corporate treasurer education and support is a top priority for Fitch Webinars Conferences Personal meetings Research distribution Education and teach-in sessions Key themes for Fitch s corporate treasurer outreach Money market trends MMF regulatory developments Bank counterparty risk Investment guidelines Tools for evaluating cash investments Fitch best in class investor service Dedicated team of 24 investor relationship managers 5,600 investor interactions globally 47,000+ subscribers to sector s 2,800 distinct institutional investors to research portal 190,000 individual active website users 105,000 Twitter feed 25

27 Fitch on Short-Term Markets MMF Quarterlies Topical research Short-Term Credit Insights Quarterly report highlighting key themes and credit/liquidity topics affecting money market funds Published quarterlyon US and European markets Special reports on various topics in short term markets describing the issues and highlighting potential impact The Short-Term Credit Insights newsletter delivers the monthly highlights of Fitch s short-term term research and commentary, covering a broad range of sectors, topics and securities. 26

28 Fitch Ratings credit ratings rely on factual information received from issuers and other sources. Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings are inherently forward-looking, embody assumptions and predictions that by their nature cannot be verified as facts, and can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed. The information in this presentation is provided as is without any representation or warranty. A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its agents in connection with a sale of securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT 27

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