Investing Corporate Cash May Be More Risky

Moving corporate cash to boost returns by a basis point or two could earn a CFO or treasurer a well-deserved dressing-down. But that doesn't mean that finance executives who manage growing pools of idle cash can stand pat with their current investing strategies. Safety and liquidity require constant vigilance — maybe even more so this year.

Big changes on the regulatory front, for example, could affect the returns of money-market funds and create opportunities for corporate investors to earn a bump in yield. And the Fed's market support is slowly ending, which may force companies to reposition money to maintain a government guarantee on cash accounts.

In a climate of historically low interest rates and fresh memories of the financial crisis, however, making any sort of change to your cash-management strategy can seem downright heretical. "My concern is that an investment is safe and liquid," says Katy Murray, finance chief of Taleo, a talent-management software firm that generated $50 million in cash last year. "The interest income off of cash hardly moves the needle anymore."

Money-market funds are Taleo's instrument of choice, and in fact they are one of the few areas of investment that have been largely rehabilitated. Since the collapse of the Reserve Primary Fund in September 2008, money funds have partially regained their reputations as a safe haven for principal preservation.

Money funds suit treasurers who don't want the hassle of doing instrument-level credit research and administration, says Peter Yi, director of money markets in the fixed-income group at Northern Trust. Further, "although you do get competitive yield, you also get liquidity the same day." As of mid-April, however, that competitive yield averaged less than 0.1%.

While liquidity plus a marginal gain brings some comfort, treasurers still need to perform due diligence on money-market funds and monitor them as frequently as weekly, says Matt Clay, head of commingled funds at Clearwater Analytics, maker of a portfolio reporting tool. Clearwater's clients, for example, dig into a fund's asset mix, portfolio duration, and credit exposure to the fund's parent or guarantor.

The Securities and Exchange Commission's new 2a-7 rules could help here. Starting October 7, money-market funds will have to disclose portfolio holdings on their Websites. They will also have to file a form on Edgar that gives the market-based values of each security and the entire fund.
Investors are pulling out of money-market funds en masse.

That will be useful, because there is still a big difference in risk across the money-fund universe, says Lance Pan, director of investment research at Capital Advisors Group. "In theory, all of these funds would have been scrubbed and scrubbed again," Pan says. "But we see big disparities." Some funds have reduced the weighted average life of their investments to 12 days (the maximum allowed is 120), for example, and others are overweighted, perhaps unadvisedly, in things like municipal securities and repurchase agreements.

Ken Grogan, manager of treasury services at Wakefern Food Corp., a cooperative of companies that own and operate ShopRite supermarkets, says Wakefern's money-market investments are highly diversified, both among fund types and fund families. "Look at what happened with the Reserve Primary Fund," Grogan notes. "When the Primary Fund broke the buck [dropped below $1 per share], there was a run on the Reserve U.S. Government Fund and it became illiquid."

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