Short-Term Investment in Challenging Economic Times: Insights from Oscar Coyle
The world of corporate finance is undergoing a dynamic transformation. Influenced by global economic trends, regulatory shifts, and technological advancements, this sector now faces new challenges. A notable change is rising interest rates’ impact, significantly altering corporate treasurers’ strategies worldwide.
This article explores the complexities of short-term investment strategies during economic challenges. Our expert guide is Oscar Coyle, the head of corporate at TreasurySpring. His firm, a cash investment platform and a leader in fintech, has seen close to $100bn worth of flows since inception in 2018, serving a diverse client base from large corporates to SMEs. TreasurySpring stands out by offering access to fixed-term funds, allowing investments across various entities like banks, governments, and SSAs (supranational, sub-sovereign and agency). They even enable clients to access the reverse-repo market, without the usual complicated onboarding processes that are involved.
Our discussion focuses on the influence of rising interest rates on treasurers’ approaches, effective cash and risk management in the current economic landscape, and TreasurySpring’s unique position compared to traditional cash investment options.
Oscar Coyle’s insights shed light on the evolving dynamics of corporate treasury management. With the growing importance of efficiently handling surplus cash, this article offers key perspectives on mastering short-term investments.
Join us to uncover the complexities of short-term investments in today’s evolving financial landscape, guided by Oscar’s expertise.
Understanding Short-Term Investments and Their Current Landscape
Short-term investments are crucial for efficient cash management in businesses. They involve placing money in various assets, such as bank deposits or money market funds, each with a risk and return profile. In simple terms, when a company puts money in a bank deposit, it essentially gives the bank an unsecured loan, taking on credit risk.
Historically, corporate treasurers have relied on two main types of short-term investments:
- Money Market Funds: These AAA-rated liquidity funds, around since the 1970s, offer great flexibility, including same-day access, making them popular among treasurers.
- Bank Term Deposits: Essential for everyday operations like paying staff and vendors, businesses facilitate these deposits through banking relationships.
However, the investment landscape is shifting significantly due to rising interest rates, a scenario unfamiliar to many current treasurers. For instance, T-bills now see interest rates around 5% in the US, a level not reached in many years. This change brings an important consideration: businesses face a growing opportunity cost if they have substantial cash reserves and don’t invest them efficiently.
Short-term investments are crucial for efficient cash management in businesses. They involve placing money in various assets, such as bank deposits or money market funds, each with a risk and return profile. In simple terms, when a company puts money in a bank deposit, it essentially gives the bank an unsecured loan, taking on credit risk.
Historically, corporate treasurers have relied on two main types of short-term investments:
- Money Market Funds: These AAA-rated liquidity funds, around since the 1970s, offer great flexibility, including same-day access, making them popular among treasurers.
- Bank Term Deposits: Essential for everyday operations like paying staff and vendors, businesses facilitate these deposits through banking relationships.
However, the investment landscape is shifting significantly due to rising interest rates, a scenario unfamiliar to many current treasurers. For instance, T-bills now see interest rates around 5% in the US, a level not reached in many years. This change brings an important consideration: businesses face a growing opportunity cost if they have substantial cash reserves and don’t invest them efficiently.
Impact of Rising Interest Rates on Short-Term Investment Options
With higher interest rates, the value of different investment products changes:
- Money Market Funds: They benefit from the interest rate curve, allowing investors to gain from increased rates over longer periods despite offering same-day access.
- Term Deposits and Long-Dated Products: These offer better returns than overnight positions, making them more attractive for treasurers looking to improve their returns.
This environment presents an opportunity for companies with large cash reserves to earn significant returns. However, this comes with the backdrop of high inflation, eroding these deposits’ value. Therefore, treasurers need to balance the advantages of having cash readily available against the need to manage it effectively, considering factors like liquidity, yield, and security.
Balancing Investment and Liquidity in Corporate Treasuries
In the context of rising interest rates and their impact on corporate treasuries, a key question emerges: Should businesses invest their cash externally or focus on internal investments? The answer varies significantly across companies, depending on their strategies and cash management approaches.
Segmenting Company Cash for Optimal Management
Companies typically categorise their cash into three main buckets:
- Working Capital Cash: The cash used regularly for operations like paying staff and vendors. Its fluctuating nature necessitates keeping it in readily accessible forms, such as money market funds or current bank accounts.
- Excess Cash: This refers to the surplus of cash not needed for immediate operational requirements. Companies decide here whether to invest this cash for short terms, like three or six months, or opt for cash equivalent short-term balance sheet investments.
- Strategic Cash: This represents cash available for longer-term planning and allocation. Decisions here are influenced by the interest rate cycle, assessing whether to lock in cash for 12 months or more to maximise returns.
Decision Factors for Treasurers
Several factors influence these investment decisions:
- Interest Rate Trends: For instance, decisions by central banks like the Bank of England on interest rates can indicate whether it’s an opportune time to lock in longer-term investments.
- Treasurer’s Role: The treasurer’s perception within the company plays a role. Are they expected to maximise the value of the cash pool or focus primarily on its safety?
- Capital Preservation: Above all, preserving capital is crucial. Losing cash can jeopardise a company’s operations.
The choice between external short-term investments and internal allocation of funds is complex. It depends on how a company classifies its cash reserves and balances the need for liquidity with the potential for higher returns. This decision-making process must carefully weigh operational requirements against strategic investment opportunities.
Exploring Short-Term Investment Options for Treasurers
In the current financial climate, treasurers are evaluating various short-term investment instruments. Understanding the most effective tools for parking cash in the short term is critical, especially given the evolving economic context.
Key Factors in Choosing Short-Term Investments
When selecting short-term investment tools, treasurers prioritise four main aspects:
- Security: Ensuring the safety of the invested funds.
- Liquidity: Maintaining easy access to the funds.
- Yield: Achieving an appropriate level of return.
- Diversification: Spreading investments across different types and sectors to minimise risk.
Popular Short-Term Investment Instruments
The most accessible options for treasurers have been money market funds and term deposits. However, repos (repurchase agreements) are gaining attention. Repos require more setup, such as agreeing on Global Master Repurchase Agreements, but they provide high-quality bank engagements with the added security of collateral, which can be liquidated in case of default. This arrangement can lead to less risk with higher returns.
The Importance of Diversification
Diversification is crucial for treasurers, and it’s not just about spreading investments across different banks or money market funds. True diversification involves considering different asset classes and sectors, such as:
- Financial Sector: This includes banks and their associated risks.
- Government and Government Agencies: Investing directly in government or sub-sovereign agencies.
- Corporate Paper: Investing in other corporates’ papers to diversify away from financial risks.
The Role of Commercial Paper in Diversification
Investing in commercial paper is a common practice, where corporates buy paper from other corporates. This approach is more prevalent in the US than in Europe. Treasurers typically rely on credit rating agencies to assess the risk of these investments. A corporate paper with a strong credit rating can offer an attractive risk-adjusted return and serve as a diversification tool away from the financial sector. This method also involves setting limits based on monetary value and credit ratings.
In the US, direct securities purchases, including commercial paper, are routine, aided by market access and the presence of short-term portfolio managers. In Europe, this practice is less common but growing.
Navigating Credit Ratings and Diversification in Corporate Treasury
Understanding and managing credit risk is a complex task In the realm of corporate treasury. Especially when considering different investment options like corporate papers.
Reliance on Credit Rating Agencies
Treasurers often rely on credit rating agencies for evaluating investment options, particularly when venturing beyond traditional bank deposits. This reliance is challenging, as seen with situations like Credit Suisse’s sudden downgrade. Credit rating agencies offer a snapshot of a company’s financial health but might not always provide timely updates. Therefore, while helpful, these ratings are not the only tool treasurers should use.
Diversification Beyond Credit Ratings
The conversation then shifts to diversification, a crucial strategy for treasurers managing corporate funds. Diversifying investments is not only about spreading funds across different banks or industries but also includes exploring various asset classes:
- Government or Sub-Sovereign Agencies: Investing in government-related entities offers a shift from bank risk to government or agency risk.
- Commercial Papers (CP): Purchasing corporate papers from other companies is a way to add diversification. However, treasurers must balance this with a thorough understanding of the associated risks and limits on exposure.
- Money Market Funds: These often include a mix of investments, including CPs, but the control over-diversification and exposure levels is limited.
Changing Priorities in Investment Strategy
In recent years, treasurers’ priorities haven’t changed significantly; they still focus on capital safety, liquidity, yield, and diversification. However, the emergence of higher interest rates has altered the landscape. A few years ago, the difference in returns between various investment vehicles was minimal, but now, terming out funds can yield significantly higher returns. This change means that treasurers must now consider optimising their cash for better returns while also managing the impacts of inflation.
While the fundamental priorities of corporate treasuries remain the same, the methods and strategies for achieving these goals are evolving. Treasurers must balance traditional approaches with the opportunities and risks presented by the current economic environment, ensuring diversification and optimal investment returns.
Cash Management: A Growing Priority for CFOs and Boards
The role of cash management in organisations is gaining increased attention from CFOs and even board members, given the changing dynamics of returns on investments.
Cash as a Crucial Asset
The phrase “cash is king” has evolved, reflecting the growing importance of cash in today’s economic environment. Unlike when excess cash might earn minimal returns, the current financial landscape offers opportunities for significantly higher returns. This shift has elevated the importance of cash management, making it a key focus area for senior executives and boards.
Enhanced Focus on Cash Management
Organisations are now more concerned with keeping cash safe and making it work more effectively. The substantially different investment environment drives this change from a few years ago. The primary concerns include:
- Liquidity Risk: This involves the risk associated with tying up cash in investments that may not be easily accessible. Vehicles like money market funds, which offer same-day liquidity, carry risks. For instance, if many investors want to withdraw their cash simultaneously, it could lead to a run on the fund.
- Cash Flow Forecasting: This is becoming a top priority for CFOs and treasurers. Accurate cash flow forecasting allows for better cash management, enabling organisations to invest cash more effectively. Knowing when your organisation won’t require cash enables strategic investment in vehicles that offer higher returns.
The Importance of Accurate Data for Cash Flow Forecasting
Effective cash flow forecasting hinges on the accuracy of the input data. The saying “garbage in, garbage out” highlights the importance of reliable data for making informed decisions. If treasurers can obtain accurate data from different teams and clearly understand their cash position and cycles, they can manage cash more effectively.
In summary, the current economic context has amplified the focus on cash management at the highest levels of the corporate hierarchy. This shift necessitates a more strategic approach to managing cash, emphasising liquidity risk management and the importance of precise cash flow forecasting. As a result, organisations increasingly prioritise cash as a key asset, seeking ways to optimise its use and maximise returns.
Differences in Short-Term Investment Strategies: US vs. Europe
The approach to short-term investments varies significantly between US and European treasurers, influenced by regional market dynamics and cultural factors.
US Treasurers: Value-Add Approach
In the US, treasurers are often viewed as a value-added sector, focusing on actively growing the business through strategic cash management. This approach includes:
- Managing cash Like a Portfolio: Treasurers often engage short-term investment portfolio managers to handle cash more dynamically.
- SIG Mandates: These involve assigning large cash pools to asset managers for strategic management within specific confines.
- Direct Security Purchases: US treasurers have more openness to buying securities directly, such as US T-bills, government bonds, or corporate and SSA paper.
European Treasurers: Focus on Protection
European treasurers, conversely, typically prioritise protecting and preserving cash. While earning a return is favourable, the primary aim is to ensure cash availability for operational needs. This conservative approach is evolving, but the mindset remains focused on safeguarding funds.
Access to Different Investment Options
US treasurers generally have greater access to various investment options, including direct government and corporate securities purchases. In contrast, European treasurers have historically had more limited access to these types of investments.
SSA Paper
SSA paper refers to securities issued by supranational, sub-sovereigns, and agencies. These entities, often government-like organisations, raise debt through bonds or other securities. SSA papers are typically bought via broker-dealers and often carry high credit ratings due to government ownership or backing. Investing in SSA paper offers treasurers an opportunity to diversify away from purely financial or corporate risks.
The investment landscape for treasurers differs markedly between the US and Europe, influenced by cultural perceptions, market accessibility, and organisational objectives. US treasurers tend to adopt a more aggressive, value-driven approach, whereas European treasurers emphasise capital protection.
TreasurySpring’s Innovative Approach to Short-Term Investments
TreasurySpring offers unique short-term investment solutions for corporates, addressing the complexities of the current high-interest-rate environment. TreasurySpring simplifies access to a wide range of investment options:
- Variety of Counterparties: Their platform provides access to over 75 counterparties, including banks, SSAs, governments, and select corporates.
- Specialisation in Repo Market: They focus on enabling businesses to access secured lending products, via the repo market. This includes establishing the necessary infrastructure for clients to engage in these investments without the usual complexities or heavy onboarding required.
- Range of Products: The platform offers products from one week to one year through fixed-term funds. These funds provide a defined credit risk for a set period, with the cash held to maturity, thereby eliminating market volatility.
Streamlined Onboarding and KYC Process
TreasurySpring’s one-time onboarding and KYC process make it easier for businesses to navigate the investment landscape, providing access to various short-term investment products.
Unique Selling Proposition: Simplifying Repo Access
TreasurySpring stands out by breaking down barriers to accessing the repo market, traditionally a challenging and time-consuming area for businesses to enter. This service allows for more efficient cash management.
Benefits in the Current Economic Climate
In the current environment of rising interest rates, the opportunity cost of not actively managing cash has increased significantly. TreasurySpring’s platform offers corporates the ability to:
- Tailor Investments: Choose from various short-term investment options, aligning with their liquidity needs and risk appetite.
- Secure Investments: Opt for secured investments like repos or investments in government or SSA papers, providing flexibility and security.
- Optimise Returns: Take advantage of the higher interest rates by strategically investing cash reserves for defined periods.
Operational Model
TreasurySpring operates by originating deals directly with banks, SSAs, and broker-dealers rather than acting as a broker. Clients select from a menu of short-dated fixed-income products, and TreasurySpring purchases the underlying asset the client has selected. Each client receives a fixed-term fund that is legally segregated, ensuring no commingling of funds and gives 100% look through exposure to that underlying asset, meaning there is no maturity transformation. This model offers clients clarity on their credit risk, which is purely to the underlying asset they have chosen, and a stable return upon maturity. The Fixed-Term Fund offers exposure to a defined credit risk, for a defined period of time, at an agreed level of interest.
Implementation and Integration
- The platform is easily accessible via a desktop website with passwordless entry.
- It integrates seamlessly with TMS systems, providing clear reporting and monthly statements.
- There’s no need for complicated integration or implementation processes.
Cost and Investment Process
- Clients invest at a specific return rate, including all costs and fees.
- There are no onboarding fees, usage fees, or minimum balance requirements.
- Clients see the rate they get, and that is the return they receive.
Future Outlook
TreasurySpring emphasises the importance of considering credit risk, diversification across asset classes, and the security offered by products like repos. In the current economic climate of high inflation and interest rates, TreasurySpring’s model becomes increasingly relevant, offering treasurers new ways to manage cash effectively.
Conclusion:
In today’s financial environment, rising interest rates offer challenges and opportunities for corporate treasurers. It’s essential to balance liquidity with potential returns, given the increased cost of uninvested cash. Treasurers must segment cash into operational, excess, and strategic categories, managing each according to specific requirements. Diversification is a key strategy, extending beyond financial institutions to encompass various asset classes and sectors.
Credit ratings and market dynamics also play a significant role. Treasurers need to focus on capital preservation and return optimisation. The varied strategies of US and European treasurers reflect different regional market dynamics and cultural influences.
Platforms like TreasurySpring are transforming access to short-term investments, making it easier for treasurers to manage these challenges. They offer a range of investment options, including the repo market, with streamlined processes emphasising diversification and security.
The role of cash management is gaining more attention at the highest corporate levels. CFOs and boards now focus on optimising cash use, not just preserving it. The tools and strategies treasurers use are evolving to meet these changes. This evolution underscores the need for agility and informed decision-making in managing short-term investments.
Frequently Asked Questions
What is the difference between short-term investment and trading?
Short-term investment involves holding assets for a brief period, typically less than a year, to gain returns. Trading, on the other hand, involves buying and selling assets quickly, often within days or weeks, focusing on immediate profit from market fluctuations.
What are short-term investment decisions in financial management?
Short-term investment decisions in financial management involve allocating funds to assets or projects expected to yield returns within a year. These decisions focus on managing working capital, ensuring liquidity, and maximising returns within a short timeframe.
What are 4 short-term investments?
Four common short-term investments include money market funds, treasury bills, certificates of deposit, and commercial paper. These options offer liquidity and relatively lower risk, making them suitable for short-term financial goals.
Who are short-term investors?
Short-term investors are individuals or entities that allocate capital into investments intending to hold them for a short duration, usually less than a year. They aim to capitalise on immediate market trends or short-term financial goals.
What are the advantages of short-term funds?
Short-term funds offer several advantages, including higher liquidity, lower risk compared to long-term investments, flexibility in investment duration, and the potential for quick returns. They are ideal for meeting immediate financial needs or goals.
