Treasurers face multiple challenges when it comes toshort-term investments. Large corporates have oodles of cash, butthe returns they're earning at the short end are minimal. And moneymarket funds, typically one of the main repositories for companies'short-term cash, could become less attractive for corporates if theSecurities and Exchange Commission (SEC) goes through with some ofthe regulatory changes it has proposed.

A recent survey by PwC suggests that while corporate treasurers areexploring ways to achieve higher returns and prepare for possibleregulatory changes, for the most part they continue to take atraditional approach to short-term investing.

“Treasurers are clearly looking for ideas and opportunity forhow to get more bang for the buck out of their investmentportfolios,” said Peter Frank, a principal at PwC and leader of itsCorporate Treasury Solutions practice.

But none of the respondents to the PwC survey rated maximizingreturn as their primary investment objective. Instead, 86% citedpreserving principal as their primary goal, while 13% citedmaintaining liquidity. Maximizing return was the third choice for86% of respondents.

Among the investments permitted by investment policies, moneymarket funds were the most common, cited by 92%, followed byTreasury bills (86%) and term deposits (79%). Some individualsecurities were on the list, such as commercial paper (72%), agencysecurities (59%), and corporate bonds (53%). But Frank noted that“policies generally afford a lot more flexibility than companiesare actually taking advantage of.” Even if a company's policyallows it to invest in a certain instrument, “that doesn't meanthat represents a significant percentage of their portfolio,” hesaid.

In fact, an Association for Financial Professionals survey last year of more than 450 of its members showed thatalmost three-quarters (74%) of corporate cash was invested in bankdeposits, money market funds, and Treasury bills.

SEC on Track to Alter Money FundRegulations

Last June, the SEC came out with proposals for additional changes in regulations of money marketfunds. (The agency made an initial round of changes in 2010.) Theoptions include setting up gates and fees that money funds coulduse to limit withdrawals in times of stress, mandating that fundsuse a floating net asset value (NAV) instead of the stable $1-a-shareNAV they use now, or some combination of the two. The SEC isexpected to announce its plans sometime this summer.

Fees and gates would be more disturbing for treasurers than afloating NAV, said Benjamin Campbell, president and CEO of Capital Advisors Group, aninvestment adviser specializing in institutional cashinvestments.

“A number of the corporates we've talked to have said that iffees and gates were imposed, in one form or another, it would be anon-starter,” Campbell said. “The treasurers are probably a bitmore accepting of the NAV float than they would be the fees andgates.

“The utility of money funds will likely be changed, and[treasurers] have to reposition around that,” Campbell said, notingthat companies are also dealing with negative interest rates in Europe and a decline in supply. “Thenumber of eligible credits that are A or above has shrunk.”

Companies are responding by re-assessing their options, he said.“We see companies evaluating separate accounts and setting up the infrastructure forseparate accounts. They're still in money funds, but they did dothe paperwork for separate accounts so they had the optionavailable to them.

“I just think the market does not want to be caughtflat-footed,” Campbell added. “When that headline does come out andthe treasurer pops his head in the office of the [assistanttreasurer] and says 'What are our plans?' it will already have beensomewhat vetted.”

Some companies are considering buying money market securitiesdirectly, rather than investing through money funds, “with theobject of getting a little more yield and in anticipation ofchanges around money fund regulations,” said Frank. “I don't thinkit's a massive trend.”

Two triggers that could lead to changesin companies' short-term investing would be changes in money fundregulations and a change in companies' tolerance for investmentrisk, said Frank, pictured at left.

If regulatory changes make money market funds less attractive,“that would force companies into a mode of operation where theywould need to be investing more directly on their own behalf inindividual securities rather than through a fund,” Frank said, buthe noted that he doesn't see this as a likely scenario.

“Except for the largest of corporates, most companies wouldn'treally have the internal resources to do the investment analysis,credit analysis, and risk analysis they would want to do to becomfortable making these decisions on an ongoing basis, andprobably would be looking more toward accounts” managed by externaladvisers, he added.

“The other trend that I think would trigger greater use ofexternal advisers would be a significant change in risk toleranceof companies for investment risk,” Frank said. “If companies startto step out on the term horizon and take more risk, or step out onthe credit spectrum and take more credit risk, almost by necessitycompanies with below–$5 billion portfolios would have to useinvestment managers to do that.”

Honeywell Makes Changes

Some companies are doing more than evaluating their options.

At the New York Cash Exchange this spring, Honeywell's assistanttreasurer talked about changes his company is making in itsshort-term investments. Honeywell is now buying commercial paper(CP) directly, assistant treasurer Jim Colby said, although it only buys thatof non-financial issuers. And it is doing an RFP for separatelymanaged accounts.

Colby said the company's cash balances “are skewed towardbanks,” and he cited the company's interest in diversifying itsshort-term holdings. “In the crisis, numerous banks had to getbailed out,” he said, but noted that “no Tier 1 or Tier 2 CPissuers defaulted.”

In addition to limiting itself to non-financial issuers,Honeywell buys only commercial paper maturing in two months or lessto avoid LBO risk and event risk, he said.

The previous changes to money market fund regulations alreadylessened the attractiveness of the funds, Colby said. “A trendwe're seeing is moving money away from money market funds intoseparately managed accounts,” he said.