Optimising cash for corporate treasurers

As their treasury functions become increasingly sophisticated, companies are increasingly turning to cash optimisation strategies. We will explore how they can provide an effective solution for liquidity management in a prolonged period of low interest rates.

Optimising cash for corporate treasurers

Optimised cash management

Corporate treasury functions play a critical role within any organisation, enabling businesses to meet their financial obligations and fund strategies that generate value for all stakeholders.

Since the global financial crisis, treasury functions have become increasingly dynamic. Their core areas of focus — managing liquidity, volatility and risk — have become more complex. Companies face numerous challenges, including changes in the banking and funding landscape, a shifting regulatory framework and a ‘lower for longer’ interest rate environment.

The pandemic has accelerated the move towards digitisation in treasury

The global pandemic has further emphasised the importance of effective strategies for cash management, operational funding and risk assessment – all in a setting characterised by speed and urgency. The pandemic has also accelerated the move towards digitisation in treasury, driven by a need to provide real-time transparency into cashflows while eliminating long-standing inefficiencies and manual processes.

Corporate treasurers are rising to the challenge. They have become progressively more sophisticated and implemented strategies to better use valuable resources. Liquidity management is no exception.

Segmenting cash needs: Viewing cash as a multi-dimensional asset

The first step to cash optimisation is gaining visibility into short-, medium- and long-term liquidity requirements, as determined by the firm’s future cash generation and absorption. The goal is to identify and categorise each cash need, and then allocate to investment strategies with correspondingly appropriate risk-return characteristics.

Companies are better equipped than ever to segment their liquidity needs

Thanks to greater visibility into cashflows and more accurate forecasts, companies are better equipped than ever to segment their liquidity needs. For example, a company may find that a large capital expenditure is slated to be paid in 12 months’ time or cash will be needed to close an M&A transaction. These needs have a slightly longer time horizon than cash earmarked to support payable ledgers. To achieve better optimisation, the business could allocate the longer-horizon cash to enhanced liquidity strategies designed to incrementally increase risk-return boundaries.

Figure 1: Segmenting your cash needs
Segmenting your cash needs
For illustrative purposes only. Source: Aviva Investors, August 2021

Each company will naturally have differing needs for liquidity, determined by their unique mix of business lines and target levels of liquidity buffers, as well as their actual and forecasted cash positions. Once the needs have been analysed and segmented, an investment manager can help match the different cash segments with the most appropriate investments and direct the investment process to manage and meet all cash requirements and return objectives holistically. This can be most efficiently achieved via a segregated mandate.

Figure 2: Selecting the right investment manager

Due diligence

Given the large diversity of funds and managers running liquidity strategies, due diligence is essential.

Manager expertise

Managers with expertise across short-, medium- and longer-term cash investing can allocate across a continuum of investments, as well as potentially enhance yield opportunities and deliver required levels of liquidity.

Evaluation

We think companies should not just evaluate fund manager expertise across all investment horizons and risk dimensions, but also the robustness of its investment process, risk management and credit capabilities.

Track record

In general, we believe firms can benefit from partnering with investment managers with a track record of delivering a comprehensive range of cash solutions to companies. Familiarity with the complex nature of today’s treasury functions and their associated array of liquidity needs is an essential ingredient for a fruitful partnership.

Source: Aviva Investors, August 2021

Bespoke mandates

Corporate treasury teams are fast discovering that bespoke, segregated mandates are ideal vehicles for cash optimisation. Cashflow and liquidity needs vary – those seeking a customised experience and full control over investment parameters may find significant benefits from a segregated mandate.

Segregated mandates enable companies to take a proactive approach to liquidity, tailored to satisfy the varying cash needs of each business line and readily adaptable to changes in circumstances. These key advantages are made possible by the flexible nature of the vehicle: clients have direct ownership of the underlying investments and full control over the investment guidelines, allowing them to create a finely tuned risk-return profile. This differs from a commingled vehicle, where clients own shares of the fund.

Nearly one-quarter of treasurers are supporting corporate ESG agendas by investing in sustainable instruments or developing a plan to do so — and this figure is growing rapidly

Companies can partner with investment managers with experienced, well-resourced ESG teams to create bespoke portfolios designed to meet a range of goals and principles. A broad spectrum of ESG considerations can be addressed within a segregated mandate, including climate strategies, such as decarbonisation and net-zero targets, as well as emerging areas of focus, such as biodiversity and supply chain transparency.

Together with a passionate investment manager that is committed to truly making an impact, firms can build sustainable portfolios with the power to catalyse change through the underlying investments as well as through their own corporate engagement policies.

Within a bespoke mandate, companies can set limits on concentration risk, particularly with the banks in which the firm maintains its deposits or geographies where the business is heavily exposed. A custom-built approach can also offer the flexibility to concurrently adhere to other limitations, including duration or spread risk and rating constraints. Such adherence to multiple, specific parameters is often not achievable with a pooled fund approach.

Figure 3: Bespoke cash optimisation
Bespoke cash optimisation
For illustrative purposes only. Source: Aviva Investors, August 2021

Case studies:

Aligning optimised cash investments with climate objectives

Client objective
  • Make cash work harder by investing core (three to six months) and strategic cash (+one year) 
  • Abide by ESG investment restrictions as per a company’s responsible investment policy, including 30 per cent lower carbon intensity versus representative benchmark and screens for certain activities related to fossil fuels
Possible solution
  • Identify asset manager with specialised expertise in climate investing and dedicated ESG analyst teams
  • Identify asset manager that is an industry leader in climate investing
  • Implement segregated mandate, enabling adherence to specific climate objectives

Optimising cash while enhancing operational simplicity and cost savings

Client objective
  • Optimise liquidity and returns across full spectrum of cash needs
  • Improve operational simplicity and cost effectiveness
Possible solution
  • Outsource all cash management and investment decisions to one asset manager
  • Utilise segregated mandate, allowing asset manager to achieve returns beyond what would be attained by allocating to a range of pooled funds
  • Custom-built mandate offering flexibility to alter mandate guidelines, cutting the costs associated with switching between various pooled vehicles

Achieving target yield and adhereing to multiple restrictions

Client objective
  • Reach overall portfolio target of zero per cent yield during a period of declining and negative yields in the euro zone
  • Adhere to unique investment restrictions, including specific issuer and sector concentration constraints, as well as limits on duration, maturity and credit rating
Possible solution
  • Identify asset manager skilled at navigating the short end of the yield curve
  • Identify asset manager with proprietary optimisation tools to solve for target yield while adherence to multiple investment constraints
  • Implement segregated mandate, enabling adherence to multiple unique limitations

Optimising cash for insurers

With low interest rates heaping pressure on insurers to optimise every inch of their portfolios, we take a look at how bespoke approaches can help them eke out additional returns from their cash allocations while still preserving capital.

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Our liquidity fund range

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Key risks

The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.

Investments in money market instruments such as short-term bank debt the market prices/value can rise as well as fall on a daily basis. Their values are affected by changes in interest rates, inflation and any decline in creditworthiness of the issuer.

Investments are not guaranteed, an investment in a Money Market Fund is different from an investment in deposits and can fluctuate in price meaning you may not get back the original amount you invested. This investment does not rely on external support for guaranteeing liquidity or stabilising the NAV per unit or share. The risk of loss of the principal is to be borne by the investor.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK Issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In France, Aviva Investors France is a portfolio management company approved by the French Authority “Autorité des Marchés Financiers”, under n° GP 97-114, a limited liability company with Board of Directors and Supervisory Board, having a share capital of 17 793 700 euros, whose registered office is located at 14 rue Roquépine, 75008 Paris and registered in the Paris Company Register under n° 335 133 229. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

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