Weighing risks and rewards for cash investments - J.P. Morgan Asset Management

Weighing risks and rewards for cash investments

A disciplined approach for evaluating investment solutions


A decision to seek out additional or incremental return cannot be taken in isolation: it will touch on many areas of investment policy and an organization’s overall approach to the cash management process.

Rather than targeting a particular yield or return at the outset, treasurers first need to assess their organization’s risk tolerance, liquidity requirements and the resources available to oversee an investment strategy. Once these have been determined, they can then work back to see what scope there is to improve yield.

By asking the questions outlined in this PDF, some organizations may discover there is far greater potential to increase return than they may have previously assumed. Others may find their need for principal preservation and access overrides all investment considerations. In either case, a thorough analysis of a company’s own tolerances, investment parameters and resources will help ensure that any investment strategy is realistic, sustainable and fully aligned with the organization’s agreed requirements for security, liquidity and return.

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A successful cash investment strategy will meet an organization’s particular requirements for security, liquidity and yield. In any market environment, corporate treasurers must preserve adequate capital and ensure sufficient liquidity to meet business needs. At the same time, they will consider how best to improve the return on their surplus cash.

Though short-term interest rates remain close to zero, Fed “tapering” has begun and rates will inevitably rise. As treasurers look to navigate a challenging rate environment, the various implications of aiming for higher yield should be assessed carefully. Organizations may need to reassess their investment policy, their view of acceptable investments, their risk tolerance and how all of this might impact their reporting and accounting. In this PDF, we present seven action points that organizations need to address when deciding if seeking additional investment income is an appropriate and feasible course of action.

1) Create an accurate picture of your cash position
The first step for any company in determining if it is in a position to seek higher investment return is to determine the availability of surplus cash.

2) Segment your cash appropriately
This process can help ensure that cash is available to the business when it is required while still enabling investment opportunities to be fully optimized.

3) Assess your tolerance for volatility
Investment strategies that aim to increase return can potentially lead to heightened volatility. Before implementing an investment strategy, an organization must be clear as to how much volatility it can tolerate across its different cash segments.

4) Assess whether greater credit risk is acceptable
Once a tolerable level of volatility has been identified for each cash segment, organizations can start to assess how return might be enhanced.

5) Assess whether maturity can be extended
Along with adding credit to a portfolio, investing further out on the yield curve is another common strategy to increase return. In a normal interest rate environment, investments that have longer to maturity will normally pay a higher yield because investors are committing their money for longer periods.

6) Decide how your investment strategy will be executed
If increasing yield is viewed as an acceptable objective, the next issue is how the strategy will be implemented and resourced. Companies need to assess whether an active or passive investment approach is most appropriate. Active management refers to a strategy in which the investor/ manager is looking to achieve a total return (e.g., from interest payments and capital gains). The strategy will involve actively trading holdings. Conversely, passive management (also known as buy-and-hold) looks to invest in securities and then hold them to maturity. It is therefore focused on generating return simply from the yield on investments.

7) Review your cash management investment policy
If an organization decides it would like to revise its strategy to try to achieve a higher investment return on its cash, this must be reflected in its formal cash management investment policy and approved by senior management.

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