<p>Instituting a cash investment policy statement</p>

As investors continue to navigate a shifting interest rate environment globally and face reforms and new regulatory standards, a short-term fixed income investment policy statement—or cash IPS—offers clarity, giving everyone in an organization, from the investment team to the board of directors, a common understanding. A cash IPS provides financial transparency and a mechanism for internal control. It addresses the essential activity of cash segmentation—categorizing cash by liquidity needs (distinguishing among operating, reserve and strategic segments), enabling firms to seize the varied opportunities available and deploy a range of appropriate, optimal cash investment strategies.

A cash IPS defines an organization’s:

• parameters for liquidity, quality and return
• risk tolerance
• return requirements
• permissible investments
• relevant constraints (tax considerations; environmental, social and governance [ESG] guidelines) 

Clarifying cash investment objectives

An Objectives section of the cash IPS should define the organization’s goals for its short-term investment strategy. It should provide a high-level framework that clearly explains how the organization will meet each objective. While affirming cash investment objectives, the IPS should also retain enough flexibility and adaptability to take advantage of new market opportunities that may present themselves.

A cash IPS defines an organization’s:

• CAPITAL PRESERVATION
  Protection of principal—the safety of cash investments— is likely to be a primary objective for many organizations.
  
  
• SUFFICIENT LIQUIDITY
  The treasury group or financial staff can ascertain the liquidity level appropriate to steer clear of avoidable risks—a crucial goal.
  
  
• YIELD/INCOME
  Providing consistent current income may be another goal, which will, however, need to be balanced with a probable increase in the volatility of principal.
  
  
• TAX-ADVANTAGED RETURNS
  Tax-conscious liquidity management may be a goal, in which case tax-free short-term funds become an appropriate option.
  
  
• ABOVE-BENCHMARK RETURNS
  Exceeding a benchmark that mirrors the portfolio’s underlying investments may be among the priority objectives.

Instituting a cash IPS begins with inventorying cash flows, defining liquidity targets and determining short-term fixed income investment objectives for your organization’s cash that will guide cash segmentation. From those foundations, the IPS becomes more detailed, specifying acceptable levels of the many types of risk—for and within each segment. An organization can choose to have a higher-return strategic cash allocation; however, because higher returns come with a higher level of risk, this decision and its trade-offs should be well understood (even if quantifying the risk is difficult), agreed upon and documented within the IPS.

Governance

While organizations vary, the cash IPS should identify responsibilities: how, when and by whom it will be approved, implemented and modified. The IPS should include provisions for ongoing evaluation: how the cash IPS will be evaluated on a regular basis and how compliance with its terms will be ensured over time.

In its Governance section, the IPS should also define how credit quality will be assessed and monitored, beyond agency ratings. As with asset management (see below), examine whether the organization has the ability and resources to do credit analysis in-house, or whether it should it be outsourced.