This solution was driven by a review of the company’s investment policy based on three key factors: first, the rapidly changing regulatory environment for banks; second, the higher liquidity premium under Basel III; and third, the prospect of upcoming reform in the European MMF sector.
Photo of Camilla McKane, J.P. Morgan Asset Management and Alex Fiott, AstraZeneca.
AstraZeneca is a global, science-led biopharmaceutical company that spans the discovery, development, manufacturing, distribution and worldwide commercialisation of primary care and speciality care medicines. It is headquartered in the UK with a primary listing on the London Stock Exchange and are a constituent of the FTSE 100.
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Key to the solution is the implementation of a separately managed account (SMA) with a professional investment manager. AstraZeneca has generated approximately a 30% increase (as at 31st March 2017) on the average return of the portfolio from the SMAs.
SMArt solution delivers impressive returns
AstraZeneca’s USD denominated cash portfolio had historically prioritised security, liquidity and yield – in that order. For a number of years, it held the majority of excess cash in money market funds (MMFs) for liquidity purposes, and in the aftermath of the global financial crisis (GFC), was understandably very cautious about extending duration and lowering credit exposure.
Alex Fiott, Assistant Treasurer explains, “We took the decision to review – and challenge – our existing investment policy based on three key factors: first, the rapidly changing regulatory environment for banks; second, the higher liquidity premium under Basel III; and third, the prospect of upcoming reform in the European MMF sector.”
US MMFs had already been through their own period of reform, but there was no clear visibility on the scope of reforms facing European MMFs.
As a result, AstraZeneca seized the opportunity to take a proactive approach by anticipating potential changes of structural reform across the MMF industry in Europe.
The treasury team – in partnership with their relationship banks including J.P. Morgan Asset Management – determined they did not need to hold as much liquidity overnight and could therefore reduce their position in MMFs accordingly. They were also concerned about the fact that AAA-rated MMFs typically have an overweight exposure to financial issuers, which were significantly affected in the wake of the GFC. The proposal was to diversify away from that sector by establishing a bespoke portfolio that gave them greater control over the investment guidelines. In addition, they introduced tri-party repo transactions with a few relationship banks, accepting investment-grade fixed income securities as collateral. “Achieving an increase in yield on our cash position was not our central objective, but it was an important consideration,” notes Fiott.
They identified that creating a portfolio that would enable them to scale back their exposure to financials (direct and indirect) was key and, as a result, their current strategic liquidity position is now over 40% diversified away from that sector.
Best practice and innovation
The implementation of separately managed accounts (SMA) with a professional investment manager such as J.P. Morgan Asset Management was the result of a sustained effort to drive efficiencies and add incremental value to their strategic cash position. It also highlighted the expertise and experience of their team in delivering an innovative and creative solution to their treasury operation and drive best practice among their peers. Once the investment policy amendments had been approved, the project involved several additional components, including:
Setting up a custodian account.
Negotiating four Investment Management Agreements with their investment partners.
Establishing a new relationship with a technology provider (Clearwater) for ongoing accounting and monitoring purposes.
Setting up tri-party repo account with Euroclear, and negotiating a number of Global Master Repurchase Agreements with repo counterparties.
“We are aware that the prestige and competition for the Treasury Today Adam Smith Awards is increasing and so winning a category is both rewarding and also acknowledges the efforts of the wider AstraZeneca Treasury team. It also validates and supports our efforts to achieve best in class in our Treasury practices.”
Fiott concludes, “As one of the first UK corporates to have undertaken a holistic and strategic review of its cash portfolio, we have successfully identified and implemented significant changes to our investment approach.”
Generated approximately 30% increase (as at 31st March 2017) on the average return of the portfolio from the SMAs.
Achieved significant cost and time synergies by outsourcing portfolio construction and credit expertise to an investment manager with significant resources dedicated to managing short-term portfolios.
Reduced counterparty risk by diversifying away from the banking sector.
Alex Fiott’s role is Assistant Treasurer, Front Office, responsible for managing cash and liquidity as well as foreign exchange risk. He joined AstraZeneca in 2010 and has over 20 years treasury experience. With the support of his team, he has reviewed and initiated a number of changes over the last two years to the AZ treasury policy around cash investments.