Photo of Camilla McKane, J.P. Morgan Asset Management and Alex Fiott, AstraZeneca.
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.
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.
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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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.