Photo of Lucinda Hamilton, Sean Privilege, Zoe Ealand and Katherine Sefton, John Lewis Partnership and Camilla McKane, J.P. Morgan Asset Management.
The John Lewis treasury team challenged its investment policy and worked with its partner to find alternative short-term investment solutions that make its cash work harder.
The John Lewis Partnership operates 50 John Lewis shops across the UK, johnlewis.com, 353 Waitrose shops, waitrose.com and business to business contracts in the UK and abroad. The business has annual gross sales of over £11.5bn. It is the UK’s largest example of an employee-owned business where all 85,500 staff are Partners in the business.
in partnership with
To assess the optimal level of liquidity required to ensure John Lewis Partnership has continued financial sustainability, the treasury team conducted a comprehensive liquidity review. The assessment included:
Stress testing cash flows over the firm’s cyclical cash cycle.
Performing a review of liquidity levels and sources across the retail peer group.
Using Basel III principles as a framework to assess optimal levels of liquidity.
As an outcome of this analysis, the Head of Treasury and Corporate Finance, Alan Drew, sought approval from the John Lewis Partnership Board to increase credit facilities from £325m to £500m. In addition, Drew requested that £100m in cash be set aside as a permanent reserve to help mitigate a 1/20 stress event.
As higher cash levels were being retained and cash holdings were growing with the business, the team was challenged by the Group Finance Director to optimise returns for its sterling-denominated cash portfolio.
Before the John Lewis Partnership was able to evaluate investment alternatives to the AAA-rated constant net asset value (CNAV) liquidity funds it used, they required a more accurate cash flow forecast. To aid in their evaluation, they created a cash flow forecasting model to assess both short and medium-term cash requirements.
The team then developed an investment strategy that segregated cash into separate investment classes based on bespoke liquidity and risk profiles. By assessing cash in this way, the team was able to better identify values that could be invested for an extended duration using a greater range of products to enhance yield.
In addition, the Treasury team reviewed and challenged their existing investment policy to increase their flexibility to manage cash whilst retaining appropriate internal checks and balances. As the existing policy contained conditions that proved restrictive, the John Lewis Partnership Group Finance Director, and ultimately the board, approved policy changes that would allow the team to more dynamically manage group cash.
With this policy in place, the team engaged with key relationship banks and investment providers on alternative solutions for its cash investment. Along the way, they evaluated a range of solutions such as repurchase agreements (repo), separately managed accounts, real estate investment trusts (REITs), commodity-linked investments, to name a few of the candidate investment vehicles considered.
As part of the investment portfolio, the treasury team selected a sterling denominated, ultra-short duration variable net asset value (VNAV) fund solution with J.P. Morgan Asset Management to act as a complement to the working capital cash we were keeping in AAA-rated liquidity funds.
CNAV liquidity funds are a dominant tool for corporate treasury departments, but the John Lewis Partnership challenged the efficacy of their existing policy and recommended changes to allow cash to be more dynamically managed across a variety of investment vehicles.
One of the outcomes of the liquidity and investment review performed by the team was the inclusion of VNAV funds within the investment portfolio to generate additional returns on cash. This was the result of a focused treasury effort to understand John Lewis’s optimal levels of liquidity, build flexibility into the investment policy to increase breadth, and create a strategy and assessment framework to better inform investment decisions.
The revised investment policy and framework positions the John Lewis Partnership well to adapt to European money market fund regulations and a changing rate environment. It further demonstrates the benefit of partnering with an experienced asset manager such as J.P. Morgan Asset Management.
Past performance is not a reliable indicator of current and future results. Investment in liquidity funds are not guaranteed. Diversification does not guarantee investment returns and does not eliminate the risk of loss.
More informed investment decisions.
Increased the return on cash in line with the team’s key performance indicators.
Diversification of investments.
Provided the team with experience and knowledge of VNAV funds with European money market fund regulations on the horizon.
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