June 2018

The low (or negative) yield environment, coupled with many banks backing away from liquidity products following the introduction of Basel III, is forcing corporate treasurers to sharpen their focus on cash management.

However, with cash on balance sheets still at all-time highs, it looks like many treasurers are choosing to take a very conservative approach. The question is whether they can afford to stay so heavily invested in low yielding cash accounts, or if this strategy may ultimately come at too great a cost in terms of lost returns.

A more effective cash management strategy

It seems that many treasurers need to re-evaluate their investment strategies to meet the demands, and seize the opportunities, of an evolving rate and regulatory environment.

An effective strategy incorporates a clear investment policy, with well-defined goals and parameters for liquidity, quality and return. An essential element of this investment planning, in our view, is cash segmentation.

In following this discipline, corporate treasurers can distinguish among Operating Cash (requiring same-day liquidity), Reserve Cash (with an investment horizon of six-to-nine months or longer) and Strategic Cash (with an investment horizon of one year or longer).

Once the segmentation exercise has been conducted, treasurers can choose the most appropriate investment solution to match the investment horizon of each cash segment.

Ultra-short solutions

As cash segmentation has grown in popularity, a sizeable ultra-short industry – including J.P. Morgan Asset Management’s Global Liquidity Managed Reserves business – has developed to help service treasurers’ Reserve Cash and Strategic Cash requirements.

Our own Managed Reserves strategy has been popular with liquidity investors as a mutual fund and as a separately managed account (SMA). With exchange-traded funds (ETFs) becoming increasingly used for liquidity management, we are now able to offer this ultra-short duration solution under an exchange-traded fund (ETF) wrapper.

According to a Greenwich Associates report published in the first quarter of 2017 (“ETFs: Dynamic Tools for Institutional Portfolios”) 45% of institutional ETF investors are now using ETFs for liquidity management, up from 36% in 2015. We forecast a continuation of this growth as traditional bank/liquidity fund investors become more familiar with ultra-short ETFs.

It may make sense for treasurers to investigate this new and growing asset class, particularly given the need to review and update investment policies ahead of the impending implementation of the new European money market fund regulations.

However, ultra-short ETFs are not just useful tools for traditional cash investors looking to enhance the yield earned by their Reserve Cash and Strategic Cash allocations. Ultra-short ETFs should also benefit longer-term fixed income investors looking to shorten their duration positions in a rising rate environment.

We are currently witnessing this trend in the US, as the Federal Reserve continues to tighten monetary policy. With higher rates expected across the globe, ultra-short ETF solutions should continue to gain traction.

Differences between traditional mutual funds and ETFs

For corporate treasurers new to ETF investing the experience should be pretty similar to trading any listed securities on exchange, as the exchange traded fund acronym suggests. Treasury investors using ETFs may also benefit from heightened portfolio and pricing transparency, with holdings typically published on the J.P. Morgan Asset Management’s ETF website daily.

At J.P. Morgan Asset Management, our ultra-short ETFs are part of the Global Liquidity business, benefiting from best practices that focus on principal preservation, market liquidity and low volatility – all managed within a highly risk controlled environment.

Investment in money market funds are not guaranteed. The value of investments may go down as well as up and investors may not get back the full amount invested.

To find out more, please visit www.jpmgloballiquidity.com or feel free to reach out to us at jpm_global_liquidity@jpmorgan.com