Cash & Liquidity Management

Cash segmentation balances liquidity and returns

Published: Dec 2021

Treasury teams should explore cash segmentation strategies to balance their liquidity and working capital needs alongside investing for higher returns and diversification. BlackRock’s James Morek and Brett Davis explain.

Wellbalanced stones on top of boulder at beach

James Morek

Managing Director, Head of International Cash Sales

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Brett Davis

Director, Cash Portfolio Manager

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Many companies are still holding more cash than usual in a legacy from the pandemic and the need for ample liquidity on hand. Their cash levels have remained buoyed by factors such as the reduction in dividend pay-outs over the last year and decisions to delay capex projects. This is leading more companies to explore cash segmentation strategies to optimise both liquidity and returns in today’s low yield environment.

“Cash segmentation involves separating cash into three main buckets,” explains James Morek, Managing Director, Head of International Cash Sales at BlackRock. “One bucket prioritises liquid working capital, holding cash needed daily. Second and third buckets target diversification and returns, with the second holding core cash in a rainy day or buffer fund, while a third invests more long term.”

Cash forecasting technology is a crucial element of cash segmentation, as is education and understanding the different risk profiles in segregated mandates. Treasury teams must also ensure all the correct internal investment approvals are in place. “Treasury teams looking to broaden their investment products need to build it into their systems; working with partners is easier than buying in the resources to do it in-house,” says Morek.

Treasurers should approach cash segmentation by putting capital preservation at the heart of the strategy. From this base, they can then shape liquidity and income priorities based on their appetite for interest rate and credit risk. “The operating account should have less interest rate risk and more highly rated securities, such as treasury bills or overnight securities,” explains Brett Davis, Director, Cash Portfolio Manager at BlackRock. Cash that can be locked up for longer can be invested in credit instruments, commercial paper, corporate bonds or swapped between fixed and floating rates. “With more runway into when you need liquidity, treasury teams can opt for more duration and interest rate risk via longer-dated securities and more credit instruments.” At its core, segmentation means constructing a portfolio based on a deep understanding of treasury’s cash needs in an approach that can be dialled up or down within a company’s broad risk tolerance.

Segregated or separate accounts should not be a replacement for short-term money market funds. Instead, they offer a complimentary place in treasury’s cash management armoury and avoid any recourse to in-house teams – they allow treasury teams to diversify their cash investments and invest further up the curve in different products. “You get the benefits of co-mingled products and the chance to tailor solutions to your own needs,” says Morek. “In a low-rate environment, they allow companies to optimise their cash positions and target different points of the yield curve,” adds Davis. They also offer a chance for treasury teams to better navigate market turbulence and benefit from a rising rate environment ahead of central bank policy moves. “Optimising the use of cash has become even more important,” says Morek.

Morek and Davis conclude that liquidity should be more than just cash on hand. Separately managed accounts utilise a broad set of investments and take advantage of the technological benefits of cash flow forecasting. “Cash segmentation is here to stay. We will see more of it as corporate treasury teams tap the benefits of outsourcing,” says Morek.

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