The International Organization for Migration (IOM), the UN-institution striving for orderly and humane migration, is sitting on around US$1.7bn in cash in an allocation that has trebled over the last seven years mostly due to expansion and an increased lead time on its investments.
Malcolm Grant, Chief of Treasury at the Geneva-based organisation, estimates the IOM only ever needs around a third of that cash on-hand, but long-standing rules around governance of the surplus dictate a duration limit of 12-months on all investment. Although IOM’s finance and management teams are involved in an ongoing process urging member states that the size of the cash pile merits restructuring the balance sheet, for now IOM must squeeze its billions into a 12-month window.
A play-it-safe strategy used to focus on bank deposits until the GFC proved that level of exposure to the financial sector risky. Today, around 80% of the portfolio lies in short-term placements, between 5-10% is in MMFs and the remainder (around 5%) is in a dual currency allocation.
Apart from an outsourced ESG mandate, one member of the six-person treasury team runs the bulk of the portfolio, overseeing a diversified strategy across sovereign and supranational issuance and a more complex allocation to a dual currency strategy. Investment is shaped around capital preservation and liquidity, benchmarking three-month rates and avoiding all allocations to equities or illiquid markets.
Navigating the impact of negative interest rates in dollars and euros has proved one of the biggest headaches. Positively, the giant cash buffer means that unlike most corporates, IOM doesn’t have to craft an investment strategy shaped around cash flow forecasts. “Cash flow is not critical given our cash buffer,” says Grant.
It’s a different story for most other treasury teams where investment strategy begins with a clear understanding of investable cash. Cue dividing cash between what is needed for operational versus long-term purposes; scrutinising the likelihood of operational cash levels coming under pressure in different markets, taking into account a post-pandemic environment requiring a reduced cash balance and strategic growth opportunities. “Before a company starts making investment decisions, treasury needs to know the cash balance in every geography especially in restricted markets and currencies far away from head office,” advises Suraj Kalati, HSBC Global Head of Liquidity & Investments Products.
Next, treasury taps the tools available spanning on-balance sheet, deposit-like products, off-balance sheet MMFs or segregated account structures available from asset managers. “Available cash, working out which tenors and pricing suits best and finding the tools available are some of the important elements in an investment strategy,” surmises Kalati who says the risk of a short-term or technical recession is unlikely to impact longer-term investment strategy. “Corporates are not likely to disrupt their investment policy because they’ve identified short-term stress. What is the right level of cash is the question companies ask.”
The macro environment also goes into the mix. As rates increase and economies enter a cycle of tightening, corporates are increasingly looking for opportunities. Treasury Today interviewees say rising rates mean corporate investors are adjusting the duration and maturities of their investments to optimise overall returns and exploring new products as rates start to climb and the yields on savings edge higher.
In recent years, IOMs treasury team has worked hard to insulate returns from the impact of plummeting yields. Now their focus is on investing with an eye on rising inflation and interest rates. “Our financial statements already reveal healthier yields,” says Grant who warns that the significant impact of inflation on procurement costs, especially transport and medical supplies, although more difficult to see, will offset the benefits. “Inflation is an invisible killer,” he says. “It is a primary treasury risk.”
In one trend, higher interest rates are encouraging some corporates to put money into current accounts in a deliberately short-term approach; not committing on tenor but expecting maximum yield and banks to pass on the benefits of higher interest rates on deposits. Indeed, some commentators note it’s triggering RFP activity as corporates consolidate and pare back on their global and local bank relationships in an approach designed to both shore up liquidity and leverage the most favourable deposit rates.
Still, it’s not the right approach for everyone. The IOM stopped placing large deposits in its current accounts years ago when banks stopped paying current account interest. “For euros the amount we were allowed to deposit without incurring negative interest with our main partner bank got pushed down to ever smaller allowances from US$150m to US$100m, and then to US$50m,” recalls Grant.
Those capacity constraints on banks’ balance sheets have helped fuel another trend: treasury demand for MMFs, sought-after for 24-hour liquidity and yield; a way to put excess balances to work and invest a specific amount of cash for a known period. The IOM runs the money market platform ICD, allocating up to US$120m as a buffer to MMF for short-term liquidity emergencies.
More recently, ballooning treasury demand for MMFs has spilt over into increased allocations to next-step separately managed accounts (SMAs). During the pandemic, many treasury teams divested from SMA’s into short-term deposits and MMF’s to shore up liquidity. Now, companies carrying large surpluses but achieving poor returns, are heading back to these off-balance sheet solutions to generate yield and bespoke exposure and expertise, especially around ESG.
Like Booking.com, where SMAs have become a useful tool in the global travel platform’s investment armoury. “Alongside programmes managed in house and vanilla bank deposits, we have found SMA’s are a helpful option,” explains Will Nossier, Director of Group Treasury. “I have sometimes heard treasurers mention that they fear an associated lock up of cash in SMAs, but the portfolio management team can construct maturity ladders to ensure there is a constant flow of cash available for withdrawal or reinvestment. Should portfolio sales ever be required to fund unexpected requirements, liquidation is also possible relatively quickly with money available in just a few days.”
Diversification and multiple counterparties are other essential seams to any investment strategy. The extent to which treasury can concentrate an allocation in one fund class or with one institution will depend on counterparty limits drawn up at board level and embedded into investment policy. A board’s appetite for risk will also translate to specific portfolio settings – however this is also an iterative process, evolving as boards become more comfortable with certain strategies.
The IOM ensures diversity via different counterparties and brokers and the size of its cash surplus means it has no shortage of banks knocking on the door or quality counterparties. “We work hard on diversification and ensuring the diversification of counterparties. You can’t just talk to the same banks,” says Grant. “We work with US, French, British, Norwegian and Asian banks.”
Additional diversity comes via interesting in-house strategies, like dual currency deposits. The approach helps navigate negative euro returns whereby placement in one currency is hooked up to a currency option, explains Grant. “If the spot price moves out of the strike rate we move out to another currency. We can manage that risk because we approach it very conservatively – we are not looking for yield enhancement. It is a little bit exotic, but we are a multi-currency agency so have margins.”
Managing currency risk is another headache that falls within IOMs investment remit. Unlike a typical corporate domiciled in one country, the organisation doesn’t have a reference currency and reports back to its different donors on a project-by-project basis spanning 3,000 operations. “We have a currency basket going across projects in all directions. It’s complex and getting data and trying to mitigate FX exposure is very difficult,” says Grant. Positively, liquidity in so many currencies allows the organisation to naturally hedge its exposure and supports rebalancing.
But despite every effort to boost diversification, the IOM can’t escape its limited investment universe. Moreover, the organisation’s ability to invest in non-financial sector investments is stymied by its own risk management capabilities. Looking to the future, mandating to more external managers looks increasingly likely, predicts Grant. “I think we will have to move more money to external managers to manage the risk and diversification we are looking for.”
At Booking.Com, an asset manager is on hand in the SMA allocation to ensure specific investment objectives are met, providing the full suite of products and connecting the group to offer important support. The strategy also allows Nossier to call on expertise during market turmoil – like March 2020 when spreads significantly widened. “Back then it would have been challenging competing with institutional trading desks when attempting to sell positions,” he says. Today, that relationship is just as important as the company seeks to align its SMA exposure with its conservative risk profile, drawing on hypothetical portfolio models and macro analysis provided by its asset manager.
Asset managers are growing providers of ESG investment solutions, says Kalati. “ESG-themed funds are available in the market. Because they are linked to clients’ operational accounts, it’s possible to sweep into these funds. Sustainability deposits for on-balance sheet options where clients deposit cash into ESG themed products is also on the rise.” Asset managers are already providing important support to the IOM around ESG integration following the organisation mandating UBS to invest in a tailor-made bond portfolio with strict ESG exclusions. That said, Grant says treasury still has a firm grip of ESG internally. Treasury stopped working with one major US bank following significant governance issues. “We are bringing an ESG flavour to the whole portfolio; it’s not exclusive to the portfolio we’ve outsourced,” he concludes.