Separate Accounts can provide cash investors with enhanced flexibility and the opportunity to obtain greater yield than money market funds (MMFs). Corinne Lewis-Reynier, Head of Product Strategy for the EMEA Cash Management Group at BlackRock, examines the benefits of Separate Accounts and the operational factors for corporate treasurers to bear in mind when considering them.

Separate Accounts differ from pooled mutual funds in that they are segregated mandates comprised solely of one company’s assets. The investment strategy of the account is driven only by the specific objectives and risk tolerances of the sole shareholder, which are typically dictated by their investment policy. Separate Accounts can add value in any economic environment, but they are particularly relevant to investors at the moment owing to a confluence of factors.

The relevance of Separate Accounts

Firstly, interest rates across most of the world’s major currencies are very low; in the Eurozone, for instance, overnight rates are in negative territory. This is putting pressure on corporate treasurers, who need to make sure that their operating cash is not only invested safely, but also that it is placed in an instrument in accordance with their investment policy.

“One way Separate Accounts help investors to mitigate this low-yield environment is by allowing them to hold their cash further along the yield curve,” explains Corinne Lewis-Reynier, Head of Product Strategy for the EMEA Cash Management Group, BlackRock. Furthermore, Separate Accounts can be tailored to a corporate’s needs, investment policy and risk guidelines – investors can dictate the level of risk they are willing to take and their provider can offer a solution to reflect this.

Regulation is another factor. On the one hand there is bank regulation. “Under Basel III, banks are having to revisit and redesign their business models for decades ahead, impacting how much they lend and for how long,” says Lewis-Reynier. “Banks are now in a situation where they are unable to provide the level and breadth of services to corporates that they have in the past, which will force some corporates to rethink their relationships with banks and how they manage their short-term cash.”

Money market fund (MMF) regulation is also having an impact. In the US, the Securities and Exchange Commission (SEC) has recently pronounced that in the next two years institutional prime MMFs in the US must have a Floating Net Asset Value (NAV), and while it remains to be seen how regulation in Europe could evolve, it is clear there is a general trend from Constant NAV towards Floating NAV. In this regulatory context, Separate Accounts provide an alternative to corporates as to how their cash can be managed.

The same MMF regulation is also affecting the cost of liquidity, which is exacerbated in this low-yield environment. Under the SEC’s new rules, prime MMFs are obligated to hold a set level of liquidity, both overnight as well as in weekly buckets. This inherent cost of holding liquidity is passed on to investors.

Beyond the low-yield environment and the challenges posed by regulation, Separate Accounts can also help corporate treasuries to be more resource-efficient. As corporate treasuries often face increasing pressure on staffing levels, Separate Accounts provide access to specialist resources that serve as an extension of a company’s treasury team. Employing an external manager can ease the pressure and enhance the quality of the investment management process through direct access to specialist credit, risk and portfolio management resources.

Flexibility

Unlike MMFs, which have a single set of guidelines in an investor prospectus, Separate Accounts give investors the opportunity to engage with an asset manager who can advise them on the benchmark that is best suited to their investment needs, set measures for their risks, and forecast what their cash needs may be in the future, all in order to provide them with an investment solution that is optimised for their individual characteristics.

Separate Accounts are arranged through the signing of an investment management agreement (IMA), which is essentially a legally binding partnership between the investor and the provider. The IMA is not set in stone, and can be revisited at any time in the future should the investor wish. “This flexibility is of great value to investors, because markets, interest rates and the credit environment are liable to change over time, and it is important to choose the right partner to maintain an ongoing dialogue throughout these changing times,” says Lewis-Reynier.

The IMA is the legal framework around the guidelines and parameters of the engagement between the two institutions, and it is reviewed by the legal departments on both sides.

Points set out in the IMA include the objectives of the portfolio, and guidelines on, credit, portfolio duration and liquidity needs. Details include agreements on maturity limits, the investor’s risk tolerance, and average or minimum ratings of the underlying securities the corporate is willing to invest in, as well as the investment universe the investor is comfortable with.

Operational considerations

There are a number of operational factors corporates need to consider when setting up the IMA for a Separate Account – these considerations need not be prohibitive, but should be understood by the company.

• Accounting treatment.

  The direct ownership of the securities held within a Separate Account can lead to accounting and tax considerations that differ from the standard cash and cash equivalents treatment of a constant NAV vehicle. The mark-to-market accounting treatment of variable NAV assets can vary from client to client depending on their reporting preferences, accounting policies and strategy for the Separate Account.

• Tax considerations.

  Separate Account clients should be aware of their domicile’s tax laws that may impact the purchase, transfer and sale of securities across different jurisdictions. For detailed tax information it is recommended that you contact your tax consultant.

• Gain/loss budgets.

  Clients can place restrictions or limits on gains/losses they are willing to tolerate. Good managers will be very familiar with the process and will have systems to ensure limits are managed appropriately.

• Custodial relationship.

  In moving from a pooled fund to a Separate Account, the corporate will need to employ a custodian to take direct ownership of the securities. As such, the client has sole influence in the selection of both the investment manager and the custodian, the latter of which will take responsibility for the safekeeping of assets as well as undertaking administrative and transaction services.

Beyond these considerations, investors should also be conscious of their own liquidity needs, and explain to a provider exactly why they want to pursue the Separate Account route. For example, if a corporate needs to raise cash ahead of a big dividend payment, this could impact the management of their Separate Account going forward.

In addition, investors should think carefully about what they want to achieve. Whether they are seeking liquidity, yield or a little bit of both, will have a bearing on what kind of investment is best for them. Their appetite for exposure to a certain sector or country, or indeed their desire to avoid a certain sector or country, will also play a part.

Furthermore, investors need to understand current market conditions. Some US corporates with European treasury centres may wish to transpose current US guidelines in order to run their Separate Accounts in Europe in the same way they do in the US; however, there are significant structural differences between the two markets in terms of size and issuance, and it makes sense to speak to an expert about these differences.

Separate Accounts at BlackRock

To leverage the full benefits of Separate Accounts, investors need to partner with an experienced provider, who has a knowledgeable team that has weathered many different economic cycles.

“Having a partner that has a broad range of products across all the asset classes is key, and this is an important differentiator for BlackRock, because we cover all the asset classes; even if the investor is not interested in them all now, they may be in the future,” says Lewis-Reynier.

“Risk management is one of the founding principles of BlackRock and our understanding of the risks investors take when they invest in certain markets or for certain durations is key to our offering. We provide our clients with tailored risk solutions, which is extremely important in the current market, and we are constantly on hand to provide scenario analysis,” explains Lewis-Reynier.

“BlackRock’s credit research team and relationship managers have considerable experience in the asset class and provide world-class insight and client engagement”, she says. “Indeed, client contact is a key differentiating factor of Separate Accounts – we have more frequent and more detailed touchpoints with the investor, and provide daily or weekly reporting depending on their needs. We can also create tailored reporting using our suite of reporting tools.”

The benefits of scale

In an environment where, largely because of Basel III, banks’ provision of secondary or even primary liquidity is greatly reduced, BlackRock provides investors with scale and access to the market. BlackRock’s leveraging of this scale is a huge advantage to clients, even if they themselves are small.

“Furthermore, BlackRock has a proven track record that demonstrates it has a range of different strategies to offer clients, including bespoke and pooled solutions, fixed income and exchange traded funds (ETFs),” concludes Lewis-Reynier. “As economic conditions continue to evolve, and the needs of clients change, BlackRock continues to offer a variety of solutions tested over time to meet the needs of corporates looking to invest their excess cash.”

Disclaimer

This material is for distribution to Professional Clients and should not be relied upon by any other persons.

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