Corporate investment preferences have long run along broadly geographical lines. European companies traditionally favour bank deposits while their US counterparts have been more likely to use money market funds, especially after the failures of a number of regional US banks in 2023.

Mark Hirst, Group Treasurer at Dr. Martens, explains that the company allow itself to be guided by the classic framework of SLY (security, liquidity, yield). “You cannot go wrong with that approach,” he says. “It is tempting to chase yield – especially when the business has a significant debt stack – but it is not likely to end well.”

Dr. Martens utilises a combination of overnight and term deposits with its cohort of lenders and low volatility money market funds. “Each investment is competitively tensioned,” explains Hirst. “There has been no real change in strategy other than recognition that in the current era of interest rates, idle cash is a real opportunity cost.”

When asked whether the company was reluctant to commit funds for long periods due to concerns around interest rates, he notes that it is hesitant to tie up cash for longer than three months – but more to avoid an argument with its auditors about whether more than three months is no longer cash or cash equivalent.

“We review our investments daily to ensure short-term excess cash is invested in line with policy,” adds Hirst. “Maturing deposits are reviewed on an ad hoc basis in advance of their maturity.”

Balfour Beatty also follows the principles of SLY when investing surplus cash, explains Deputy Group Treasurer, Sune Christensen. “Security is always our primary consideration, ensuring funds are placed with high quality counterparties and remain protected,” he says. “Liquidity is also critical, as we need ready access to cash to support the business. Yield is important but only after security and liquidity requirements have been satisfied. This ties in with the risk appetite of the business.”

The majority of the firm’s surplus cash is invested with relationship banks through short-term deposits, which helps support its broader banking partnerships and it also maintains a proportion of investments in money market funds as a source of diversification. This core strategy has remained consistent for a number of years. “Our treasury policy currently limits investments to a maximum tenor of three months, allowing cash to retain its classification as cash and cash equivalents for accounting purposes,” says Christensen.

“While the policy is under review, we are unlikely to significantly extend investment durations. Interest rate uncertainty is one factor but maintaining flexibility and liquidity remains the key driver of our approach.”

Investment positions are reviewed daily to ensure they remain aligned with liquidity requirements, counterparty limits and treasury policy.

Where treasurers can forecast their cash needs with confidence, they are moving out of overnight instruments and into high quality government securities and short duration strategies to lock in yield, suggests Dan Farrell, Head of International Fixed Income at Northern Trust Asset Management.

This is more about matching maturities to known liabilities than calling the next central bank move. “That discipline is the biggest behavioural shift we have seen and it marks a more advanced approach to liquidity management, one that delivers both yield enhancement and diversification rather than treating cash as a single undifferentiated pool,” he says, adding that treasurers are extending duration selectively, wherever their cash flow forecasts give them confidence to do so.

According to Farrell, while US corporates have long used money market funds as their core liquidity tool and European corporates have leaned more heavily on bank deposits, the latter are now actively adding funds to diversify counterparty risk and capture market yield.

“The direction of travel is the same on both sides of the Atlantic,” he says. “Less reliance on any single instrument and more diversification across the liquidity stack.”

Chris Tufts, Global Head of Portfolio Management and Trading or Global Liquidity at J.P. Morgan Asset Management notes that prime, low volatility net asset value (LVNAV) and standard money market funds are also widely used by corporates for both near-term liquidity management and return enhancement.

“Government/constant net asset value (CNAV) money market funds play an important role in corporate cash management strategies, particularly during periods of market or interest rate volatility,” he says. “However, many corporates remain comfortable taking modest, incremental credit risk in through prime, LVNAV and standard funds, which can offer higher yields.”

Tufts adds that cash segmentation strategies have become increasingly common, with operational cash favouring CNAV and LVNAV funds and more stable cash balances being allocated to prime and standard money market funds or ultra-short duration strategies that can offer increased return potential.

Natalie Cross, Senior Client Portfolio Manager Invesco Global Liquidity observes that LVNAV funds’ ability to maintain a constant dealing NAV under normal market conditions, combined with same-day liquidity, makes them operationally efficient for treasurers managing working capital and short-term cash balances.

While European public debt CNAV (PDCNAV) money market funds (MMFs) have emerged in recent years, Cross says corporate investors have not moved away from LVNAV funds into government-only strategies in large numbers.

“Although PDCNAV funds invest predominantly in government-issued securities and are therefore perceived by some investors as offering a lower risk profile, many corporates remain comfortable with the risk characteristics of well-managed LVNAV funds,” she adds.

For most corporate treasurers, the primary objectives of cash management remain capital preservation and liquidity. In this context, LVNAV money market funds continue to offer a compelling solution – providing daily liquidity, broad diversification and professional risk management while delivering yields that often compare favourably with overnight bank deposit rates.

“Factors such as banking relationships, treasury policies, regulatory requirements and internal risk appetites all influence how organisations allocate surplus cash,” says Cross. “Corporates are increasingly adopting a diversified approach, using a combination of bank deposits and money market funds to balance counterparty exposure, liquidity requirements and yield objectives.”

Alastair Sewell, Senior Investment Director at Aviva Investors, observes that government securities have become more attractive as yields have risen over recent years. For corporates with highly predictable cash flow profiles, direct investment in treasury bills, gilts and other short-dated government instruments can form an effective component of a liquidity strategy.

“However, the decision is increasingly broader than a simple choice between government securities and money market funds,” he adds. “Many corporates are also allocating cash to professionally managed short duration or ‘step-out’ strategies, which invest in diversified portfolios of high quality, short-dated bonds while typically retaining daily dealing and liquidity.”

The attraction of step-out strategies is that they enable treasurers to move modestly further along the risk and duration spectrum while benefiting from active credit selection, diversification and professional portfolio management.

Sewell agrees that corporate treasurers generally remain cautious about locking away liquidity for extended periods, although that can be attributed in part to the realisation that assumptions about future cash flows can change rapidly and unexpectedly.

Even where interest rates are expected to decline, preserving optionality remains an important consideration. The enduring attraction of money market funds is that they allow treasurers to earn a market-based return while maintaining resilient, daily access to capital.

Sewell notes that MMF assets in both Europe and the US are growing. Recent European reforms have removed some unintended incentives around liquidity thresholds and redemption mechanisms while strengthening minimum liquidity standards, which should reinforce the sector’s reputation for resilience during periods of market stress.

Theo Wasserberg, Managing Director UK and Ireland at Embat also refers to increased traction for government money market funds, particularly from treasurers who have had their fingers burned by credit scares and want absolute simplicity.

“The yield on a short-dated gilt or T-bill is genuinely compelling now,” he says. “For a corporate that knows, say, a large supplier payment isn’t going out for another six months, the question of why they are holding that cash in a fund rather than going direct is a reasonable one to ask.”

However, direct investment in sovereign paper comes with operational requirements such as settlement, custody and reinvestment decisions that aren’t trivial to manage. For mid-market corporates, the economics often don’t stack up once these overheads have been factored in.

Wasserberg says most corporates are keeping the majority of surplus cash within a 12-month window with the bulk of that at the very short end.

“The factor that really differentiates who is willing to take on a bit more duration is the quality of their forecasting,” he adds. “I have had conversations with treasurers who openly say they couldn’t comfortably commit cash beyond 90 days because they don’t have confidence in their cash flow visibility beyond that point.”

Wasserberg accepts that European and US corporates have different mindsets but reckons the gap is narrowing, thanks in part to advances in technology. “When it is easy to see your options side by side and act on them quickly, behaviour changes,” he concludes. “We are increasingly working with European corporates who want to be more active and more diversified – they just needed the tools to make it practical.”