Interest rate hikes during the first three quarters of this year on both sides of the Atlantic prompted many corporates to pile into short-term government debt to get more immediate access to rising yields.

However, a recent Northern Trust Asset Management report on corporate treasury trends suggested a lack of portfolio diversification posed counterparty and concentration risks as well as threatening investment performance – with one-in-five of the treasury teams surveyed holding 80% or more of their short-term investment portfolio in bank deposits.

While rates were moving upwards, many corporate treasurers were tempted to go short duration and roll over their investments to benefit from increasing returns. However, as the consensus moves to rates having reached a tipping point and being more likely to be lower than higher in the future, some companies have realised they would be better off with longer fixed rate investments.

“There are some limits though, as longer investments may not always qualify as cash/cash equivalent under IFRS rules and therefore the potential impact on financial ratios should be taken in consideration,” says Ghyslain Ladret, Global Head of Corporate Structuring at Crédit Agricole, who adds that the golden rule for investment of not putting all your eggs in one basket is still valid.

“Corporates are increasingly looking at ways to optimise their balance sheet and as a result find the best mix between their liabilities and their assets – including cash investments,” he says. “We have been involved in various strategic discussions with corporate clients who are looking for advice around this topic. We can also consider other instruments or asset classes, such as repo which can be a very good way for corporate treasurers to access secured investment for their cash.”

According to JP Jolly, Global Co-Head of Corporate & eCommerce Sales at J.P. Morgan Payments, the capital allocation process has become increasingly rigorous this year.

“Treasurers are driving greater discipline across their organisations and in many cases the ‘hurdle rate’ for capital allocation decisions has become more challenging,” he says. “High rates, high inflation and continued market volatility have exposed inherent weaknesses in a number of market participants and as a result there is increased vigilance around counterparty risk management.”

While money market funds might present a good near-term opportunity, Jolly reckons it is prudent to maintain a diverse portfolio of liquid investments and treasury should consider deposits, term deposits and other liquid instruments to meet their funding needs.

Invesco believes money market funds are a key tool to reduce counterparty risk explains Paul Mueller, Head of Global Liquidity EMEA Portfolios.

“With our funds we would generally diversify investments across at least 30-40 different issuers, although history has shown there is no way to completely avoid all risk,” he says. “To further reduce risk we not only diversify across issuers but also across economic regions as it is difficult to be completely sure where risks may occur as we saw with the issues faced by some of the medium sized regional US banks in March this year.”

Daniel Farrell, Director of International Short Duration within the Fixed Income Group at Northern Trust Asset Management recognises corporate investors are more comfortable with what they know – especially if they do not have the time or resources to spend looking at investment options. In this context, bank deposits seem like a safe choice.

“But by being so concentrated in a single or small number of banks they can unintentionally create more risk,” he cautions. “This is where diversified funds such as money market funds have a critical role to play.”