Bank Interview: Laurie Carroll, BNY Mellon

Published: Jul 2010

This month we talk to Laurie Carroll, Global Short Duration Strategist at BNY Mellon, about why corporate treasurers should adopt a segregated approach to managing cash. We explore BNY Mellon’s three tier cash management strategy, the benefits this can bring to corporates and future developments expected in the industry.

Laurie Carroll

Global Short Duration Strategist

Laurie Carroll is an Executive Vice President and the Global Short Duration Strategist for BNY Mellon Cash Investment Strategies (CIS), a division of The Dreyfus Corporation. Laurie is responsible for the global strategic direction and product development for the short duration products of CIS. She is an active member of CIS’ Fiduciary Risk Committee and has over 29 years’ industry experience. Laurie’s career spans 24 years at BNY Mellon, during which she has held positions of increasing responsibility for a number of company affiliates. Most recently, she served as Managing Director of Short Duration, Index and Stable Value Strategies for Standish Mellon Asset Management, a BNY Mellon company. Previous roles at Mellon Bond Associates included Head of Portfolio Management and Portfolio Manager for active and short duration strategies. She started her investment career as a Portfolio Manager for AIM Advisors, Inc. Laurie has an MBA from the University of Pittsburgh and a BA from Seton Hill University. She is a member of the Board of Trustees of Seton Hill University.

How have recent market events affected the way corporate treasurers approach cash management?

Above all, recent events have led corporate treasurers to focus on the amount of cash they have on hand and how they are managing it – either internally or via investment managers. Treasurers are taking a closer look at what they are doing and how they are placing that cash. There simply isn’t enough yield available at the moment and people are not making a lot on their cash, but I do not believe that the desire for yield has gone away.

BNY Mellon Asset Management offers a three-tier strategy for cash management – what is the function of each tier?

We believe that everyone has excess cash, although they might not think that they have a lot. Most of the time this is cash that is waiting for some other reason, such as M and A activity, benefit payments, grants and longer liabilities.

Our strategy is to provide solutions appropriate to the three different tiers of cash typically held by clients:

  • The first tier consists of operating cash which is required for daily cash flows. This needs to be highly liquid and money market funds or short-term separately managed accounts are the most appropriate means of providing this.
  • The second tier is the company’s core cash. This is allocated to particular medium and long-term requirements and therefore needs moderate liquidity. We believe that treasurers may be missing an opportunity to pick up additional yield here. We suggest using Enhanced Cash or Ultra Short separately managed accounts for the second tier.
  • The third tier is set aside for longer-term liabilities (such as construction costs or capital calls) and therefore less liquidity is needed and higher yields and returns are expected. We provide this with 1-3 or 1-5 year maturity portfolios or matched funding separate accounts.

It is really a solid framework for managing all available cash. As part of this approach, we look at how we manage fixed income at the very front end of the curve. Obviously, our cash management strategy is devoted to this specific area, in contrast to longer-term bond managers like our sister firm, Standish. So we look at the front end of the fixed income curve, meaning five years and under, and make certain determinations: how much should we keep liquid? How much should we have in the one-year area, or the three-year area? We do that every day and we think it is also useful for the client to look at their portfolio – meaning their total cash portfolio – in this way.

So clients can pick and choose from the solutions available?

Absolutely, it depends on their needs.

We have, for example, been hired by institutions that have a particular liability stream up to five years and want to match that, and don’t want to worry about whether they’ll have the cash when the payment is due.

On the other hand, we have clients that have decided, “We have capital calls that are one year, two years etc – let’s buy high quality corporate bonds to mature in those time frames.” So we can provide clients with all three solutions – or with one or two of them.

Is this an established approach or something new?

We have been managing this type of framework since the early 1980s in the US and we’re continuing to expand it. While we haven’t always described it in these terms – managing cash in three tiers – we have had clients for years that have hired us for one or two of the strategies I’ve mentioned, or for all of them.

What advantages does segmenting cash in this way offer to corporate clients?

It enhances diversification, which is increasingly important. There is diversification in the money market funds, where you see repurchase agreements, deposits and commercial paper. Once you get past the one-year area, then you are looking at corporate securities, or maybe longer-term, high-quality asset-backed securities. So it gives you diversification of instruments.

It also gives you some diversification away from the regulated money market area, which is only becoming more regulated. There is increasingly a spread differential between money market funds and one or two-year types of funds or instruments or portfolios, because money market funds are required by regulatory statute to keep more liquidity. They need to have an average maturity of 60 days or less to be an AAA-rated fund.

What regulators are saying to the banks – and of course this is a completely different set of regulators – is that the banks are going to issue longer paper, reduce their dependence on deposits and issue one-year, two-year, three-year, five-year, ten-year fixed income paper bonds. Consequently we won’t have this tremendous rollover that currently has to be done on a daily basis, or a monthly basis.

There will therefore be less supply in the money market area and more supply in the longer-term instruments. Again, clients can benefit from this by looking at these tiers and making a conscious decision to keep a certain amount very short and then taking other cash longer.

How does this approach fit in with the need to balance liquidity with yield?

Money market funds are designed for a purpose and that is to provide liquidity. However, individual treasurers often have too much short dated cash on hand. This will of course dampen any opportunity for yield in the total cash portfolio compared to the approach we suggest, where the portions of the portfolio that are not immediately needed is invested according to the necessary profile of each bucket.

Furthermore, if you’re going to use this framework, you should maintain investment grade only, because quality also brings you liquidity. If you need to sell corporate bonds it will be much easier if they are investment grade, as opposed to emerging market bonds or something where we literally have to go around looking for a buyer.

Why should treasurers consider outsourcing the investment of their cash?

There are a couple of reasons. First of all, it has become a more complex environment, as I mentioned. The regulatory changes are themselves making it a very complex environment.

A second reason is a lack of resources. Very large multinational corporations might have the staff to deal with this internally, but others do not. It just depends on where institutions want to spend their resources. We have a lot of staff devoted to credit research and I don’t think you see that type of credit research within a treasurer’s realm.

Maybe they are relying on ratings. Although we do start with ratings, we then do a much deeper dive: we have dedicated analysts conducting primary research. Can you do that kind of research if you’re a corporate treasurer? We think it’s difficult.

We also think it’s difficult to have the asset management software which is needed to maintain positions and track your exposures in real time. Again, some larger corporations will have that and a lot of other corporations will not.

We find that very large corporations that have a lot of cash – and I do mean a lot – will manage a portion of their money themselves. They’ll use money market funds; maybe they’ll have a portfolio manager internally. However, they will also hire an external manager, because that external manager gives them a different viewpoint on the world – on what the central banks are doing, what is happening with corporate credit. It gives them another avenue for information.

Are companies other than the largest corporations capable of doing this in-house?

I think it’s difficult. I think they say that they do it in-house, but what they are actually doing is holding deposits with banks. We think that’s good in some circumstances, but it’s not good for the full interest rate cycle. I think at times they feel that it is a costeffective approach, but I think that over a full interest rate cycle they lose out on some of the expertise and expose themselves to unnecessary opportunity costs.

What sort of developments are you expecting to see over the next couple of years?

I think that we’ll continue to see the stable NAV money funds. I think you will see more floating rate funds in the very short space as well, and this is something we will be looking to develop.

Due to the supply considerations, yields are going to be low for a long time, even when central banks start to increase rates. There is just a lot less commercial paper available for participants to buy. This is where the three tier system can really add value. As mentioned earlier, by mapping your liquidity requirements onto your investments you can achieve additional yield in your portfolio whilst having the cash available when you need it.

Like a lot of our peers, we are looking to increase our own presence globally, so requests for new currencies will inevitably come onto the horizon. We may also look into launching fund products that reflect the second tier.

Another trend that we are seeing is that some clients are slightly fearful of some of the sovereign risk out there at the moment, particularly in Europe and some of the Mediterranean countries. Consequently, an investment that might traditionally have been a straightforward money market fund investment may now become a separate account, as clients are showing some nervousness towards sovereign risk.

How is the industry as a whole likely to develop?

We think there will continue to be consolidation in the investment management area, and particularly the short duration money market base, for some of the reasons that I outlined as to why treasurers might not want to be able to do some of this internally. Independent credit research and the sort of risk controls you need to manage cash at the highest level require both a number of analysts and an extensive IT infrastructure and without scale, this may not be feasible.

We are also seeing a realisation that you do need to have the infrastructure to do this. The cost of that infrastructure is a barrier to entry. We might see some of the firms that got out of this business a couple of years ago try to go into it again, but we think it’s difficult to position yourself credibly in this area without having the resources.

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