The complementary use of commingled and separate accounts may help in optimizing corporate cash management.
The percentage of corporate investors considering money market funds as permissible investments has been declining since 2009, while the permissible use of separately managed accounts has been climbing.
- Six Advantages of Separately Managed Accounts:
- Tailored Risk Management
- Higher Return Potential
- Free from “Hot Money”
- Income and Capital Gains Management
- Versatile Reporting
Investments in time and research in a separate account relationship may bring just rewards in times of uncertainty.
One of the lessons corporate treasurers learned from the recent financial crisis is that, despite their appearance of safety and liquidity, pooled liquidity vehicles, including money market funds, are susceptible to lapses in investor confidence that may lead to runs. In 2007, after early blowups of supposedly conservative “yield-plus” and “ultra-short” funds, several state-owned local government investment pools (LGIPs) froze redemptions due to investments in troubled structured investment vehicles (SIVs). The Lehman Brothers bankruptcy in 2008 forced the $64 billion Reserve Primary Fund to “break the dollar,” the second such instance in the history of money market funds. The U.S. Treasury had to institute an emergency guarantee program to prevent widespread runs on money funds beyond the four fund families that had already implemented fund freezes. These events evoked uneasiness among treasury professionals who routinely used commingled investment vehicles as mainstay cash management tools.
Since we revised the original paper of the same title in December of 2008, the Securities and Exchange Commission (SEC) implemented new rule 2a-7 requirements that reduced risk in money market funds and improved their transparency. Still, the vulnerability of money market funds was manifested in 2011 by investor concerns with the funds’ holdings of European banks exposed to peripheral European sovereign debt. Officials at the SEC and other federal agencies concerned with financial systemic risk continue to believe that further regulation is needed, including the potential to do away with the constant net asset value (NAV) or to add a mandatory holdback on large redemptions. Not surprisingly, the money market fund industry and many institutional shareholders pushed back fiercely, suggesting that these potential reforms could result in a substantial reduction of money fund assets from institutional shareholders.
Meanwhile, based on our observations, interest in separately managed account (SMA) solutions has been building among institutional cash managers since the financial crisis and we’ve also noticed that interest in SMAs has become more intense in recent months. Some of the primary drivers for this renewed interest may be a desire for enhanced yield while the Federal Reserve holds short-term interest rates steady, concern over regulatory uncertainty with money market funds, and the need to diversify cash options before the expiration of unlimited FDIC deposit guarantees.
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