gtnews Guide to

Investing Strategic Cash

Strategies for Managing Short-Term Cash Series
Underwritten by

gtnews Guide to

Investing Strategic Cash

Strategies for Managing Short-Term Cash Series
State Street Global Advisors
Welcome to Our Guide to Investing Strategic Cash
This is the second in a two-part series written for treasury practitioners who are
responsible for investing cash. In the first guide we covered the investment of
operating cash used for working capital. In this guide, well turn our focus to the
investment of strategic short-term cash which is in excess of your daily operating
liquidity needs. To help you invest these balance sheet assets wisely, well examine
the importance of having an effective cash forecasting system, the role of strategic
cash for multinational corporations, risks to consider when investing strategic cash
and practical guidelines for making investment decisions.
For treasury professionals today, there are few simple answers for how to invest
cash. While market conditions can vary by region, general challenges facing cash
and fixed income investors may include low yields, increasing price volatility and
shrinking supply among some issuers and counterparties and the uncertainty
caused by regulatory reform surrounding money market vehicles.
Continued on next page

Contents
Investing Strategic Short-term Cash

Objectives When Investing Strategic

Short-term Cash

Identifying Risk When Investing

Making Appropriate Investment Decisions

Selecting Investment Instruments

10

Conclusion 13

GTNEWS GUIDE: Investing Strategic Cash

Against this backdrop, some investors may feel hesitant about investing excess
cash, while others may inadvertently take on unintended risks that arise when
moving beyond overnight investments. At State Street Global Advisors, we
encourage treasury professionals to identify their goals and risk parameters clearly
before making longer-term investment decisions. To help treasurers manage risk
and plan for liquidity needs, we believe its useful to segment cash into three
distinct categories:
Operating cash
Strategic short-term cash
Longer-term cash
Regardless of your time horizon, investing cash prudently in todays market
environment requires knowledge, precision and skill. Whether you manage cash
in-house or choose to outsource part or all of your cash management functions,
we hope youll find this guide a useful resource for making decisions about how to
invest your strategic cash.
Sincerely,
Barry F.X. Smith
Senior Managing Director
Global Head of Cash Management

Investing involves risk including the risk of loss of principal.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered
a solicitation to buy or an offer to sell a security. It does not take into account any investors particular investment objectives,
strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from
sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall
have no liability for decisions based on such information. The whole or any part of this introductory letter may not be reproduced,
copied or transmitted or any of its contents disclosed to third parties without SSgAs express written consent.
Although bonds generally present less short-term risk and volatility risk than stocks, bonds contain interest rate risks; the risk of
issuer default; issuer credit risk; liquidity risk; and inflation risk. This effect is usually pronounced for longer-term securities. Any
fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
The views expressed in this introductory letter are the views of Barry F.X. Smith through the period ended 09/30/14 and are subject
to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking
statements. Please note that any such statements are not guarantees of any future performance and actual results or developments
may differ materially from those projected.
State Street Global Advisors is not affiliated with gtnews.
GCB-0522
Expiration date: 10/31/2015

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iv

GTNEWS GUIDE: Investing Strategic Cash

Investing Strategic Short-term

Cash
The first priority of any treasury practitioner is to ensure
that sufficient cash is available to meet operating
requirements. Many companies will rely on cash position
forecasts, together with other pertinent information, when
planning the most efficient use of group funds to finance
working capital and to identify when external borrowing
might be required. To minimize the potential impact
of contractions in liquidity, some companies may also
arrange external funding streams to ensure that working
capital is always available.
From an investment perspective, this process can also
be used to identify when and for how long a company
is likely to have significant amounts of excess cash.
The level of detail in any forecasting process will vary
according to the companys general cash position. A
cash-rich company may rely more on general business
forecasts to anticipate future cash balances, whereas
a cash-poor company is likely to devote the time and
resources into achieving a more precise forecast.
The next step is to stratify, or bucket, any excess cash.
Broadly speaking, cash can be used for three primary
purposes:
1. To support daily operations. The most important cash
category is operating cash. This is cash that is recycled
back through the business to fund daily activities in
the form of payments to suppliers, employees, and
governments (tax payments), and through loan and
lease payments. Operating cash is vital; without it a
company would be unable to trade.
2. To fund strategic, short-term activities and to provide a
backstop for operating cash. Once sufficient operating
cash has been identified, a second level of cash can
be stratified for investment. This cash needs to be
available to fund strategic, short-term activities, such
as making an opportunistic acquisition, or is injected
as operating cash in case the company experiences
worse than expected trading conditions. So, for some
companies, this means cash needs to be accessible
within a three-month timeframe the average time
period of an opportunistic acquisition.
3. To provide longer-term funding. This cash is longer
term and permanent in nature, so the board will need
to decide whether to use it to fund new business or
return the funds to shareholders.
Please note that not all companies will have all three
buckets.
To characterize cash in this manner, the treasury
practitioner needs to be confident in the available
information. Unless the treasury practitioner is assured
that the company has access to sufficient operating cash,
any assumption of additional risk when investing could
result in significant ramifications regarding the companys
ability to meet its obligations.
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The Benefits of Good Information

Having an effective cash position forecasting system
enables treasury practitioners to invest cash for longer
periods. If the forecasts provide an accurate picture
over a period of three to six months, then the treasury
practitioner can be more strategic in both borrowing
and investing. When borrowing, the treasury practitioner
is able to consider a wider range of potential funding
sources and take advantage of opportunities as they arise.
When investing, the treasury practitioner is able to ensure
that cash is invested much more efficiently using a wider
pool of investment instruments and for longer periods,
subject to the companys liquidity needs.
If forecasts show a steady or growing cash surplus that
is not required for operating purposes, then the treasury
practitioner can start allocating it as either operating cash
or non-operating cash. This process of stratification allows
the practitioner to set different objectives for surplus cash
based on the companys principal and liquidity needs.
To do this effectively, the treasury practitioner needs
access to good quality information. This will require two
things:
First, central treasury will need access to good quality
information from entities participating in any centralized
structure, as well as external partners such as banks.
If a liquidity management structure is in place,
information will flow alongside any movement of cash.
Second, the treasury will need to employ technology
to capture data, which is then used to populate a
sufficiently robust cash position forecasting system.
This will need to take place at every level within the
organization that has responsibility for managing
cash. For example, a highly centralized company may
only need a single cash position forecast. However,
a decentralized group, managed at the country or
regional level, will need to calculate positions at each
management level. Notably, decisions may be taken
at the local level for regulatory reasons. For example,
exchange controls can prevent the centralization of cash
balances from some locations, but treasury can still
impose a degree of control by requiring local entities to
follow the group short-term investment policy.
The companys overall cash position (whether cash-rich
or cash-poor) will then define the amount of detail the
treasury practitioner will require in any management
reports and in future position forecasts. Companies
subject to tight loan covenants, for example, are much
more likely to invest in detailed cash analysis and
forecasting than those that are highly cash generative.
While both strive for accuracy and efficiency, a net
borrower will derive the greater benefit from a more
accurate forecast.
Historically, treasury practitioners have tried to minimize
the amount of simultaneous borrowing and investing
performed by their companies. Increasingly sophisticated
liquidity management structures have been designed

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GTNEWS GUIDE: Investing Strategic Cash

to concentrate cash to group headquarters or in-house

banks, with one entitys surplus used to finance another
group entitys borrowing requirement. However, the
market uncertainty of the last few years has resulted
in some treasury practitioners deciding to fund more
opportunistically, recognizing the fact that this action
reduces their companys exposure to volatility in the
funding markets. The result is that it is increasingly

Objectives When Investing

Strategic Short-term Cash
For treasury practitioners to be able to take different
approaches to cash investment, they need to have both a
sufficient volume of cash and the ability to stratify their
cash needs. Otherwise, they have no choice but to treat
all cash as operating cash when investing.
If it is possible to identify strategic short-term cash, the
practitioner should set appropriate objectives, approved at
the board level, prior to investment. Similar to operating
cash, the fundamental requirement of investing strategic
short-term cash is to ensure that risks to principal and
liquidity reflect the nature of the cash invested.

Setting Objectives for Strategic

Short-termCash
There are three main objectives for any investor:
1. Security of Principal. Protection of the invested
principal amount.
2. Liquidity. Ensuring access to some or all the invested
amount whenever necessary.
3. Yield. Generating sufficient return on investment.
These three objectives are fundamental to any cash
investment strategy. The treasury practitioner needs to be
cognizant that risk to principal and liquidity adequately
reflects the nature of the cash being invested. When
investing operating cash, the treasury practitioner should
always be prepared to sacrifice yield to safeguard the first
two objectives; however, when investing strategic shortterm cash, the treasury practitioner may seek to generate
a higher yield on an investment. A greater focus on yield
implies some sacrifice of either security of principal
or access to funds (or both) and, therefore, a greater
exposure to risk.
A companys approach to strategic short-term cash
investments is typically determined by its fundamental
tolerance of risk. If a group has a policy of stratifying
cash, then the short-term investment policy must set
clear objectives for each investment bucket. As noted,
these objectives should be discussed at the board level,
giving the treasury practitioner the authority to follow
different approaches for each bucket of cash.
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likely that even generally cash-poor companies will have

significant cash balances that need to be invested at
particular times in the business life cycle. In other words,
both cash-rich and cash-poor companies could have
significant cash balances to invest at any one time. It is
vital that treasury practitioners fully understand the future
use of such balances, so that excess cash generated by
the business is considered strategic short-term cash.

Companies need to understand their risk

appetite before investing their strategic cash.
If they do, certain investment results might be
disappointing, but not surprising.
Barry F.X. Smith, State Street Global Advisors
Greater detail about the factors a treasury practitioner
should consider when setting investment objectives is
laid out below.

Security
Strategic short-term cash is not required by the business
for immediate operational purposes. The primary
distinction between operating cash and strategic cash
is determined by the accuracy of companies cash
position forecasts and their approach to disbursements.
A company with an accurate forecast and structured,
outgoing payments on a two-week or monthly cycle will
have a longer-term view, while a company with daily cash
disbursements and a less accurate forecast will have a
condensed view.
Although the company may have a more flexible use
for any surplus strategic cash, the treasury practitioner
should be cognizant of protecting the principal
investment. Clearly, although the consequences are not
immediate, a loss of principal would reduce the amount
of cash available to support future projects and would
represent a balance sheet loss.
In multinational companies, the treasury practitioner also
needs to establish whether any cash outside regional or
global pooling structures is considered strategic cash.
The company then has to choose whether to invest in its
current location or repatriate that cash so that it can be
controlled from the group treasury center. The decision
to repatriate may affect the principal amount as the cash
could be subject to tax or exchange controls. This applies
to companies headquartered in the USA, many of which
choose to invest surplus cash offshore to avoid applicable
federal taxes.

Liquidity
When investing strategic short-term cash, the practitioner
should be mindful of the companys access to any

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GTNEWS GUIDE: Investing Strategic Cash

invested funds. Unlike operating cash, there is no

need to require access to funds in the very short term.
However, the funds will need to be accessible within
a period, often three to six months, in order to ensure
their availability to support strategic acquisitions or to
serve as a backstop source of operating cash. There are
essentially two strategies to achieve this level of liquidity,
although they can be used together when appropriate.
The practitioners decision will depend on the companys
needs and specific timeframe.
The first strategy is to invest in instruments with a
maximum maturity that reflects the timeframe within
which strategic short-term cash must be accessible. If
this approach is followed, the practitioner should ensure
that maturity dates are staggered to reduce reinvestment
risk. This approach is sometimes referred to as a buy
and hold to maturity strategy and means that all
investments will mature within the required timeframe.
The second strategy is to have a policy which allows
investments to be redeemed over a three to six-month
period either directly, if investment is managed in-house,
or after notice is given, if investment is outsourced to
a specialist asset manager. Note that if this approach
is taken, the investment manager may have to sell
held investment instruments in the secondary market.
At certain times, it may be difficult to redeem these
instruments, even with sufficient notice, without some
loss of principal. This approach requires more active
management of the portfolio than a buy and hold strategy.
The treasury practitioner must also understand the
implications of any exchange controls. These can make

repatriating cash difficult, even with a significant notice

period. At the very least, the need to comply with
documentation requirements can add time and cost
to the process of repatriation. In extreme cases, it can
be impossible to repatriate cash without an underlying
transaction.

Yield
When investing operating cash, the first two factors are
paramount. However, in the case of strategic short-term
cash, a company may primarily be looking to achieve a
better return on their investments. To achieve this, the
treasury practitioner will need to relax the objectives
of either preserving principal or maintaining liquidity,
or both. In other words, the treasury practitioner may
need to be prepared to invest strategic cash with lesser
quality counterparties or to invest in instruments with
longer maturities than are appropriate for operating
cash. Because either alternative exposes the company to
additional risk, it is important that the general approach,
at the very least, is approved at board level.
Note that as confidence returns to economies around
the world, interest rates are expected to start to rise.
There is likely to be a divergence of monetary policies,
including interest rates, as separate economies grow at
different rates. For example, interest rates may start to
rise in the USA and the UK earlier than in the eurozone
and Japan. Under these circumstances, treasury
practitioners will find themselves under increasing
pressure to achieve additional returns when investing
strategic short-term cash.

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GTNEWS GUIDE: Investing Strategic Cash

Identifying Risk When Investing

Having identified the objectives for strategic short-term
cash investment, the treasury practitioners next task is
to identify the risks which might prevent the company
from achieving those objectives. Some companies may
decide to treat strategic short-term cash in the same way
as operating cash by adopting a conservative approach to
investment. This is likely if the volume of cash outside the
operating cash bucket is not significant enough to justify a
segmented approach to short-term cash investment.
However, as long as there is sufficient cash in the strategic
cash bucket, the treasury practitioner will want at least
to explore alternative investment approaches, including
identification of risk, and present them to the board for
discussion and approval. The focus is to try to understand
how additional risk may arise when the company
compromises on objectives of either security or liquidity.
The challenge is then to ensure that any additional risk is
fairly rewarded by potential increases in returns.
For any investment, the associated risks increase with time.
As an investment period is extended, there is an increased
chance that the market environment will change, affecting
the value of the invested principal. As long as the cash
is not needed in the immediate short term, the treasury
practitioner can take additional risks in investments.

Sources of Investment Risk

Given this general point, risks to strategic cash arise in
four primary ways:
credit risk;
market risk primarily in the form of foreign exchange,
interest rate and spread duration risk;
liquidity risk; and
operational risk, which arises out of managing
investments and their redemptions.
The principles apply equally when investing strategic
short-term cash or operating cash, and are explored in
detail in the first guide in this series. Below, we consider
how investors can assume additional risk when investing
strategic short-term cash.

Credit Risk
Understanding credit risk
Credit risk (which includes both issuer risk and
counterparty risk) refers to the risk assumed by an investor
that a counterparty to the contract will not be able or
willing to fulfill its contractual obligations. Issuer, or
default, risk is the risk that the issuer or borrower defaults
and does not make full repayment. Counterparty risk is the
risk that a party, other than the borrower, fails to fulfill its
obligations. Credit risk could equate to a loss of principal,
being denied access to funds (a loss of liquidity), or being
denied the promised level of return. Note that market
conditions may also intervene such that an investor may
find it difficult to sell securities issued by a particular
counterparty in the secondary market.
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Generally, investors can seek a better return on strategic

short-term cash by either investing in instruments issued
by the same issuers as for operating cash, but for longer,
or by expanding the list of approved counterparties to
lesser quality issuers. Both strategies expose the investor
to greater risk. If either strategy is followed, the treasury
practitioner must ensure that it is within the bounds of
the companys risk appetite (for strategic cash) and that
the ratio between risk and return is similarly acceptable.

Assessing credit risk

As with operating cash, the first step in managing credit
risk is to assess the companys actual and potential
exposure to each counterparty. This can be a complex
task for some companies, especially where group entities
are responsible for investing surplus cash. As discussed
in the first guide, the treasury practitioner should, at a
minimum, have visibility over all group bank accounts,
even those operated locally.
The next step is a risk assessment of counterparty
failure. Although there is a wide range of information
available, the additional time horizons involved in
strategic cash investment makes this a complex task.
Although the longer horizon associated with strategic
cash allows investors to plan investment more gradually
than operating cash (stratified strategic cash can be
invested as operating cash until an appropriate vehicle is
found), it also expands the potential range of alternative
instruments suitable for investment and, therefore, which
need to be assessed. This needs to be done within the
constraints of limited in-house capability and capacity.
That said, there are certain steps most treasury
practitioners can and should take to assess the relative
strength of different counterparties. These are described
in detail in the first guide in this series, with the additional
detail relevant to strategic cash outlined below.
1. Access credit information. Problems caused by rapid
or late downgrades from investment grade to junk have
caused treasury practitioners to question the utility of
published credit ratings for operating cash investment.
The extended time horizons used for investing strategic
cash (compared to operating cash) provide an additional
level of concern over their relevance. However, as with
operating cash, credit ratings represent a good initial
indication of the relative strength of an institution.
As discussed in the first guide, credit ratings are still
used in investment policies in such a way that cash
may only be placed with counterparties holding a
particular credit rating. A policy may set different limits
according to credit rating, so that company may invest
EUR50million with an A-rated institution but only
EUR25million with a BBB-rated one.
This also allows for different levels of exposure for
each cash bucket. For example, the counterparty limit
for BBB-rated institutions may be USD25million
for operating cash but have an overall limit of
USD50million for all cash. Over longer time horizons,

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GTNEWS GUIDE: Investing Strategic Cash

the other data available from credit rating agencies

becomes more important. Sovereign ratings, in
particular, can provide additional information about
the environment in which an entity operates, allowing
the investor to form an assessment of the longer term
pressures on the counterparty.
2. Other sources of information. Although credit ratings
provide a good first indication, there are many other
sources of information which can be used to support
the assessment of potential counterparties. These
tools include a range of publicly available information
such as (for publicly listed companies) share prices,
credit default swap spreads, and more general
news information including official stock exchange
announcements and annual reports. As with sovereign
ratings, these sources provide the investor with a
longer-term view of the environment in which the
counterparty is operating. The problem that arises for
treasury practitioners lies in not knowing how to find
and evaluate relevant information for all potential
counterparties. In reality, effective in-house assessment
is likely to be beyond the abilities of all but the
largest corporate treasury departments, simply due
to the sheer volume of potential counterparties. One
solution to this is to use data developed by third-party
providers. The treasury practitioner then has to assess
the competencies and approach the provider took in its
assessment before relying on the information provided.
3. Outsourcing credit risk analysis. There are market
providers that specialize in the analysis of potential
counterparties, making it possible to outsource credit
risk analysis either as a discrete transaction or as part
of a wider outsourcing of investment management. In
the case of the former, the treasury practitioners task
is to evaluate the quality of the vendors output and its
relevance to the companys investment requirements.
For example, a vendor appropriate for evaluating
counterparties suitable for operating cash investments
may not be the right fit for evaluating counterparties
suitable for strategic cash investments, e.g., their
analysis may focus on shorter term investments.
Outsourcing credit risk analysis to a specialist asset
manager includes operational tasks, such as custody
and reporting, so the treasury practitioner will want
to select an asset manager with a philosophy and
approach to risk reflecting that of his or her own
company. A company could also outsource investment
management to an asset manager via a mandate or
a separately managed account. In this scenario, the
company agrees to an investment policy with the
asset manager, who would then be responsible for
its implementation. Depending on the agreement,
the mandate can transfer much of the operational
investment activity, including some credit risk analysis,
to the asset manager. The challenge for the treasury
practitioner is to ensure that the companys risk
appetite is clearly communicated to the investment

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manager, that the managers philosophy matches the

companys objectives, and that the manager is capable
of managing counterparty risks.

Diversification as a protection against credit risk

Credit risk analysis is subject to many variables;
therefore any investment strategy should also include
diversification of counterparties as an added layer of
protection. Diversification of counterparties can take
place over single credits, groups of credits, industries,
and geographic locations. That said, it can be difficult to
find 35 different issuers all with a credit rating of A+ and
above, all of which have issued appropriate instruments.
As with operating cash investments, treasury practitioners
should always track their exposure to particular
counterparties. Best practice dictates that the companys
investment policy provides both individual counterparty
limits for strategic cash and an aggregated counterparty
limit for all short-term investment instruments.

Market Risk
Market performance also has the potential to have a
significant impact on the treasury practitioners objectives
when investing strategic short-term cash. Three factors
a change in interest rates, a change in exchange rates,
and a change in credit spreads have the most potential
effect in this context.

Interest rate risk

As with counterparty risk, the risk posed by a change in
interest rates increases with the length of the investment
term. A combination of historically low interest rates
and concerns over counterparty creditworthiness has led
treasury practitioners to focus on security and liquidity
at the expense of yield when investing all forms of cash.
However, with interest rates now expected to rise in the
foreseeable future, treasury practitioners are becoming
more concerned with interest rate risk, especially when
investing non-operating cash. Longer-term investors
have been shortening the duration of their portfolios in
anticipation of rising future interest rates.
The result is a concentration of investors in the shortterm market: cash-generative companies have more
strategic short-term cash to invest and longer-term (fixed
income) investors are looking to shorten their durations.
The strategic short-term cash investors typically retain the
underlying conservative approach to risk, categorized by
operating cash investment policies, whereas fixed income
investors are generally more focused on achieving an
improved yield.
The choice of investment instrument affects the degree to
which a company is exposed to changes in interest rates.
An instrument issued at a discount has a fixed interest
rate, assuming the instrument is held to maturity. Its value
will change until maturity, which becomes a factor if the
investor decides to sell in the secondary market. Some
longer-term instruments, such as floating rate notes, may

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GTNEWS GUIDE: Investing Strategic Cash

be reset at the beginning of each coupon period, reducing

their sensitivity to interest rate fluctuations.

Foreign exchange risk

The impact of a sudden change in a foreign exchange
rate can have a significant impact on principal. Treasury
practitioners need to consider the most appropriate
currency (or currencies) in which to hold strategic shortterm cash investments. There are three broad choices:
1. The company may require all strategic cash (or cash
to be invested as non-operating cash) to be repatriated
to group headquarters for investment in the groups
functional currency.
2. The company may permit strategic cash investments in
the currency in which the cash is generated.
3. The company may decide to transact cash into another
international currency for investment purposes.
The ultimate decision is driven by a number of factors
including the range of investment instruments available
in the first two categories. In addition, some companies
may choose to hold cash in the currency of the country in
which they expect to make their next acquisition.
Because some local markets may not provide the range
of alternative counterparties or instruments to satisfy
the demands of diversification as indicated above, it
is possible to transact some of the cash into another
currency to allow for more diversification. However, there
are two major disadvantages to this: the company will
lose some principal on both legs of the foreign exchange
transaction, and it will be exposed to foreign exchange
risk. As a result, this solution is unlikely to be worthwhile
for all but the largest sums. (Some banks, notably in
the Nordic region, do offer cross-border, cross-currency
pooling solutions.)

Liquidity Risk
In the context of strategic short-term cash, the primary
liquidity risk arises from an inaccurate stratification of
cash often due to an unexpected or unplanned need.
In this context, cash categorized as strategic short-term
may actually be required for operating reasons, but be
inaccessible because of the conditions of the selected
investment instrument. For this reason, it is important
that the treasury practitioner consider the results of any
cash stratification carefully and assess the accuracy of
any forecasts.
In addition, the treasury practitioner should follow the same
general principles when investing strategic cash as those
used when investing operating cash. There should be some
laddering of instrument maturities within the strategic cash
portfolio so that reinvestment (or roll) risk is reduced.
Note that the use of funds, including money market
funds, does offer some protection against liquidity risk, as
all funds have to have a degree of natural liquidity to help
them manage redemptions. The question when managing
strategic cash is whether the treasury practitioner wants
effectively to pay for a benefit which is more relevant
when managing operating cash.

Operational Risk
The final risk to manage is operational risk that which
results from a breakdown in internal procedures, people
or systems (i.e., technology). Error and fraud should be
protected against by designing investment procedures
to include professional scrutiny. This may include
segregation of duties, authority limits set according to
each individuals competencies, and an audit process that
includes spot checks.

Note that any decision to invest strategic cash in a

currency other than the companys reporting currency will
involve an exposure to translation risk. This is the risk
that a change in the exchange rate will result in a change
in the reporting currency value of the investment. This
may need to be monitored if, for example, the company is
required to comply with tight loan covenants.

The use of technology should be managed carefully.

Automated processes should be subject to audits.
Forecast and actual data should be reviewed regularly
to ensure data is flowing effectively both within the
organization and via external data feeds. Any system that
manages segregation of duties or authority limits should
similarly be subject to regular checks, especially after any
change in personnel.

Spread duration risk

Drafting an Investment Policy

Spread duration risk is the is impact on an asset value

or price due to a change in credit spreads to a risk-free
security or interest rate benchmark over the expected
life of the investment. The greater the proportion of cash
invested in longer-term instruments, the more exposed
the company. This is most likely to cause an actual loss if
the investor has to redeem some or all of the companys
invested strategic cash within a specific period of time,
especially in an illiquid or distressed market. Such losses
can be avoided by requiring investments to be held in
instruments with a maturity that is less than any notice
period, such that any need for redemption will be met
from maturing investments rather than from sale in the
secondary market.

In order to achieve the objectives outlined above,

companies should enact a broad, short-term investment
policy that covers the stratification of cash and includes
investment policies for each bucket of cash. Some
companies choose to incorporate short-term investment in
a wider investment policy, covering all parts of investment
from operating cash through to pension fund investments.
However the investment policy is structured, the elements
relating to strategic short-term cash should reflect the
companys appetite for risk in its investments. This
will either allow the treasury practitioner to structure a
portfolio within those parameters, or to form the basis of
an outsourced investment management agreement for use
by a third-party asset manager.

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GTNEWS GUIDE: Investing Strategic Cash

When managing strategic cash, the investment objectives

need to be clearly communicated. Unlike operating
cash, where the appropriate objectives are clear (the
maintenance of principal and the assurance of sufficient
liquidity), there are different ways of approaching
investment objectives for non-operating cash.
The part of the investment policy relating to strategic
cash must also be clear with respect to the entities to
which it applies it may apply to all group entities
or just those managed from the corporate center. It
depends on the size of the cash balances each group
entity maintains. If an entity participates in a group-wide
liquidity management structure, it is unlikely ever to have
strategic cash available to invest, even if the company
operates a threshold balancing solution. Any cash
retained by the group entities will only be appropriate
for operating cash. However, if cash-generative group
entities are outside of a group liquidity management
structure (or such a structure does not exist), then it
may be appropriate to permit group entities to stratify
cash. In these circumstances, it is possible for them to
have strategic cash. However, before group entities are
permitted to invest anything other than operating cash,
the central treasury practitioner must be confident in
the quality of the forecasting and reporting on which
any operating cash requirements are calculated. Note,
too, that the investment policy may have rules about the
currency (or currencies) in which cash is stratified.
Having established the scope of the policy relating to
strategic cash, the next step is to put in place a series of
parameters, each designed to help the company achieve
its investment objectives.

Preserving Principal
The investment policy should be designed to limit
exposure to a single counterparty and to ensure the
selection of appropriate investment instruments. This will
not eliminate a risk of loss of principal, but it should act
to minimize its impact. The following features should all
be incorporated into the investment policy.

Counterparty limits
The policy should define the concept of an approved
counterparty and state if the company permits the use
of additional counterparties (over those approved for
operating cash) for strategic short-term cash. If the
company decides to retain the same counterparty list
for all cash investments, practitioners may follow the
approach for approving counterparties outlined in the
first guide.
If the company chooses to approve additional
counterparties for strategic short-term cash, then there
should be a specific process for doing so. As with
operating cash, the company can elect either to maintain
an approved counterparty list or to have set criteria
for approval of counterparties. Because of the shorter

investment timeframe for strategic cash (compared to

operating cash), the treasury practitioner will want to
implement a stringent review process to ensure the list
remains relevant.
As with operating cash, the policy should then set
clear counterparty limits. These can be broken down
into sub-categories, setting limits by country or by
counterparty type (e.g., bank, non-bank financial
institution, other). The policy may also set participation
limits, such that the company may not hold more than
a specified portion of a particular instrument or fund.
The treasury practitioner will also want to specify
whether limits for operating cash and strategic cash
apply separately or if there is an aggregate limit in place
as well. Whatever is decided, there should be a clear
approach in case any limits are breached.
Because of the longer timeframe, any variance in
counterparty limits categorized by credit rating
has the potential to cause difficulties in the event
of a downgrade. Where it may be appropriate to
hold operating cash investments with downgraded
counterparties until maturity, the use of longer-term
instruments can make this approach inappropriate
in the case of strategic short-term cash. The policy
should include a timeframe for the disposal of any such
counterparties in excess of breached limits.

Use of appropriate instruments

The policy should list instruments permitted for
investment of strategic short-term cash, which may or
may not differ from those permitted for operating cash.
It may also list instruments not permitted for investment.
Some policies also set out the circumstances in which
derivatives can be used to protect principal. If investing
strategic cash for the first time, the company may need
to redraft the investment policy to reflect a wider range of
permitted investment instruments.
The use of instruments can also be subject to limits.
The challenge when investing strategic short-term cash
is to decide whether to set separate limits solely for
strategic cash or to incorporate the limits for all surplus
cash. Practical reasons, such as small, expected levels
of strategic cash, may make it more appropriate to
incorporate all cash under the same limits.
If a company decides to use funds (e.g., money market or
exchange traded funds) or separately managed accounts,
the treasury practitioner should acquire information from
the asset manager regarding the holdings within the fund
to ensure they are included in any calculation of limits
affecting the entirety of the companys portfolio.
Finally, the policy should state whether foreign currency
investment is permitted and, if so, whether positions
should be hedged using derivative instruments.
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GTNEWS GUIDE: Investing Strategic Cash

Preserving Liquidity

Changing Circumstances

The policy will need to state the extent to which

the company wants to preserve liquidity within its
investments of strategic short-term cash. For both
operational reasons (e.g., a reduced need to reinvest
maturing instruments) and to achieve an improved
return, it is often appropriate to sacrifice some liquidity
when investing strategic cash. The decision should be
driven by a combination of the forward accuracy of the
companys cash position forecasts and the timeframe in
which the company would need to access the funds in
order to meet an unanticipated strategic need, such as
to make an acquisition.

As with operating cash, the investment policy should

also provide guidance for how to approach changing
circumstances. First, it should set out how counterparty
limits, the approved counterparty list, and approved
instrument list can be changed, which may require formal
board approval. Second, the policy should provide clear
guidance about the approach when limits are neared or
breached. Third, it should also state how frequently the
policy will be reviewed. Most policies are reviewed on a
regular basis, and then subject to special review after a
corporate event such as a major acquisition.

The accuracy of cash position forecasts varies according

to a range of factors (see the AFP Global Liquidity Guide
to Cash Position Forecasting). If strategic cash is to
be available to support a shortfall of working capital,
it needs to be accessible within the period of expected
accuracy of the cash position forecast. For example, a
retail company may have confidence in its cash position
forecasts only for a period of about three months,
whereas a mining company may have the same level of
confidence for up to a year. If on the other hand strategic
cash is to be used to finance corporate events such as an
unanticipated acquisition, the treasury practitioner will
need to redeem any invested funds within the timeframe
of a normal completion. This will typically be about three
months, although it can vary according to industry norms.
With this in mind, the investment policy should set a
period within which funds (or a proportion of funds) are
accessible. If investment management is outsourced,
whether to a fund or via a separately managed account,
the treasury practitioner should be able to access funds
by giving notice of, say, three months.
If the investments are managed in-house, then the
portfolio should be structured in such a way that
funds can be accessed within the same period. This
can be done using a range of measures including the
use of maximum maturities for individual investment
instruments, especially those which cannot be sold in a
secondary market, as well as a maximum duration for the
portfolio as a whole.

Generating Yield
The policy may set an objective for generating yield,
such as a market rate benchmark. For example, it may
be appropriate to use a three-month market rate as a
benchmark if the notice period (outlined above) is set
at three months. The policy may set a target for the
proportion of cash held in fixed versus floating rate
instruments as protection against interest rate fluctuations.
As with operating cash investments, tax rules have the
capacity to reduce yield significantly, so it is vital that
independent tax advice is sought while an investment policy
for strategic cash is being developed. The key tax treatments
to consider are: transfer pricing, thin capitalization, and any
withholding tax on interest payments.
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With an investment policy in place, the treasury

practitioner then needs to draft and follow a set
of consistent operating procedures to oversee the
implementation of the policy and to structure appropriate
investment decisions. Note that if the investment of
strategic short-term cash is outsourced to a third-party
investment manager, such as via a separately managed
account, the policy should direct the investment
parameters followed by the investment manager.

Checklist for Strategic Short-term Cash

Investment Policy
The following is a more detailed list of some of the
features relevant when investing strategic cash. This
should be used in combination with the checklist of
features to be included in a short-term investment
policy published in the first guide in this series.
Objectives when investing strategic short-term cash.
These may vary significantly from the core
requirements when investing operating cash of
preserving principal and ensuring liquidity. The
investment policy should clearly state the objectives
when investing strategic short-term cash.
There are a number of potential scenarios:
Seek an enhanced yield by reducing immediate
access to funds.
Diversify cash holdings via the use of longer-term
instruments. This may also allow the investor to
take exposure to different counterparties which
may issue these instruments.
Create a cash fund to support expansion of the
business. Investors may use strategic cash to
finance acquisitions on both a planned and
opportunistic basis. This cash may be invested in
a different currency to manage the currency risk
associated with an acquisition in a new market.
Hold strategic cash as a source of back-stop
operating cash to protect against volatility in
funding sources.

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GTNEWS GUIDE: Investing Strategic Cash

An approved counterparty list or set of guidelines for

acceptable counterparties for strategic cash.
Where the treasurer decides to have different
criteria for acceptable counterparties for different
segments of cash, these should be clearly
documented in the investment policy.
Counterparty limits, and possibly participation
limits, when investing strategic cash.
A permitted instruments list. There may be a
prohibited instruments list.
It is usually appropriate to allow the use of more
diverse investment instruments when investing
strategic short-term cash rather than operating cash.

Making Appropriate Investment

Decisions
Where the investment policy sets the parameters, the
operating procedures establish precise actions to be
followed.

Note that instruments prohibited for operating cash

may be appropriate for strategic short-term cash.
Maximum duration or weighted average life for
portfolio as a whole.
This should be consistent with the objectives
for short-term strategic cash investment and the
accuracy and time horizons of the cash position
forecasts used to segment cash.
Management of strategic short-term cash portfolio.
Treasurers need to decide whether to manage the
portfolio in-house or whether to outsource to a
specialist asset manager.

service-level agreement or mandate thoroughly

documented. The treasury practitioners due diligence
in this case includes checking the asset managers
internal procedures and controls before an outsourcing
agreement is reached.

A Set of Operating Procedures

The operating procedures should map out how a decision
should be made. It should start at the point at which
the cash forecasts are produced and assessed to help to
stratify cash into separate categories, one of which will be
strategic short-term cash. This is followed by the process
of identifying the appropriate investment instruments
and counterparties to use, and concludes with the
processes for investment execution and record-keeping.
The precise process will vary according to whether the
company intends to manage activity in-house or decides
to outsource some or all of the investment management
of its strategic cash.
If the company decides to manage any activities in-house,
clear procedures should be in place and understood by all
personnel involved. Investment procedures should:
Cover the selection of the appropriate instrument and
counterparty for each investment decision;
Detail how to assess the impact of any selected
instrument on the groups strategic or wider cash
portfolio before an investment is made; and
Explain the processes for selection of dealer, approval
and authorization of deal, execution, settlement,
recording and audit.
On the other hand, if the company decides to
outsource management of its investments to a
third-party asset manager via a separately managed
account, then a detailed investment policy needs
to be communicated to the asset manager and a
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Case Study: Why One Technology

Company Outsourced its
Investment Management
One US-based technology company has outsourced
its investment management to third-party advisors
for a number of years. The advisors have full
discretion to invest on behalf of the company, as
long as they comply with the conditions set out in
the companys conservative investment policy. The
policy includes strict conditions regarding the types
of security to be bought, along with minimum credit
ratings for these instruments. The policy also sets
out strict limits in terms of the volume of particular
instruments and the concentration of holdings with
particular counterparties.
The companys treasurer made the decision to
outsource for two main reasons. First, the treasurer
recognized the advisors expertise in fixed income
securities. Second, to manage investments
internally would require significant and ongoing
resource commitment in terms of both skilled
practitioners and technology. The company needed
to be confident that it would have permanent levels
of excess cash on an ongoing basis to justify this
expense. An outsourcing arrangement gives the
company more flexibility to respond, should its
underlying cash position change significantly.

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GTNEWS GUIDE: Investing Strategic Cash

Management of Strategic Short-term

Cash Portfolio
There are a number of factors which will determine
whether it is more appropriate for a company to
manage its portfolio in-house or whether to outsource.
The following questions will help treasurers to decide
the most appropriate method of management:
Credit risk assessment
Does the company have sufficient resource
to evaluate and monitor enough potential
counterparties to meet counterparty limits?
Selection of investment instrument
Does the company have sufficient resource
and expertise to select appropriate investment
instruments each time an investment needs to be
made? The treasury will need to have qualified
individuals with the time and expertise to make
selection. It will also need a technology platform
which can model the impact of alternative
instruments on the portfolio before selection and
ensure compliance with counterparty and other limits.
Deal management
Does the company have sufficient resource to select
a dealer, approve and authorize a deal, and execute,
settle and record the transaction?

Selecting Investment
Instruments
The range of investment instruments available depends
on the precise characteristics of the market in which
the cash surplus is to be invested. Broadly speaking, an
investor will have three options when investing strategic
short-term cash.
The first option is to invest strategic short-term cash in
the functional currency of the group company, which
is most often managed from a group treasury center.
Companies choose this option primarily when the majority
of its operations take place in its home market or it
has an efficient cash concentration structure in place.
This works best if the home market has a wide range of
alternative investment instruments, thus allowing for a
diversified set of potential counterparties.
The second option is to invest strategic cash in those
locations in which sufficient surplus cash in generated.
This occurs most often in companies where the
group does not concentrate cash back to the group
headquarters or where a country (or group of countries)
remains outside such a structure. For example, a number
of companies headquartered in the USA choose to
hold significant cash balances pooled to locations in
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Relationship management
Does the company have sufficient resource to
manage relationships with the necessary partners?
These will include dealers, custodians and issuers,
and will include ensuring appropriate service level
agreements and mandates are in place.
Portfolio management
Is the company able to manage the portfolio
on an ongoing basis? The treasurer will need
to review the performance of strategic cash
investments individually and in aggregate to ensure
they continue to comply with approved limits.
The treasury will also need to be able to take
appropriate action in the event of a breach.
Cost of managing investments
What is the cost of employing enough staff
and sufficient technology resource to manage
the investment process securely? To manage
the process in-house, the treasurer needs to
be confident that the cost of doing so with
appropriate rigor is justified by the anticipated
benefits. If not, it is appropriate to outsource
management either by investing in funds or, if
the company has sufficient cash to invest, via a
separately managed account.

Europe. Again, the availability of alternative investment

instruments is important.
The third option is a variation of this in which companies
transact surplus strategic cash into an international
currency in order to gain access to a wider range of
alternative investment instruments. This option is popular
if the market in which the surplus cash is generated has
limited investment options, if the volume of surplus cash
is difficult to invest, or if the currency in which the cash
is generated is experiencing significant volatility.

Key Differences Between Investment

Markets
It is important to understand clearly the nature and
characteristics of investment instruments before placing
funds. There are some significant distinctions between
instruments in different markets, including:
Terminology. Terms are used differently across markets.
For example, money market funds are clearly defined
in both the USA and the EU. However, money market
funds outside the USA and EU may permit investment
in a much wider range of instruments than, for
example, Rule 2a-7 (USA) allows. In Australia, for
example, there is no regulated definition of the term
money market fund.

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GTNEWS GUIDE: Investing Strategic Cash

Regulation. Capital requirements (aka capital adequacy

or regulatory capital) vary significantly around the
world. As bank start to comply with the Basel III capital
accord, their appetite for corporate deposits is also
changing. From a strategic cash perspective, banks are
more likely to offer higher interest rates for deposits
with maturities over 30 days in order to meet capital
requirements. However, local regulations apply as
well. For example, banks in the UK have an additional
liquidity threshold of 93 days, and Italian certificates
of deposit with maturities exceeding 18 months cannot
be cashed in until after the first 18 months. Securities
regulations also affect some short-term investment
instruments. For example, commercial paper maturities
are driven by the requirement to register paper with
the local regulator. This means that US commercial
paper has a maximum maturity of 270 days, whereas
commercial paper in the UK has a maximum maturity
of 364 days.
Market size. Just as investors want to diversify their
pool of counterparties, borrowers want to draw on the
maximum number of potential investors to ensure
access to the funding levels they need. In addition,
some territories have a more established secondary
market for some instruments, such as commercial
paper, than others.

Characteristics of Investment Instruments

Significant differences in key markets and approaches
to risk gives treasury practitioners a range of alternative
instruments to choose from. As with operating cash, there
are a number of different variables to consider before
placing strategic short-term cash. These characteristics
must be evaluated in the context of the companys
objectives for managing strategic cash.
Counterparty. The most important feature of any
investment instrument is the counterparty. For some
issuers of instruments, notably banks, there can be a
number of different issuers of instruments within the
same group. In these circumstances, it is important to
establish precisely which entity is the issuer, whether
other group entities provide any guarantees in the
event of default, and what level of public information is
available on the issuer (e.g., credit default swaps).
Most governments will have the repayment option of
simply printing more money. This helps ensure that
principal is not lost, although its underlying value
may decline if the exchange rate also depreciates.
Some governments that share currencies, including
governments within the eurozone, do not have this option.
When investing indirectly via an asset manager, it is
important to understand the nature of the counterparty
relationship. If an investment is made in a fund, then
the investor will be participating in the fund on an
equal level with all other participants and will benefit
from the liquidity of the fund. However, if the investor
is looking to invest strategic cash, the value of liquidity
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is diminished. Investing in a separately managed

account reduces the run risk associated with a fund
and eliminates the cost of providing a liquid investment
for all investors. Deciding which option works best may
be determined in part by a companys attitude toward
liquidity when investing strategic cash. In addition,
in order to invest in a separately managed account,
the company needs to have a sufficient volume
of strategic cash. Achieving satisfactory levels of
counterparty diversification with minimum deal tickets
of USD10million requires a minimum investment of
USD 250 million over any invested operating cash.
Types. There are essentially three types of investment
instruments suitable for strategic cash.
Open-ended investment instruments. The most
common investment instruments, this type allows
investors to access cash subject to the conditions
set by the investment manager or issuer. Openended investment instruments are generally highly
liquid, but, as discussed, the strategic cash investor
needs to consider how important that liquidity is as
an objective. An example of this type of instrument
is a money market fund, which allows the
investment and redemption of cash on an intra-day
(or next-day) basis.
Notice instruments. These require investors to provide
advance notice (one week or more) to redeem funds.
The funds may be accessible sooner for a fee and
loss of any interest earned. Some bank deposits are
structured this way, with notice periods most often
driven by capital requirements. Separately managed
accounts can be considered notice instruments in
that, although investors can leave funds invested
for as long as they choose, they will need to give
sufficient notice of an intended redemption.
Time-limited instruments. Finally, most formal
investment instruments have a maturity date, which
may be in the form of a stated maturity date on
which the borrower has to pay the instruments face
value to the bearer. Government-issued treasury
bills and corporate commercial paper, certificates
of deposit, and longer-term bonds fall into this
category. This type of investment instrument is
helpful in managing the duration of a portfolio
and ensuring cash is accessible within a particular
timeframe. Many time-limited instruments can be
sold in the secondary market, allowing an investor to
redeem funds if necessary; however, bank certificates
of deposit are not usually redeemable until the end
of the term.
How funds are held. Investment instruments differ
in how funds are held and, consequently, the level of
security and access to liquidity they offer to the investor.
No certificate. Many short-term investment
instruments, including money market and other
investment funds, are held in a comingled fashion.

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GTNEWS GUIDE: Investing Strategic Cash

This gives the investor the advantage of scale,

meaning that even a relatively small investment can
achieve diversification of risk and cash can usually
be redeemed relatively easily. To achieve this benefit,
the investor will want to ensure that the companys
holdings in a comingled fund remain below a
maximum proportion (often 5%) of a funds total
assets.
Certificate of investment. Other short-term
investment instruments allow the investor to hold
specific instruments, typically in a dematerialized
form, which provide a clear record of the investment
held. In most cases, this instrument can be sold
in the secondary market, giving an investor the
opportunity to access cash before maturity. This
difference will also matter if the counterparty or
issuer of the investment instrument fails and the
investor needs to demonstrate title. An investor can
achieve a greater level of security on time deposits,
for example, by entering into repurchase agreements.
Tri-party, or tripartite, repos outsource the
management of the collateral to a third-party agent
and also allow the investor to diversify counterparty
risk by requiring different types of collateral. If
investing by way of a separately managed account,
the asset manager purchases instruments on behalf
of the investor in accordance with the terms of
its mandate. These instruments are then held by
a custodian. This provides additional security for
the investor in comparison with a fund investment,
which has a greater run risk.
With sufficient cash to invest, a strategic cash investor
may be able to achieve a desired level of diversification
by outsourcing investment management either via
a money market, or fixed income, fund or through
a separately managed account. Generally, fund
investments allow an easier access to cash, as they
always ensure there is a degree of liquidity within the
fund to meet normal redemption requirements. For the
investor of operating cash, this is a useful advantage,
because it allows funds to be placed in slightly longerdated instruments while still giving overnight access
to cash. However, when placing strategic cash, this
becomes a disadvantage, as the investor does not (or
should not) need immediate access to cash. In effect,
a strategic cash investor will be subsidizing the other
investors access to cash.
How instruments are accounted for. Understanding how
an investment will be accounted for is an important
determinant of its suitability. When investing operating
cash, investments are made in highly liquid and secure
investment instruments, because of the requirement
to preserve capital and to retain access to that cash.
Because of this, most operating cash investments
are made in instruments considered for accounting
purposes to be cash equivalent under IAS 7
generally those with a maturity of up to three months
and with very little chance of a change in value.
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Cash equivalent investments can be recorded on the

balance sheet at face value. The rules are generally the
same for accounting under both IFRS and US GAAP,
although there are some minor differences. (Specialist
advice should always be sought before placing funds in
a newly approved instrument.)
Where a short-term investment instrument does not
qualify as cash equivalent, it will need to be classified,
usually as financial assets at fair value through profit or
loss, held for trading (IAS 39). This is more likely when
investors seek to achieve a greater return when investing
strategic cash, as they may decide to select instruments
with a longer maturity date or with a variable net asset
value. Neither of these would allow the investment to
continue to qualify as cash equivalent. Under the terms
of IAS 39, the company would have to calculate the fair
value of any such investment, with any gains or losses
between reporting periods having a direct impact on
the companys balance sheet. This can add complexity
to accounting for these instruments and also result in a
degree of additional volatility in the value of short-term
investments.
How investments are recorded. For operating cash,
the use of money market funds has been popular
because many offer a constant net asset value (CNAV),
meaning the treasury practitioner has not had to
account for a fluctuation in the value of operating
cash. However, regulators in the USA and Europe
believe that the use of CNAV masks the underlying risk
to principal in these investments, resulting in some
pressure to require most money market funds to be
valued on a variable basis (VNAV). In July 2014, the
US SEC announced that institutional prime funds and
municipal funds will be required to adopt VNAV, with
implementation to take place over a two-year period.
With this change, US strategic cash investors will see
less of a difference between investing in money market
funds and other investment instruments with a longer
horizon as more cash investments will be marked to
market. There will no longer be a complex transition
between the accounting for operating cash investments
(currently still CNAV, whether in the form of bank
deposits or money market funds) and more strategic
cash investments (more usually VNAV). (The situation
in Europe is more complex with approximately 50%
VNAV funds, the majority of which are French domestic
funds. EU regulators are continuing to examine the
regulation of CNAV funds.)
Finally, investors should understand how instruments
will be treated in the event of the issuers failure. Each
instrument has a different status with respect to the
seniority of the debt. With longer dated instruments,
this becomes a more important issue for the treasury
practitioner to understand. Again, there is a difference
between investing in a fund, where all participants share
in the impact of an issuers failure, and investing in a
separately managed account or in-house portfolio, where
the investor has to accept the full loss.

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Case Study: How Ahold Selects

Appropriate Investment
Instruments
Ahold is a Netherlands-headquartered international
retailing group, with an annual turnover in FY2013
of over EUR 32.6 billion. With average cash
balances of EUR 2.8 billion over the last five years,
investing strategic cash is a significant assignment
for the groups treasury team. For Gavin Jones,
Deputy Treasurer at Ahold, the recent market
environment has made this a particularly challenging
task, given the key objectives of preserving capital
while enhancing after-tax yield. Working to identify
appropriate investment instruments has been an
important focus of the treasury team.
The Ahold treasury team devotes significant time
to understanding the characteristics of particular
instruments. A few years ago, the team performed a
deep evaluation of money market funds.
We found a significant degree of conformity in terms
of instruments and issuers within the funds, said
Jones. Our approach is now to deconstruct a product
and then to rebuild it in order to fully understand
its characteristics before approving it for use. This
takes time and resource. It also means that if an
instrument is subjected to this scrutiny and is then
approved for use, then it definitely fits our strategy.

liquidity, the score is determined by how quickly

the company can get access to cash. In the case
of derivative transactions, their complex valuations
can result in a relatively low score. For yield, the
team will assess a product against an appropriate
market benchmark.
These calculations form the basis of the managers
initial assessment. This is then reviewed by the front
office team, before a formal recommendation is made
to Jones and the Group Treasurer, Andy Nash. The
same process is used to review previously approved
instruments for suitability once or twice a year.
If an instrument is approved for use, we will not
necessarily use it straightaway, says Jones. For
example, we approved the use of tripartite repos about
three years ago. Last year, we decided we wanted
more security with our term deposits. Because we
liked the concept and approved the instrument,
we had already done some work to create our own
collateral filters. This meant when the time came, we
could start to use tripartite repos very quickly.
With a small team, one of the challenges is to
ensure internal resources are used effectively. The
team manages certain investments in-house, with
both term deposits and tripartite repos managed
internally. Other investment activity is outsourced.

Initially, all new investment products are assessed

by the teams investment manager to determine their
suitability for use. Products are reviewed against
agreed criteria using a matrix developed in-house.

We do not have the time or credit expertise to build

up portfolio-type instruments such as commercial
paper, explains Jones. For this, we use an asset
manager, as well as variants of money market funds,
both 2a-7 and fixed income funds.

For example, when we review an instrument for its

ability to preserve capital, we might score it 5/5 if
capital is guaranteed, but only 1/5 if there is any
risk to capital, explains Jones. When reviewing for

This approach is key to managing risk. Ahold

treasury resources are primarily deployed on strategic
activities, with some investment activity outsourced
within parameters set by Jones and his team.

Conclusion
Successful management of strategic cash investments
requires the confidence of treasury practitioners in
the departments ability to stratify cash into separate
buckets. Unless there is a clear and understood
distinction between operating cash and strategic cash,
all cash should be invested as operating cash. As long
as a company has the ability to stratify its strategic
cash, clear objectives for the investment of this cash
should be set and documented in the organizations
investment policy.
The first guide in this series provided three short
documents to assist treasury practitioners in preparing or
reviewing their investment policy and procedures. These

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same documents can also be used to help develop the

policy and procedures for strategic cash.
Daily management of strategic cash is less likely to be
necessary given its nature. In turn, this means that more
specialist skills are required, especially in the area of
portfolio management and counterparty risk analysis.
The organization, ideally at board level, will need to decide
whether there are sufficient resources available to manage
the investments in-house. If not, the treasury practitioner
will need to identify the most appropriate way of outsourcing
it, whether to a fund or via a separately managed account.
Either way, the company needs to establish a clear view
of its risk appetite in regard to strategic cash, and any
investments should be consistent with that view.

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13

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GTNEWS GUIDE: Investing Strategic Cash

About the Author

WWCP Limited
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Publications also include a number of definitive WWCP
authored treasury guides: Best Practice and Terminology;
with The ACT, Investing Cash Globally (four editions),
International Cash Management and Trade Finance; and, with
AFP, Treasury Technology and a series of treasury guides.
www.worldwidecountryprofiles.com
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About AFP
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