Cash & Liquidity ManagementCash ManagementPracticeInvestment Management in a Captive Corporate Environment

Investment Management in a Captive Corporate Environment

The 2008 global financial crisis and its aftermath caused many challenges for corporate treasurers; their company being cash-rich is the latest one. For decades, a corporate’s challenge was to find a decent yield, given its constraints. These days however – in certain countries and currencies – the challenge is to avoid negative interest rates, implying that active investment management is required in order to reach the goal of preservation of capital.

Currently, there are multiple European currencies which have negative yields, implying a cost of carry for holding cash. The most prominent example is the Swiss franc (CHF), where the national bank desperately tries to fight a further appreciation of its currency by introducing negative interest rates. Other currencies, such as the Swedish krona (SEK), the Danish krone (DKK) and even the euro also have (close to) negative yields, at least for the short end of the curve.

Given these extraordinary circumstances, corporates are forced to revisit their cash and investment management policies and practices. The following provides a guide to how a corporate can transform its investment management by providing a best-practice framework for investment management.

Investment management is a process and can be approached in three steps:

Step 1: Planning

The starting point is to define the objectives of a corporate’s investment management strategy, in particular with regards to risk and return.

The goal of the risk objective is to identify a risk tolerance, which is dependent on the ability as well as the willingness to take risk. While the willingness is a preference – and typically low within corporates – the ability to take risk is dependent on a corporate’s constraints.

There are two angles to define the return objective. On the one hand, a return can be required. While corporates should not be dependent on any investment income to finance its working capital and other operational needs, it can be an important component when relating it to longer-term liabilities such as pension plans. On the other hand there might be a desired return, which is a matter of preference rather than need.

It is common economic sense that there is a trade-off between risk and return, however, the current low-yield environment has dramatically impeded the practical application. Often it is still management’s expectation that some yield can be generated on excess cash, while an adjustment of the risk tolerance is typically not considered. This dilemma has often put treasurers in a relatively difficult situation, requiring internal education and resolution. Therefore, one of the biggest challenges in coping with negative interest rates is the change management of the stakeholder’s mind-set within the organisation.

Once the objectives have been set it is important to identify the factors constraining a corporate’s investment management. While these are multi-faceted and company-specific, the most important constraint in a corporate environment is typically its liquidity needs. Ensuring solvency at all times is one of the prime tasks of financial risk management, implying that investments must be put in context of a corporate’s liquidity needs.

Many companies rely solely on short-term investments such as money market deposits, despite the fact that immediate liquidity needs are only a portion of the total cash balances. A commonly applied resolution used by corporates is to segment corporate cash. Operating cash is needed to allow for sufficient working capital and should therefore be invested in highly-liquid assets, with no or only minimal market risk. Medium-term cash can be seen as investable cash focusing on incremental return. Strategic cash has the character of reserves supporting the longer-term strategic objectives of the company, where the risk-return relationship must be seen in a long-term, multi-year time horizon.

Subsequently, a suitable asset allocation can be created. All components should be formalised in an investment management policy, a document that governs investment decision making, taking into account objectives and constraints. This policy should also be an integral part of the treasury policy and changes should be approved by senior management.

Step 2: Implementation

The next step is to translate the planning into an execution strategy. As described above, segmentation of the cash is of particular importance and not always easy to implement in practice. It is also important to note that segmenting cash relies on robust, reliable and precise cash planning. Consequently, appropriate cash flow forecasting is a necessary pre-condition for effective investment management, linking investment management to regular treasury operations.

Furthermore, the composition and selection of investment products must be carried out, resulting in a portfolio of assets matching the objectives and constraints. Many corporates have decided to manage this process in-house for short-term money, while outsourcing the management of strategic cash to specialised investment managers as the selection, management and rebalancing of portfolios becomes more complex.

Step 3: Feedback

Investment management is a dynamic process. The environment is ever- changing – as has been very evident in recent months – requiring the implementation of real-time monitoring and evaluation steps. Best practice is to periodically review the progress made to achieve the investment objectives. Not to be missed in the periodic review should be the measurement of the performance (i.e. the calculation of the portfolio’s return), performance attribution (i.e. the sources of the portfolio performance) as well as the appraisal of the performance (i.e. how well the portfolio manager performed versus a pre-defined benchmark).

Ideally, this feedback step should be part of a monthly routine and can be integrated in the regular treasury reporting of a corporate. Furthermore, an internal investment committee should periodically evaluate whether the fundamental objectives and constraints as defined in the planning step are still valid and, if required, should initiate a review.


The above has outlined a three-step framework on how a corporate can approach its investment management transformation. It has shown that investment management cannot be seen in isolation as the need to segment corporate cash and to accurately forecast the cash has direct implications on a corporate treasury daily operations, concluding that robust treasury operations is an important enabler of effective investment management.

Therefore, in an attempt to redefine its investment management approach, treasurers should also utilise this momentum to bring their treasury operations to the next level. However, the biggest hurdle in changing and managing this transformation is to change a corporate’s mind-set and to prepare the organisation for the new reality of negative interest rates.

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