Cash & Liquidity ManagementInvestment & FundingQ&A: Maintaining liquidity under uncertainty

Q&A: Maintaining liquidity under uncertainty

Tony Callcott, global head of liquidity client solutions at Aviva Investors discusses how treasury departments can get the most out of their cash while also maintaining liquidity

Liquidity and cash management have always been a critical component of a treasurer’s responsibilities. However, as uncertainty continues to influence the global economic outlook, the treasury function will need to watch both their cash at hand, while also finding appropriate products to invest excess funds into.

The Global Treasurer spoke with Tony Callcott, global head of liquidity client solutions at Aviva Investors, to get his thoughts on the key takeaways from the past 18 months, what to expect for the next 12 and what asset managers can do to help their corporate clients.

Cashflow forecasting and liquidity remain a priority, what does that mean for investment strategies? 

Liquidity and easy access to cash will always be a priority for corporate treasury departments alongside security of capital. Yield, whilst usually the third most important is becoming equal to that of liquidity and security of capital whilst we operate in a lower for longer yield environment.  Whilst there is a want to achieve attractive yields it would not however be at the expense of diluting the credit worthiness of a portfolio.

Strategically though we do see many clients looking to be more pro-active with how their cash pools work.  Looking at the reserve and strategic buckets of their allocations, for example, to try and make those buckets work harder and generate yield.  Ultra-short duration funds or even short duration bond funds now being analysed more and more by treasurers and included in the overall strategies of a treasury centre.

Many corporates drew on credit lines and revolvers last year, what have they done with that excess cash? 

Cash was accrued during the pandemic to meet payroll and maintain BAU as best as could be achieved by many clients as we traded through the pandemic.  Depending on the business type of the client, this would dictate how much cash needed to be raised during this time.  As we move into recovery, but also aware the pandemic is not yet over, we are seeing much of that excess liquidity that was raised during 2020 is now being put to work, be that on cap Ex projects (rebranding, updating office space, reducing/increasing office space, tech investments as we move to remote environments), M&A (opportunities in the markets for companies to scale up. Some companies have been successful throughout the pandemic and now have a chance to gain advantage on their peers through acquisitions), paying down debt (refinancing to remain debt free post-coronavirus).

Some companies acquired a lot of debt to finance themselves through the tough times. Coming through this with a clearer horizon and market confidence, companies will begin to pay down some of the debt that they originally took on, or also investing in longer dated securities. There’s increased investment appetite into longer dates assets such as real estate. These will pave the way for higher returns/ yields as the markets becomes less stressed.

Tech has been utilised to give faster/more real-time visibility, how does this affect the efficient use of capital? 

We know that technology has been a key enabler during the crisis, allowing treasurers to provide a continuous and seamless service for their organisation. Visibility and transparency are key, which with the right technology in place can be delivered. Efficient cloud connectivity, straight through processing, automated payments, electronic execution venues, real time and transparent reporting, embedded cash forecasting tools, all necessary and all achieved through technology. This allows treasurers to have a precise understanding of risk and counterparty exposures of their investments, create visible and dynamic audit trails and provide real time views on liquidity requirements be they for operational needs, capital repayments or acquisition payments.

That said, capital can be deployed much more efficiently now with the right technology in place. In turn cash no longer is simply parked, it can be put to work to optimise returns covering operational, strategic and reserve deployments.

How can asset managers help treasurers with liquidity? Should they be more aware of treasurers’ liquidity needs? 

Absolutely. It’s not enough to simply deliver what we think a treasurer needs. As an asset manager within the liquidity space, it is imperative that counterparts within liquidity funds are deemed partners in business. Consistent dialogue is required to fully understand their needs. This is not limited to the types of pooled vehicles that are within one’s range but also to reporting and transparency requirements, prompt payments and servicing that our clients require. The client experience and journey with a fund provider is and should be at the core of an asset managers strategy. After all, who are we without our clients and partners in business.

Interest rates are expected to remain low for at least another year, while inflation is “transitorily high” what impact does this have on liquidity management?

Inflation is not good for cash. Keeping cash on bank account is the least attractive opportunity in such an environment as immobilised cash can’t keep up with inflation. As you said, central banks are not in a rush to raise rates (in particular the ECB and the Fed). In this environment, money market funds offer a much better option than bank accounts. They can limit the inflation damage by:

1) favouring floaters over fixed therefore limiting WAM

2) reinvesting maturing assets into higher yielding assets as inflation is priced in.

Another alternative for liquidity management is that of short duration solutions. As inflation is priced in the curve, long dated assets steepen relative to short dated assets so short duration solutions can capture that steepness and harvest the yield for longer. This is also the best spot for traditional fixed income investors who are looking to shorten duration to protect their allocation against rising inflation.  Though this type of liquidity management would be more appropriate for the reserve and strategic elements of cash pools investments.

There still a lot of uncertainty over the recovery, how much is this impacting risk?  

We see the global economy in a mid-cycle expansion, following peaks in Quantitative Easing and fiscal support. We think global growth will moderate to a still above-trend pace in 2022. We see inflation as transitory as driven by short term dynamics (booming commodity prices, supply bottlenecks).  In the early parts of the cycle, the economy booms and markets follow (equities, credit, real assets). Mid cycle is a different game, significant differentiation (at sector and security levels) needs to be made.

In the short / medium term monetary policy is still loose globally (Central banks learned from their previous mistakes of tightening too early) but as we look forward there is a potential impact of longer-term disruptions. Trends toward sustainability, greener economy and social justice for example.

Key take away here are portfolios need to:

  • Build solid portfolios by relying on fundamental analysis as opposed to hunting for yield and protecting against a rising inflation risk
  • Where appropriate, expand the investable universe to short duration portfolios to benefit from a much more diverse universe and higher potential yield.
  • Integrate ESG in selecting assets to protect against rising climate/social transition risks.

What are the lessons learnt that treasurers should continue to remember from the past 18 months? 

It remains a challenging environment and treasurers are talking appropriate measures to optimise working capital more than before. Preparedness, planning and being more operationally ready are the main priorities.  Implementing frequent system and operational updates, identifying areas of focus alongside ensuring an organisation’s liquidity and smooth cash flow is paramount.

No doubt liquidity has been the most important consideration these last 18 months. As a consequence, the importance of cash forecasting has also been highlighted. Increasing the frequency of forecasting, analysis and commentary needs be scrutinised in much greater detail.  In order to meet all these requirements having the right technology to cope with a major disruption is critical.

Another lesson perhaps is around mindset. Focus on the outcomes not the causes of these outcomes and identifying what appropriate responses need be implemented to maintain BAU.

To find out more about Aviva Investors’ liquidity solutions click here 


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