Do you know what your company does with its cash?
What we're talking about here is short-term cash management. We're not talking about putting money away for six months. We're talking about money that's put away overnight.'
Marc Doman, managing director of Aim Global Advisors in London, is on a mission – and it's something of an uphill struggle. He is trying to persuade UK corporates that instead of putting short-term cash into high street banks it makes sense to farm it out to money market funds, preferably the sort run by Doman and colleagues. The sales patter is slick, the logic almost impeccable; but something doesn't quite add up.
Doman points out that money market funds have been all the rage in the US for years. Now he wants to help export the idea. He argues that if you've got corporate cash you need to put somewhere overnight, you're looking for security, liquidity and yield – probably in that order. With a historically fragmented banking system in the States, made up of many small to medium-size local banks, there has been a higher than acceptable level of risk in leaving corporate cash in the bank overnight. Couple that with relatively low returns, sometimes capped by regulations, and you've got some seriously unhappy corporate treasurers.
Enter money market funds – a couple of decades ago, that was. These institutionally-managed funds offer an alternative to bank deposits for short-term cash. 'It's an option that doesn't rely on bank balance sheet risk, that is an unsecured creditor, and therefore offers a high degree of security.' Doman says that Aim's money market funds (along, it should be added, with those of its competitors) have been assigned triple-A status by Moody's and Standard & Poor's. 'It's a very low-risk alternative for short-term cash – it provides triple-A for security, daily liquidity and a competitive yield.'
So what?
The trouble is that many UK corporates just aren't bothered by all the blather. For a couple of basis points difference and little existing risk, why should they be concerned with switching cash out of long-established relationships with their high street banks? In any case, Europe's banking history runs along strikingly different lines to that of the US. Europe is better known for a few nationally-oriented, large banks in each market. In fact, the US banking industry is only just getting to this stage. Most leading European banks are a very different proposition to the small, regional banks of the past in the US. As one UK-based treasurer puts it, 'It's not as if Barclays or NatWest is likely to go under. No-one's going to let that happen.'
Not surprisingly, Doman takes a slightly different tack on this argument. He agrees that the likelihood of a major UK high street bank going under is probably minimal. But then again, he argues, many people in the City thought the very same thing about Barings before Nick Leeson had his day. And today many companies are actually running out of highly-rated options for placing their money. With most corporate treasurers constrained by strict board guidelines on balancing the level of risk and diversity of corporate cash holding, a new and highly-rated option should be seen as some welcome relief.
'Cash oils everything,' adds Doman. 'It's the thing that makes companies work. I'm saying don't ignore cash, don't just sling it out to the bank, think hard about it.' Cash management, he argues, is just as important for shareholder value as any other corporate function.
'Corporate funding is increasingly moving away from bank balance sheets and capital markets are becoming wider and deeper. More European companies are raising cash by by-passing the banks because they want cheaper funding. As corporates are issuing more commercial paper, the people buying it are money market funds.'
Big fish, small pond
Aim is currently one of the leading protagonists of money market funds in the UK, although others are starting to make noises too. As one corporate treasurer puts it, 'They're selling the story fairly aggressively.' But it's a hard slog to a skeptical audience. Get this: Doman reckons his UK team is averaging somewhere between $1.2-1.4 bn under management. Compare that to the average of $1.4 trillion sloshing around in money market funds in the US and it really is small fry.
Aside from the different banking structure in the UK, money market funds face other problems at each end of the corporate spectrum. The big corporates have their own in-house treasury operations which can do the job just as effectively; the smaller ones don't have the same large levels of cash or are too interested in cementing current banking relationships to worry about tiny potential increases in rates of return.
One treasurer at a leading FTSE 100 company says that his company can outperform most money market funds with in-house operations. 'They are offering good, diversified credit for temporary cash. But beware of the charges – they are probably equal to the extra return we can achieve in-house.'
Justin Read, corporate treasurer and in charge of IR at Hanson, also notes that the money market funds option simply mirrors a lot of the skills Hanson already possesses. 'We have quite a significant amount of cash to manage and a corporate treasurer has to decide whether to farm that out or do it in-house.' On a positive note, he adds that at least the objective of money market funds is to get the best yield, whereas banks may have other ideas about where their interests lie.
'We've not tended to use money market funds,' says David Tilston, finance director at small-cap chemical company Victrex, adding that the choice for smaller companies will tend to rely on how they want to manage their banking relationships. 'It may be marginally more inefficient but the odd fraction of a percent is less important than keeping a relationship with a good foundation.'
Fair enough
Doman retorts that it's up to each company to choose its own approach – and, indeed, the large and small arguments have their merits. 'I'm just saying this is an alternative. For large-caps we're another alternative to bank deposits; and smaller companies probably have the finance director doubling up as treasurer with thousands of things to do.' He then selflessly offers to help these struggling finance directors with their cash management workload.
Perhaps Carolyn Bradley, technical officer at the UK's Association of Corporate Treasurers, can throw some objective light on the situation. Bradley, a former treasurer and investor relations officer at Anglian Water, believes that there certainly is a market for money market funds in the UK – it just might take some time to develop. 'It's getting difficult to find anywhere to put money with highly-rated institutions,' she says, noting that board directives often dictate that cash is only placed with counterparties of a certain credit rating. 'After the Barings collapse the ratings issue came much more to the fore,' she adds, while at the same time bank ratings have been dropping. 'There's a conflict between [sourcing high] ratings and the distribution of money across a number of counterparties.'
Bradley's main concern with money market funds is their choice of benchmark. It's a problem for cash management across the board. If you choose a monthly benchmark, she says, you will find that whoever manages your cash just beats the target, raising the first question of what benchmark to choose. Aim Global chooses to benchmark against overnight rates which, Bradley says, 'can be all over the place. I personally would find that unattractive – it's not a benchmark I'd use in cash management.'