Reengaging Return
As 2009 draws to a close, many of us in the corporate treasury world will likely feel this is an easy year to leave in our rear view mirror. With the lingering effects of the credit crisis and ensuing recession paralyzing many treasurers, flight to quality trades swamped the market and drove 30-day Treasury yields to a mere 3 basis points. However, some may now be feeling a tinge of optimism as we look forward to a new year. With positive GDP growth emerging, several government support programs expiring uneventfully, and leading economic indicators surging, one may justifiably begin to consider a yield environment outside of 3 basis points. With this in mind, how might one begin to seek more return when safety of principal is the top objective?
To address this question, it’s important to understand the benefits that can have by both separately managed cash investment accounts and pooled products such as money market funds. Separate accounts allow precise credit control where one can be very selective on credit and duration exposures, allowing a step up in return by targeting specific industrial and systemically important financial credits. In our view, in the current environment, many of these select credits are consistent with capital preservation while providing yield opportunities above and beyond U.S. Treasuries.
Evaluating risk/return in pooled products such as money funds is a bit more complicated due to the existence of additional factors such as fellow shareholders, shared liquidity and limited transparency. In addition, depending on the size of the funds, concentration levels may require 130-150 credits to be managed within the portfolio. Furthermore, money funds may participate in structured products to a greater degree than an individual investor on his own would. Needless to say, tracking these exposures is crucial.
Given these factors, the credit oversight and monitoring of pooled products is certainly more complex than selecting single credits. However, we still expect the flight to quality we saw in September of 2008 to gradually reverse as return opportunities are carefully reengaged. For this reason, in this month’s Research Spotlight, we’re exploring where, in this improving economy and credit environment, one may consider exploring select exposures to financials, industrials and certain prime funds.
Best Regards,
Ben Campbell
President & CEO
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