Shaping Investment Policies for a Safer Cash Portfolio

2 min read

Abstract

We set out to answer 10 of the most common questions related to writing investment policy statements (“IPS”) for cash portfolios. In doing so, we will provide a number of peer group data comparisons to add insight into the process.
The treasury investment management landscape has undergone significant changes. We found that investors tended to shorten their maximum maturities, increase ratings requirements, reduce issuer-based concentration, and dial back the use of asset-backed securities. These changes represent a trend to upgrade portfolio credit characteristics, which is consistent with investor behaviors in the wake of major market downturns, in our opinion.
The 10 questions we address related to drafting investment policy statements focus on the following investment subjects:

  1. Maximum liquidity limits
  2. Minimum credit ratings
  3. Concentration limits
  4. Percentage of portfolio in overnight liquidity
  5. Benchmark selection
  6. Appropriateness of ABS and MBS in cash portfolios
  7. Prohibited transactions
  8. Addressing conflicts of interest
  9. Monitoring portfolio performance
  10. Resolving out-of-compliance items

Revision Notes

Since we last updated this paper in 2009, the treasury investment management landscape has undergone significant changes that require a fresh look at how corporate investors construct their investment policy statements. The general guidelines contained in the Appendix still serve as a quick reference guide for key components in an IPS. This revision also offers a side-by-side view of the preferences of Capital Advisors Group’s client universe in 2012 versus 2009, which helps to illustrate the changes that have occurred since the financial crisis.
In general, we found that investors have shortened their maximum maturities, increased ratings requirements, reduced issuer-based concentrations, and dialed back the use of asset-backed securities as permissible investments. All of these changes represent a trend to upgrade portfolio credit characteristics, which is consistent with investor behavior in the wake of major market downturns, in our opinion. We hope this update provides additional helpful insight for institutional investors in their own IPS construction or revision efforts.
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Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

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