Is Your Cash Investment Policy Up to Date?

If you are among the 20 percent of institutional cash managers who don’t have a formal investment policy statement, it may be time to draft one. And if you do have one, December is a good time to dust it off and update it for the coming year.

According to the 2019 AFP Liquidity Survey, approximately one in five institutional cash managers operates without a written investment policy. It’s easy enough to understand the lapse. Developing an effective investment policy requires a difficult and delicate balancing act. Your policy must enable the daily liquidity your organization requires, but it must also provide room for expected investment returns. At the same time, it must establish clear risk-management guardrails to ensure capital preservation.

Our December research report, Shaping Investment Policies for a Safer Cash Portfolio, provides a 360-degree perspective on writing and maintaining an effective cash investment policy. If you need to develop one from scratch, it provides the background you need to get started. If you already have an investment policy statement that may be slipping out of date, the report can help you ask the right questions and point you toward the answers you may need.

For instance, what is an appropriate maximum maturity limit for your cash investments? Revisions to the limit with each fluctuation in interest rates are impractical. They can require time-consuming board meetings and audit committee debates. So, it may be better to have your organization define its maximum risk tolerance at the outset and allow investment managers to make tactical decisions within that tolerance.

And what is an appropriate minimum credit rating? Investment returns are challenged by the low interest rate environment. And with ratings by the agencies seemingly on a systematic downward drift, BBB debt is becoming a more attractive option for cash investors looking for high-quality names and a significant return advantage over government securities. Should your investment policy allow room for high-quality investments that are not A-rated?

Those are only a few of the many questions organizations need to answer as they set prudent investment policies. Our report aims to help you answer them while also providing useful comparative data from your peers. For instance, more than 70 percent of Capital Advisors Group clients maintain a 24-month maximum maturity limit in their policies.

A good investment policy statement doesn’t just help protect you from potential liabilities. It also helps you manage your cash portfolio more effectively. With today’s cash management landscape constantly evolving, it’s not just good practice to review and update your policy once a year. It’s becoming a necessity. And if you haven’t drafted your investment policy statement yet, completing one is a New Year’s resolution you should keep.

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Best Regards,

Ben Campbell
CEO