Cash and treasury management - time to review your strategy?

Interest rates

The low interest rate environment that we’ve been seeing in the UK, US and Eurozone since 2009 is now in the past due to increasing inflation over the past year. We discussed how we got to this position in our ‘What does high inflation mean for your investments?’ insight which can be found here.

Although interest rate hikes by central banks are intended to control inflation, they typically come with a delay of up to 12 months in terms of their impact. Lessons learned from the outcome of a largely reactive approach in the 1970’s high inflation era will be at the forefront of decision makers’ mind. As will the importance of having flexibility in relation to monetary policy as we navigate a challenging economic climate in months to come. While we may start to see signs of reducing inflation in many economies in early 2023, reductions in interest rates are likely to be slower. A swift return to the near-zero rates most developed economies have become accustomed to over the last 15 years isn't expected.

The returns that may be available through different instruments used as part of the cash management strategy, whether it be cash funds, government and corporate bonds, or various deposit accounts, react differently and on different timescales to base rate changes. In an ever changing environment, it’s important to consider an approach that can take advantage of this.

Counterparty risk

When deciding how to manage your charity’s cash reserves, it's important to think about how comfortable you're with the risks associated with the institutions you’re using. Assessing this risk is no easy task. Factors such as credit ratings, capital reserves, market pricing of default risk, and available protection schemes can all be areas of concern. This is pertinent even where you're holding cash deposits rather than a mixed strategy which incorporates other low risk, ‘cash-like’ solutions.

Credit Suisse is a recent example of how the assumed risk of a bank can change rapidly (see chart below). How the market perceives the risk of default can be assessed by looking at the pricing of Credit Default Swaps (CDS). A CDS is a contract that allows an investor to offset the risk of a borrower defaulting over a certain period. The fees or ‘spread’ an investor pays for the protection is expressed in basis points (bps) i.e. the percentage of the nominal amount. A typical expectation for an institution with a low risk of default might be a spread of less than 200bps for a five year CDS. These are just one of the measures that we consider when assessing risk for cash deposits.

Charities often ask for professional help with their cash reserves because of changes in interest rates rather than because of changes in risk factors. This can be partly attributed to the latter being harder to measure and arguably less newsworthy. However, these risks can be even more important during tough economic times and with increasing regulation and expectations, shouldn't be ignored.

Cash and treasury policies

In times of change, it’s important to review your policy on holding liquid assets. Certain areas are always going to be more important for particular charities, whether it’s project funding, deposit protection, or foreign exchange management. It’s important to develop strategies that consider short, medium, and long-term liquidity needs alongside counterparty risk and obtaining competitive rates of return.

This may range from one-off advice on suitable deposit accounts to ensuring up-to-date and appropriate treasury policies and creating a diverse cash and bond portfolio with varied return sources and maturities to mitigate counterparty risks and match future liabilities.

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Our Investment Consultancy team at Buzzacott advise not for profits, companies, trusts, and families. As well as advising on investments, we can help develop robust cash management and treasury policies. If you would like to speak to one of our specialists, please contact Seth Dowley or Matt Hodge. Alternatively, fill out the form below and we will be in touch shortly.