7 Essential Investment Considerations for Short-Term Cash

  • By Zachary Green
  • Published: 6/22/2023
Financial charts

With institutional money market yields now greater than 5% in several instances, corporate cash managers may need to reassess their short-term investment strategies. Our current yield environment is significantly higher than the prevailing rates observed in recent years. Indeed historically, short-end rates have never climbed so far so fast.

Here are some considerations for corporate cash managers to be mindful of given this scenario:

1. Opportunity for higher returns

A money market yield of over 5% presents an opportunity to generate more substantial returns on short-term investments than we’ve seen since money market funds last experienced these levels roughly 16 years ago. Corporate cash managers could potentially allocate a larger portion of their cash reserves to money market instruments and other short-term investments to take advantage of the higher yields.

2. Risk assessment

While a yield of over 5% is attractive on a relative and historical basis, corporate cash managers must carefully assess the associated risks as higher yields often correspond to increased risk, such as credit risk or market volatility. Evaluating the creditworthiness of the underlying securities, analyzing the stability of the issuer and considering the market conditions that are driving such yields are crucial steps in managing risk.

3. Diversification

Even in a higher yield environment, diversification among both investments AND counterparties remains important. Corporate cash managers should diversify their short-term investments across various money market instruments, such as Treasury bills, commercial paper, certificates of deposit (CDs), and of course, the money market funds themselves. Diversification of both helps to spread risk and reduce exposure to any single issuer, instrument or counterparty.

4. Liquidity needs

While higher yields may no doubt be appealing, corporate cash managers must ensure that their investments maintain an appropriate level of liquidity to meet the organization's short-term cash needs. Careful consideration should be given to the maturity profiles of the investments and the ability to access funds when required. This is often one of the key value propositions that money market funds offer.

5. Investment policy review

At times this piece tends to be overlooked. Given the significant change in market conditions, corporate cash managers should review and update their investment policies to reflect the new yield environment. Most won’t. The policy should outline the permissible investments, maximum percentages of exposure to funds and counterparties, risk parameters, liquidity requirements and reporting mechanisms that align with the organization's objectives and risk appetite.

6. Risk management

Corporate cash managers should implement robust risk management practices to monitor and mitigate the risks associated with the now higher-yielding investments. Regular monitoring, stress testing and scenario analysis can help assess the impact of adverse events on the portfolio and ensure risk exposures remain within acceptable limits.

7. Active management and monitoring

In a higher yield environment, it becomes even more critical for corporate cash managers to actively manage and monitor their short-term investments. Staying informed about market conditions, economic indicators and credit ratings is essential for making informed investment decisions and adjusting the investment strategy as needed.

In conclusion, corporate cash managers should regularly reassess their investment strategies based on prevailing market conditions, changing regulatory requirements, and the organization's specific needs and risk tolerance. Consulting with institutional financial professionals and considering individual circumstances is crucial in making well-informed short-term investment decisions.

About the Author

Zachary Green is an industry veteran with over 20 years of experience helming global businesses for marquee asset management firms. A tested leader with deep international experience, demonstrated strategic, analytic, human capital leadership, and motivational skills, he's restructured, expanded and launched new businesses in markets spanning North, Central and South America, Asia Pacific and Europe.

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