You may also be interested in:


AFP Executive Forum: How Investments Are Changing

  • By Andrew Deichler
  • Published: 5/22/2017

NEW YORK – Geopolitical uncertainty all over the world has called into question many of the assumptions traditionally used to make investment decisions. During a special panel session at the AFP Executive Forum, treasury and finance executives received insights on short-term and long-term investment strategies in this volatile market.

Panelist Jerome Schneider, managing director, head of short-term portfolio management for PIMCO, told AFP that the key to investing in today’s environment is maintaining optionality in your investment allocations. “Investing, for corporate cash management, is generally slower,” he said. “They have a fixed set of agendas and investment parameters that are very slow to modify. Unfortunately, we are in a world that is constantly changing and evolving at a much rapid pace. That requires reaction functions that are more dynamic.”

Schneider believes that while traditional cash management tools like money market funds will continue to be part of that construct, they won’t be the only part. “You have to have tools that will allow you to manage interest rate risk, currency risk, geopolitical risk, and be balanced,” he said. “So what we’ve been doing over the past few years—really decades—is focusing on how to weigh those risks facing those corporate executives today.”

Treasury and finance executives need to determine their priority, he stressed. Is it liquidity management? Capital preservation? Income? Volatility management? Executives need to tailor their investment allocations to those priorities.   

Additionally, we are in a rising interest rate environment. As noted in AFP’s latest Treasury in Practice guide, financial professionals haven’t had to think about rising rates in nearly a decade. “That means old methods need to come back into play—but the game has changed,” Schneider said. “We have to think about how to management that process a little more fluidly now. Simply put—money market funds are one avenue to mitigate higher risks. But yet, this cycle of higher rates is not going to be profitable if you remain in money market funds, unlike previously. The money market fund yields will not increase at the same rate benchmark rates would have.”

Therefore, a key challenge for finance executives going forward will be finding solutions that not only have a proper risk/reward, but also proper income and compensation in a rising rate environment. “There’s a lot of food on the table to digest here, and that’s a question we need to answer,” Schneider said.

One of the key points made in the AFP guide was that treasury departments who have been preparing for this type of rate environment are likely better off than the ones who haven’t been thinking about it at all at this point. Some organizations who began preparing for this five years ago when it looked like rates were poised to rise and have kept it a priority ever since. But for most organizations, it is only now that interest rate hedging has risen to the top of the list.

“That discussion has become more deliberate, more poignant, and is definitely reaching a conclusion that is more central,” Schneider said. “I think that’s the philosophical discussion that’s being had now. Quite honestly, it’s not easy to form a clear set of objective outcomes. They can’t just say, ‘There are rising rates; we need to find ways to defend against them or embrace them.’ It doesn’t always work that way, and we spend a lot of time with clients trying to weigh those different values like liquidity, capital preservation and income, and try to devise solutions that help to optimize those goals.”

Schneider added that corporates also need to understand that this is an evolutionary process that won’t be resolved overnight. “It’s not a one-and-done deal; it’s something that requires consistent handling over the next few years—multiple discussions through the changing environment,” he said.

Optimize your cash flow.

Our treasury management and payment services can help you manage cash flow, control risk and become more efficient. Member FDIC.

Let’s get started.

Copyright © 2021 Association for Financial Professionals, Inc.
All rights reserved.