Where to Stash Your Cash

Back before the financial world imploded in fall 2008, mid-size companies were getting handsome yields from a range of cash investments, including commercial paper, asset-backed securities, hedge funds, mutual funds.

But with the folding of investment bank Lehman Brothers and the mayhem in the financial markets that ensued, such vehicles became highly unreliable. Many companies quickly reordered their cash strategy, hastily retreating to safer havens such as bank deposits.

Now as financial markets and the economy in general begin to recover, corporate finance executives are reviewing the investment landscape once again.

If you are among those companies lucky enough to have cash to park somewhere, what are your best options?

The answer is, it depends. The old options remain, but some are less stable, though potentially higher yielding, than they once were. Others provide security, but good luck earning much on the principal. Until the Federal Reserve raises rates and the economy and financial markets return to their more robust form, CFOs are curbing their appetite for risk, aiming for safety over liquidity, and sitting tight in less exciting options with shorter-term maturity rates.

Still in the Safety Zone
Jim Metzger is one CFO who doesn’t worry much about cash flow. TM Forum, the $50 million telecom marketing association where he’s CFO, has a full year’s worth of overhead on hand. Before the downturn, the organization was big on stashing cash in auction rate securities. “We were thinking they were safer. None of it was real estate,” Metzger recalls.

These days, TM Forum has about half its cash in more conservative Treasuries and CDs, where it will stay at least a couple of years. “A lot of our cash is reserve funds, so I don’t need access to it,” Metzger says. The rest is in a mix of more liquid options, from bank deposits to short-term commercial paper or shorter-term CDs. “I’m still of the opinion that some banks are too big to fail, so the counterparty risk is low to us,” he says.

But in the current landscape of corporate investing, TM Forum is almost a radical. Other companies are still playing it safer, according to the Association for Financial Professionals, a trade group for corporate finance executives at companies of all sizes. In a study conducted in May 2010, AFP found that on average, 74 percent of its member companies are investing cash in more conservative vehicles such as bank deposits, money market funds and Treasury securities.

“There’s a real emphasis on safety versus liquidity,” says Tom Hunt, AFP’s director of treasury services. “A lot of companies are saying, ‘I can make 15 basis points, but I’d rather have my money now.’”

In the same survey, AFP found that 42 percent of its members’ short-term investments are parked in bank deposits, up from 25 percent two years ago when the economy was only beginning to chug toward a halt.

The trend isn’t moving toward riskier vehicles any time soon. By May 2010, more companies were stocking up on cash than even six months earlier, according to the group.

The conservative trend is reflected in the attitudes of financial professionals, only three in 10 of whom expect to increase short-term cash and investment balances in the next year.

Josh Turner, principal at Gateway CFO Solutions, a financial services outsourcer with mid-size clients in a range of industries, says CFOs and treasury professionals are starting to figure out what they can do. “They’re not as shell-shocked as they were,” Turner says.

There are some slight bright spots. Excluding bank deposits, AFP members reported using an average of 2.4 investment vehicles this year, up from 1.6 in 2009, though not quite to the pre-recession high of 2.9 in 2006 when the economy and financial markets were extremely robust. Furthermore, the number of members who said "safety of principal" was their top concern dipped slightly, to 75 percent in 2010, from 83 percent last year, when hoarding and securing cash was paramount.

Of course, not all companies are lucky enough to have extra cash on hand to invest. Jayne Williams, the CFO at KPost Company, a mid-market construction company in Dallas, Texas with more than $500 million in contracts, would love to be able to think about Treasuries versus auction rate securities, yield versus safety. “Cash is king around here,” she says. “But all our cash goes back into the company” as the seven-year-old business continues to grow.

Still other companies are eying the lower price tags on businesses for sale and applying their cash to mergers and acquisitions, instead of investments.

Safe, Secure, and Yielding
If your company has even a partial treasure trove of cash, here’s a guide to where you might stash it right now, from the safest to the most liquid and higher yielding:

Bank deposits – Yes, banks close, as hundreds seized by the FDIC in the first six months of 2010 proved. But bank deposits are protected and insured, making them the most reliable place available to stash money right now – other than putting it under the CFO’s mattress – even if they’re not likely to earn more than 1 percent interest. This option isn’t about making money, and that’s why CFOs like it.

CDs – Companies and their advisers like timed deposits and CDARS right now because of their slightly higher return - about double what bank deposits offer, not that that’s saying much. CDs keep money tied up for a set amount of time, but many companies are focused on shorter periods of time, such as six months or a year.

Treasury bills - Treasuries are extraordinarily safe and protected against deflation, which some economists have begun to hint at, giving them a significant spot in companies’ investment mix. But Treasury yields are uninspiring, especially any with terms under five years, when they only begin to creep over 1 percent interest. Treasury bonds, on the other hand, are nearly three times higher, though that rate has been falling.

Corporate bonds - Turner, the Gateway executive, recommends corporate bonds, but only if you’re prepared to sit on them for at least a few years. If you’re aiming for liquidity and any sort of return at all, these won’t serve you. “The way things are now, if you can’t hold it to maturity, I wouldn’t recommend it,” says Turner.

Money market mutual funds - Once a safe haven for the largest corporations down to the smallest individual investor because they diversified risk, mutual funds fell out of favor when values plunged along with the overall market. These funds are coming back in favor with mid-size company CFOs because they’re short term and invested in large, creditworthy banks and corporations. However, they’re not known for their yields.

Commercial paper - TM Forum’s Metzger puts a portion of his cash in commercial paper because of its high liquidity aspect, even if the spread is lower than before the downturn.

So what’s next? Metzger, who sits on AFP’s corporate treasurers’ council, sees a shift on the horizon based on what he’s heard from fellow council members: An optimism that conditions may be improving. “Most people are beginning to chase yield,” he says. It’s a recent development, he adds, “because there just wasn’t yield to chase.”