Treasury Management: Investment Management

Investment Management

• Surplus funds not needed for operating purposes or compensating bank balances are available for investment.
• Prudent use of these funds can add to income, but the treasurer must consider a range of investment criteria, types of investments, and investment strategies.

Investment Criteria

• Investment criteria are the defined set of parameters used to assess an acquisition target.
• Safety of the principal being invested is the first consideration.
• Other criteria include:
• Management Team: look for teams with great entrepreneurial potential.
• Market Opportunity: demonstrate a strategy to claim significant market share or revenue.
• Use of Proceeds: funds must be used to accelerate company's achievement of key milestones.
• Growth Potential: demonstrate a plan to generate significant profits.
• Competitive Advantage: must have some proprietary features that distinguish you from potential competitors.
• Strategic Fit: significant executive experience in a variety of fields.
• Technology: invest in first-of-a-kind new ideas.
• Exit Strategy: a clearly articulated exit strategy is essential.

Investment Options

• Common investment options with low risk levels, short maturity dates, and high levels of marketability:
• Bankers' acceptances
• Bonds near maturity dates
• Certificate of deposit (CD)
• Commercial paper
• Money market fund
• Repurchase Agreement
• U.S. Treasury issuances

Investment Strategies

• The treasurer should develop a standard methodology for investing funds.
• Strategies range from passive to active and require continuing decision making.
• Common investment strategies:
• Earning Credit Strategy: use earnings from idle balances to offset service fees.
• Matching Strategy: match the maturity date of an investment to the cash flow availability dates.
• Laddering Strategy: create a set of investments with a series of consecutive maturity dates.
• Tranched Cash Flow Strategy: determine what cash is available for short, medium, and long-term investment.
• Riding the Yield Curve Strategy: buy longer-term securities and sell them prior to their maturity dates.
• Credit Rating Strategy: buy the debt of a company that may be on the verge of having its credit rating upgraded.

Risk-Reduction Strategies

• A risk management strategy is a key part of the risk management lifecycle.
• Risk reduction strategies:
• Avoid investments in the securities of any single entity.
• Invest solely in one or more money market funds.
• Use the FDIC insurance coverage.
• Use the Certificate of Deposit Account Registry Service (CDARS) to achieve FDIC coverage on up to $50 million of deposits.
• Create a sweep account to automatically sweep funds out of a concentration account and move into an interest-earning account.

Investment Management Controls

• The process of issuing funds for an investment is unique in that every step in the process is a control point.
• Controls are essential to ensure that investments are made in accordance with the investment policy and strategy.

Investment Management Policies

• An investment policy is used to define the level of risk that a company is willing to tolerate.
• The policy should define the exact types of investment vehicles to be used (or not used).
• The policy should cover the level of allowable liquidity.
• Risk is a critical factor in the policy.
• The policy should be closely aligned with the investment strategy.

Investment Management Procedures

• Procedures should be established to ensure that investments are made in accordance with the investment policy and strategy.
• The procedures should be regularly reviewed and updated to ensure that they remain relevant and effective.