Treasurers Cling to Safety

When it comes to short-term investments during the downturn, treasury departments see protecting their principal, rather than making money, as a top priority.

Burned by the credit crisis, finance executives are in cash-hoarding mode. Liquidity is top of mind as companies’ ability to quickly get outside financing has shrunk. Nearly three-quarters of companies increased or maintained their cash balances this year, according to a new survey by the Association for Financial Professionals.

Moreover, treasury departments have flocked to the safest and most liquid avenues when it comes to deciding where to put their money: 78% of companies’ short-term investment balances are in bank deposits, money market mutual funds, and Treasury securities, the survey says.

Conducted in May, the survey, based on 360 responses, is the AFP’s fourth annual look at corporate liquidity practices. (While the survey of AFP members and 48 nonmember finance professionals was underwritten by Bank of New York Mellon, AFP says its research department was solely responsible for fielding the survey and analyzing and reporting the results.)

Released this week, the report highlights that finance professionals are acting conservatively when it comes to where they park their cash. They have become more risk averse. Most are putting aside the desires for a good return on their investment in favor of a focus on making sure that they can get their money back. Eighty-four percent of the respondents said “safety of principal” was their guiding objective for their short-term investment decisions, compared to only 75% who felt that way a year ago.

The effects of a more conservative investing mindset are showing up in where and how many places companies will invest for the near term. They’ve cut back on the number of investment vehicles they use, for instance. On average, the AFP survey found, organizations use 1.6 types of investments for their cash and short-term needs, compared to 2.4 investment vehicles used a year ago.

Which financial products that are getting the boot? Mostly auction-rate securities (only 8% of respondents’ short-term investment portfolios allow their use) and asset-backed securities (20% allow their use, down from 31% in 2008). Rather, the top places to make short-term investments: Treasury bills (83%), money market mutual funds (65%), agency securities (56%), and commercial paper (55%). For its part, investment in commercial paper is down 63% compared to last year. In addition, more than 37% of cash and short-term investment balances are sitting in bank deposits, up from 25% last year.

AFP says nearly seven out of eight respondents reported their access to credit hasn’t improved between January and May, and 27% of the surveyed finance professionals said their ability to get credit has actually deteriorated. In the meantime, companies have cut capital spending (70% of respondents said), reduced or stopped hiring (69%), and have considered or conducted layoffs (58%).

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